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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Fiscal Year Ended December 31, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
Commission file number 1-13177
APOGEE, INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3605119
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1060 First Avenue
King of Prussia, Pennsylvania 19406
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code 610-992-2600
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Common Stock, $.01 par value American Stock Exchange
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 as the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers, pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |_|
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As of March 31, 1998, 10,089,329 shares of Common Stock, $.01 par
value, were outstanding, and the aggregate market value of the shares of Common
Stock, $.01 par value, held by non-affiliates of the registrant as of March 31,
1998 was approximately $13,400,000. (Determination of stock ownership by
non-affiliates was made solely for the purpose of responding to this requirement
and registrant is not bound by this determination for any other purpose).
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the documents, all or portions of which are
incorporated by reference herein, and the Part of the Form 10-K into which the
document is incorporated:
Part III incorporates information by reference from portions of the
registrant's Proxy Statement to be filed with respect to the 1998 Annual Meeting
of Stockholders scheduled to be held on June 15, 1998.
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PART I
ITEM 1. BUSINESS.
GENERAL
Apogee, Inc. ("Apogee" or the "Company") is one of the largest multi-
disciplinary providers of outpatient behavioral health services in the United
States. The Company provides its outpatient behavioral health services
principally at free-standing clinics. The Company also operates one of the
largest behavioral managed care organizations ("BMCO") in the nation, Integra.
As of December 31, 1997, the Company operated 100 behavioral health clinics
located in 13 states and the District of Columbia. Through its Integra
Division, the Company maintains a variety of full and partial risk arrangements
with employers and health maintenance organizations. As of December 31, 1997,
the Company estimates that it served approximately 600,000 lives through its
Integra Division.
Apogee's outpatient practices provide a broad range of behavioral
health services, including diagnosis, psychiatric consultation, psychological
assessment and evaluation, medication monitoring, group and individual
psychotherapy, behavioral management, marriage, family and child therapy and
substance abuse and chemical dependency rehabilitation. The Company's
multi-disciplinary practices typically employ some or all of the following
professionals: board certified or board eligible psychiatrists; licensed
clinical psychologists; licensed clinical social workers; registered psychiatric
nurse practitioners; licensed marriage, family and child counselors; and other
allied mental health professionals.
Apogee's behavioral managed care division, Integra, provides
services to over 150 employers and health maintenance organizations. These
services span a continuum of no-risk administrative services only ("ASO"),
employee assistance program ("EAP") services to full-risk capitated and
sub-capitated arrangements. For the year ended December 31, 1997, Integra's
revenue mix was as follows: managed care services (38%), EAP services (46%)
and administrative and other services (16%).
During December 1997, the Company announced its plans to sell and
divest its outpatient behavioral health group practice operations. The Company
entered into an agreement of purchase and sale (the "Purchase Agreement") to
sell to PsychPartners, L.L.C., an Alabama limited liability company
("PsychPartners"), through two subsidiaries of PsychPartners (the "Purchasers"),
substantially all of the assets of the outpatient behavioral health group
practice business (hereinafter referred to as the "Sale"), except for practices
located in the Western region of the United States, which the Company plans to
divest. The consummation of the Sale will result in the divestiture by the
Company of substantially all the assets and business of the Company's outpatient
behavioral health practices. As of December 31, 1997, the outpatient behavioral
health practice business accounted for approximately eighty-four percent (84%)
of the assets of the Company (before the impact of the write down of assets held
for sale and the impact of the restructuring charges the Company recognized in
connection with the exit from the outpatient business); and for the year ended
December 31, 1997, the outpatient behavioral health practice business accounted
for approximately eighty-three percent (83%) of the Company's net revenues.
After the closing date of the Sale, which is anticipated to occur in mid
May 1998, the Company will no longer operate outpatient behavioral health
practices and its primary business activity will be managed behavioral
healthcare through its Integra Division.
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As a result of the Sale, the Company will be a significantly smaller company in
terms of revenues and assets.
TERMS OF SALE AND NEED FOR SHAREHOLDER APPROVAL
Pursuant to the Purchase Agreement, the Company will sell to the
Purchasers substantially all of the assets and business of the Company's
outpatient behavioral healthcare business, which consists of (i) all of the
capital stock of AGP Acquisition Corp., one of the subsidiaries of the
Company operating two outpatient behavioral health practices, and (ii)
substantially all of the assets (the "Assets") relating to 20 of the Company's
outpatient behavioral health practices (the 22 practices are collectively, the
"Practices"). In consideration for the sale of the Practices, the Purchasers
will pay to the Company a purchase price consisting of (a) $27,000,000 in cash,
(b) a warrant to purchase 400,000 Common Units of PsychPartners at a purchase
price of $.05 per Common Unit (the "Warrant") if certain performance criteria
are met and (c) the assumption of certain liabilities of the Company and the
Practices (collectively, the "Purchase Price"). The Purchase Price is subject
to certain adjustments. The Purchase Price may be adjusted if the aggregate
amount of the cash, accounts receivable, deposits and prepaid expenses of the
Practices to be acquired by the Purchasers is less than the aggregate amount of
the liabilities and future contingent cash payment obligations of the Practices
to be assumed by the Purchasers. These contingent cash payment obligations are
based upon the Practices achieving certain net revenue and pre-tax earnings
targets. As of December 31, 1997, the aggregate amount of such assets less the
aggregate amount of such liabilities (not including future cash contingent
payment obligations) was $1,713,810. The estimated future cash contingent
payment obligations to be assumed by the Purchasers was $1,835,712. As of
December 31, 1997, the Company would have had a net asset adjustment due to the
Purchasers of ($121,362). The Company believes that subsequent to Closing any
required adjustment would not exceed $500,000. Approval of the Purchase
Agreement and the Sale will require the approval of the holders of a majority
of the issued and outstanding shares of common stock, $.01 par value, of the
Company. A special meeting of shareholders is anticipated to be held in mid
May 1998 to vote on the Purchase Agreement and the Sale.
The Company's Board of Directors believes the terms of the Sale are
fair to and in the best interest of the Company and its shareholders for the
long-term growth of the Integra business. In making its recommendation to exit
the outpatient behavioral health practice business, the Company considered the
recent operating results, future prospects and strategic direction of the
outpatient behavioral practice business. The Company also considered the current
constraints on its ability to finance future growth and the positive effect the
Sale and the repayment of debt would have on the Company's ability to obtain
additional financing.
BEHAVIORAL HEALTHCARE MARKET
Mental illness remains a serious health problem in the United
States. In 1990, an estimated $43 billion was spent on behavioral healthcare
services. The cost of lost productivity due to mental illnesses was
approximately $75 billion, according to a study by the University of California,
San Francisco, Institute for Health and Aging. Based on this study, the market
for outpatient behavioral health services in the United States was approximately
$10 billion in 1990 and grew at compound annual rates of approximately 12%
between 1985 and 1990. In a recent study by Open Minds, a behavioral healthcare
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trade publication, the total managed behavioral healthcare market was
approximately $3.5 billion. This study estimated that approximately 56% of all
Americans are enrolled in a managed behavioral health plan. 58% of all Americans
are managed by an independent BMCO such as Integra. BMCO enrollment has
increased approximately 14% a year since 1992, based upon the Open Minds study.
Management believes that enrollment continues to grow due to (i) privatization
of programs such as Champus and Medicaid; (ii) a continued emphasis on cost
containment by employers and payors and (iii) the inherent subjective nature of
the diagnosis and treatment of mental health disorders.
BUSINESS STRATEGY
Value Based Business
Apogee's management has formally adopted the Company's Mission and
Values -- the reason Apogee is in business, and the standards to which its
employees should strive to achieve on a daily basis. This Mission and these
Values have been introduced to Apogee's employees and, when fully integrated
into the Company's culture, will distinguish Apogee from its competitors.
Mission: To help our patients achieve their highest level of functioning
through quality, ethical and cost-effective behavioral healthcare.
Values:
Patients Come First . . . patient care is the most important thing
we do.
Respect for the Individual . . . the "handshake" between the Company
and each employee.
Exceeding Customer Expectations . . . the needs of our customers
define our services.
Uncompromising Integrity . . . compels us to always do the right
thing.
Continuous Self-Renewal . . . commitment to setting the standard of
excellence which unifies and strengthens us.
It is management's belief that a strong commitment to these values
will enable the Company's employees to build the Company's business and their
careers and provides the foundation upon which Apogee's business plans are
developed.
Plan for Growth
Since its inception in 1991, the Company has experienced significant
growth in net revenues due largely to acquisitions. In 1996, management
curtailed its acquisition activity in order to evaluate the Company's operations
in light of regulatory and market changes. In 1997, the Company's decision to
discontinue its provider operations was based on the then current operating
environment including the margin pressures experienced by provider groups in
general versus the faster growth rates and higher margins experienced with the
Company's behavioral managed care operation with the overall outlook of
continued growth in the managed behavioral health care market. Further, the
Company
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believes a clear focus on a pure managed care strategy will be helpful to the
Company in the public market and for increasing both short and long-term
shareholder value.
The consummation of the Sale will result in the divestiture by the
Company of substantially all the assets and business of the Company's outpatient
behavioral health practice business, except for those locations in the Western
Region. The Company intends to divest or close these remaining outpatient
practices. As of December 31, 1997, the outpatient behavioral health practice
business accounted for approximately 84% of the assets of the Company; and for
the year ended December 31, 1997, the business accounted for approximately 83%
(before the impact of the write down of assets held for sale and the impact of
restructuring charges the Company recognized in connection with the exit from
the outpatient business) of the Company's net revenues. After the closing date
of the Sale, the Company will no longer operate outpatient behavioral health
practices and its primary business activity will be managed behavioral
healthcare through Integra. Management believes that the Company's future
operating profits will be improved as a result of the Sale. Subsequent to the
Sale, the Company will have only one line of business which will be
significantly smaller in terms of revenues and assets.
OUTPATIENT BUSINESS
Apogee intends to sell its group practice operations in the Midwest,
Northeast, and Southeast to PsychPartners for $27 million in cash and a
contingently issuable warrant to purchase up to 400,000 units of PsychPartners
at an exercise price of $0.05 per unit.
The Company anticipates that the proceeds from the Sale will be used to repay
the Company's credit facility (the "Credit Facility") with PNC Bank, National
Association ("PNC Bank") ($15.0 million), to fund the payment of contingent
acquisition consideration ($2.9 million) and severance and separation
payments ($1.4 million), to pay costs pertaining to the transaction
($1.0 million), to escrow money for any net asset balance sheet adjustment
pursuant to the Purchase Agreement ($0.5 million) and pay any settlement of the
Florida Medicare review ($2.2 million). See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Medicare Review."
As of March 25, 1998, there was approximately $14.3 million of principal amount
outstanding under the Company's Credit Facility which the Company expects to
increase to $15.0 million on the closing date of the Sale. The Company expects
to have approximately $4.0 million available from the proceeds of the Sale for
working capital and general corporate purposes. The Company will reinvest the
remaining proceeds in the Integra Division financing internal growth and
performing select acquisitions.
MANAGED BEHAVIORAL HEALTH BUSINESS
Increase Employee Assistance Program (EAP) and Managed Care Risk
Business. Integra specializes in behavioral health contracting for employee
assistance programs, third party clinical case management and claims
adjudication and capitated arrangements with MCOs and directly with employers.
Over the last three years, Integra has experienced rapid growth with revenues
increasing from $4.5 million in 1995 to $10.4 million in 1997. As of March 31,
1998, Integra provided services to 600,000 covered lives under capitated and EAP
contracts. Apogee believes this growth is attributable to Integra's focus on
quality of care, customer service and satisfaction and utilization of outcome
based
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measurements and has been in both the employee assistance programs business and
the managed care business.
Employee Assistance Programs
The Integra operation was originally founded to provide EAP
services to employers. The typical Integra EAP contract essentially consists
of 24 hour availability of a masters-level clinician to assist customer
employees or their family members in a variety of family, marital, behavioral
or work related problems. The employer pays a capitated amount for the service,
which entitles the employee or family member to an initial phone contact, a
face to face evaluation and, based on the terms of the contract, between three
(3) and eight (8) sessions of counseling.
The Company expects to continue pursuing EAP sales to large,
self-insured employers. In this regard, Integra expects to leverage its unique
Compass(TM) clinical data and outcomes management capabilities. These
capabilities enable Integra to demonstrate improved quality of care to
employees. Based on discussions with customers and potential customers, the
Company believes the Compass(TM) tool helps differentiate Integra from other
BMCOs.
Managed Care Risk Business
Management believes there is a significant opportunity to expand
services to health plans and other payors interested in sharing risk in the
delivery of behavioral healthcare benefits to a variety of populations. With
the total number of Americans who are migrating to managed behavioral health
plans exceeding 169 million lives, there is a substantial demand for effective,
quality mental health managed care expertise. In these products Integra is
responsible for the triage, assessment, referral, case management and reporting
on a full risk basis.
Given its innovative outcomes and clinical data systems, management
believes that the Integra case management expertise coupled with the continuing
trends of cost containment and continued growth of enrollment in managed care
plans, including the migration of Medicaid and Champus covered lives, offers a
strong opportunity for growth. The Company expects to pursue expanded health
plan managed care business in select geographic markets.
Perform Selective Acquisitions
The Company expects to pursue small EAP and privately owned BMCO
organizations as acquisition candidates. Subsequent to the pay down of the
Company's existing Credit Facility (see "Liquidity and Capital Resources in
Management's Discussion and Analysis of Financial Condition and Results of
Operations"), the Company intends to fund acquisitions with the remaining
proceeds from the Sale of the outpatient business combined with bank borrowings
under a new or replacement Credit Facility which the Company expects to secure.
Acquisition candidates will conform to acquisition criteria which includes a
clinical compatibility, an ease of integration into existing Integra operations
and a complementary customer mix and philosophy of care. The Company's research
indicates that over 60 candidates exist which would potentially fit the Integra
acquisition profile.
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ALTERNATIVES TO THE SALE
If the Sale is not consummated, the Company will be required (i) to
either continue operating the outpatient behavioral healthcare business or
attempt to locate another buyer for the outpatient behavioral healthcare
business, and (ii) to refinance its revolving Credit Facility and obtain
additional financing. The Company is currently party to a credit agreement with
PNC Bank that includes a $15.0 million term loan, of which PNC Bank retains
discretion for borrowings in excess of $12.0 million. Borrowings outstanding
under the Credit Facility were approximately $12.1 million as of December 31,
1997 and $14.3 million as of March 25, 1998. The Company is currently in
technical default of certain covenants contained in the Credit Facility. PNC
Bank has temporarily waived these covenants and authorized borrowings in excess
of the $12.0 million, both of which are contingent upon consummation of the
Sale. The Company estimates additional cash needs of approximately
$7.0 million will be required during 1998 for contingent payments, seller notes
and for restructure-related activities. The Company has obtained a letter
of intent from PNC Bank indicating their present intention to keep the existing
Credit Facility in place and to expand the Credit Facility to $22.0 million.
The preceding letter of intent would be subject, among other things, to PNC
Bank obtaining guarantees to partially collateralize the Credit Facility. The
Company has entered into an agreement (the "Commitment Arrangement") with
certain investment funds (the "Investment Partnerships") which are significant
stockholders of the Company and are managed by Foster Management Company, an
affiliated party, to obtain their commitment to guarantee the additional $7.0
million of financing. In return, the Investment Partnerships will receive the
following: (i) a commitment fee of 2% of the guaranteed amount; (ii) a draw
down fee of 2% on bank borrowings in excess of $15.0 million; (iii) an unused
commitment fee of 1/2% per annum; and (iv) warrants (the "Apogee Warrants") to
purchase 400,000 shares of common stock of the Company at a price of $0.05 per
share or, in the event the Sale is not consummated, a transaction fee of the
greater of $3.5 million or an amount that would equate to an internal rate of
return of 50% on the maximum amount drawn down under the increased portion of
the Credit Facility, payable on or before April 30, 1999. The commitment fees
are payable in cash upon the termination of the Commitment Arrangement and will
be paid promptly thereafter. In recognition of the Company's need to evaluate
other potential guarantors and the terms they may offer, the Company was given
the right to accept proposals from other potential guarantors. In the event the
Company terminates the Investment Partnerships' obligations because it has
secured more favorable financing arrangements, the Company shall be obligated
to pay the Investment Partnerships the commitment fee described in clause (i)
above. In addition, the Company shall be obligated to pay (a) 30% of the Apogee
Warrants if such termination occurs on or after March 30 and before April 6,
1998, (b) 60% of the Apogee Warrants if such termination occurs on or after
April 6, 1998 and before April 13, 1998 and (c) 90% of the Apogee Warrants if
such termination occurs thereafter.
REIMBURSEMENT
The Company estimates that 83% of its net revenues during fiscal
1997 were derived from the outpatient behavioral health business. The remainder
of the Company's revenues was primarily generated by its managed behavioral
health business, Integra, which generates revenues almost exclusively from
managed care and other third party payors. The following table sets forth the
Company's principal sources of reimbursement as a percentage of net revenues
during 1997:
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<TABLE>
<CAPTION>
Year Ended December 31,
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Payor Source 1997 1996 1995
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<S> <C> <C> <C>
Managed Care and Other Third Party Payors ........ 66% 59% 50%
Self Pay ......................................... 21 20 22
Medicare ......................................... 7 16 21
Medicaid ......................................... 4 2 3
CHAMPUS .......................................... 2 3 4
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100% 100% 100%
=== === ===
</TABLE>
Managed Care and Other Third Party Payors. The Company receives
reimbursement in mainly two forms: i) fee for service arrangements, and ii)
capitated contracts.
i) Fee for Service. For managed care services, the Company enters
into an agreement with a managed care payor for a stated fee per service and
agrees to clinician credentialing as well pre-authorization requirements. For
other third party payors, the Company bills and accepts the payors' reasonable
and customary payment and pursues the balance of the service fee directly from
the patient.
ii) Capitated Contracts. Revenues are primarily generated by
capitated managed behavioral health and employee assistance programs. The fees
are defined by contract and are primarily calculated on a fixed per-member per
month fee. Revenues under these contracts are recorded in the month for which
the member is entitled to services. Generally, these membership contracts are on
a one to three year basis subject to cancellation by either party without cause
at any time with thirty to ninety days written notice. Integra had approximately
600,000, 425,000 and 350,000 covered lives at December 31, 1997, 1996 and 1995,
respectively.
The Company estimates the cost of providing services under these
agreements, including a reserve for services incurred, but not reported, based
upon authorized services, past claim payment experience for member groups and
other factors. The Company typically does not subcapitate the risk of providing
services under these contracts, but arranges discounted fee-for-service rates
with independent inpatient and outpatient behavioral health providers, which the
Company manages. Integra utilizes certain Apogee outpatient behavioral health
practices as part of the provider network. The Company anticipates that where
practicable, it will continue to utilize these outpatient behavioral health
practices as network providers at the existing or comparable rates which it
believes are at fair market. The Company believes there is a ready supply of
service providers in these markets, and accordingly, is not dependant on the
Apogee outpatient behavioral health practices for the delivery of service to
these contracts.
Under capitated contracts, the Company is responsible for ensuring
appropriate access to care and bears the risk for utilization levels and pricing
of the cost of services performed under these contracts. The Company believes
the future revenues under these contracts will exceed the costs of services it
will be required to provide under the terms of
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the contracts. An underestimation in the utilization or price of services for
these contracts could result in material losses to the Company. Historically,
Integra has managed these capitated contracts profitably. The Company maintains
no re-insurance against the risk of loss under these contracts, however the
Company maintains malpractice and errors and omission insurance coverage for all
professionals and facilities that perform services on behalf of the Company.
Medicare. Medicare is a federal health insurance program which
provides health insurance coverage for certain disabled persons, for persons
aged 65 or older and for certain persons with end stage renal disease. There are
two insurance plans in the Medicare program: Part A which covers inpatient
services, home health care and hospice care and Part B which covers physicians,
other health care professionals and outpatient services. Medicare is funded by
both beneficiary and federal contributions. When behavioral health care services
are provided to patients in long-term care facilities by health care
professionals, such as psychiatrists, clinical psychologists and social workers,
Medicare Part B payments are based on the applicable Resource Based Relative
Value Scale ("RBRVS") Fee Schedule which differs by geographic region. Medicare
beneficiaries are required to pay a deductible and copayment for most Part B
services that generally equals 20% of the Medicare allowed amount. However, for
therapeutic treatment of mental, psychoneurotic and personality disorders,
Medicare pays 62-1/2% of the approved amount minus the 20% coinsurance, thus
requiring the beneficiary to pay about 50% of the approved Medicare allowable
fee. This limitation does not apply to diagnostic services.
Medicaid. Medicaid is the state administered and state and federally
funded program which provides health insurance coverage for certain low income
individuals. For qualified Medicare beneficiaries, the Medicaid program pays the
beneficiary's Part B premiums and may reimburse all deductibles and copayment
portions of the approved Medicare charge up to an allowable amount established
by each Medicaid program. The extent of actual copayment contributions varies
widely by state. Most Medicaid programs cover behavioral health care services
but may limit the number of approved visits per year. There has been an
increasing trend for Medicaid programs to contract with managed care
organizations to administer care and control costs for its beneficiaries. In
these situations, the Company and its providers must be approved to participate
on the select provider panel in order to treat patients.
Government and other third-party payors' health care policies and
programs have been subject to changes in payment levels and payment
methodologies during past years, including determination of medical necessity
for behavioral health services. There can be no assurance that future changes
will not reduce reimbursement from those sources for behavioral health care
services.
COMPETITION
The managed behavioral health business is highly competitive. The
Company competes with large insurance companies, HMOs, preferred provider
organizations ("PPOs"), third-party administrators ("TPAs"), IPAs,
multi-disciplinary medical groups and other managed behavioral health companies.
Many of the Company's competitors are significantly larger and have greater
financial, marketing and other resources than the Company, and some of the
Company's competitors provide a broader range of services. The Company may also
encounter substantial competition in the future from new market entrants. Many
of the Company's customers that are managed care companies may, in the
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future, seek to provide managed behavioral healthcare and EAP services to their
employees or subscribers directly, rather than by contracting with the Company
for such services. Because of competition, the Company does not expect to be
able to rely on price increases to achieve revenue growth.
REGULATION
Licensing and Certification. Psychiatrists, clinical psychologists,
clinical social workers and registered psychiatric nurse specialists must be
licensed in the state in which they practice. Such licensure is controlled by
state boards as well as the regulatory authorities in each state. The Company
has procedures designed to ensure that each of its professionals employed is
properly licensed and has satisfied his or her continuing education
requirements. With respect to the Company's crisis intervention program,
additional licensure of clinicians who provide telephonic assessment or
stabilization services to individuals who are calling from out-of-state may be
required, if such assessment or stabilization services are deemed by regulatory
agencies to be treatment provided in the state of such individual's residence.
In addition, certain states in which the Company operates impose licensure or
certification requirements on the Company's facilities or operations.
The Company anticipates that each of its facilities and
practitioners will be able to maintain applicable licenses, certifications and
accreditation and obtain reasonable reimbursement for services. However, the
loss, denial or restriction of any such reimbursement, licensure, accreditation
or certification, including certification-of-need or exemption through changes
in applicable regulatory requirements, an enforcement action or otherwise, could
have a material adverse effect on the Company.
Governmental HealthCare Regulation. As a behavioral healthcare
provider, the Company is currently subject to extensive and frequently changing
federal, state and local regulations governing licensure, conduct of operations
at existing facilities, purchase or lease of existing businesses, cost
containment and direct employment of licensed professionals by business
corporations. The various types of regulatory activity affect the Company's
business either by controlling its growth, restricting licensure of the business
entity or by controlling the reimbursement for services provided.
In order to receive Medicare reimbursement, the Company's local
operations must be registered with Medicare as a group provider. In addition,
each individual provider must be certified as an independently practicing
provider and be assigned an individual provider number. The certification
criteria, which are established by the Department of Health and Human Services,
are interpreted and administered by each state.
Medicaid programs do not generally require certification of the
Company or its providers over and above the requirements of Medicare.
The Social Security Act imposes criminal penalties upon persons who
make or receive kickbacks, bribes or rebates in connection with the Medicare or
Medicaid programs. The anti-fraud and abuse rule prohibit providers and others
from soliciting, offering, receiving or paying, directly or indirectly, any
remuneration in return for either making a referral for a Medicare or
Medicaid-covered service or item or ordering any covered service or item. In
addition, the Medicare and Medicaid Patient and Program Protection Act of 1987
imposed civil sanctions for violation of these prohibitions, punishable by
exclusion from the Medicare and Medicaid programs; such exclusion, if applied to
the Company's operations, could result in significant loss of reimbursement. In
order to provide guidance with respect to the anti-fraud and abuse rules, the
Office of the Inspector General ("OIG") issued final regulations outlining
certain "safe harbor" practices, which although potentially capable of inducing
prohibited referrals, would not be prohibited if all applicable
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requirements are met. A relationship which fails to satisfy a safe harbor is not
necessarily illegal, but could be scrutinized under a case-by-case analysis. In
February 1997, the OIG issued an interim rule regarding its recently mandated
proposals for accepting and issuing advisory opinions on the anti-fraud and
abuse rules. Because the anti-fraud and abuse laws have been broadly
interpreted, they limit the manner in which the Company can acquire businesses
and market its services to, and contract for services with, physicians, nursing
homes and other health care providers. Management considers and seeks to comply
with these regulations in planning and conducting its activities, and believes
that its activities do not violate the anti-fraud and abuse statute.
Federal and some state laws impose restrictions on physicians', and,
in a few states, on psychologists' and other behavioral healthcare
professionals' referrals for certain designated health services to entities with
which they have financial relationships. The Company believes its operations are
structured to comply with these restrictions to the extent applicable. There can
be no assurance that the federal government or other states in which the Company
operates will not enact similar or more restrictive legislation or restrictions
that could under certain circumstances impact the Company's operations.
In certain states, the employment of psychiatrists, psychologists
and other behavioral healthcare professionals by business corporations is a
permissible practice. However, many states, including some states in which the
Company operates, have interpreted existing medical practice licensing laws to
restrict business corporations, such as the Company, from providing behavioral
health services through the direct employment of psychiatrists and, in a few
states, psychologists and other behavioral healthcare professionals. The
Company believes its operations are structured, or can be restructured, if
necessary, to comply with applicable laws and regulations. However, there can be
no assurance that other states in which the Company operates will not enact
similar or more restrictive legislation or regulations.
Managed Behavioral Healthcare. The managed behavioral healthcare
industry and the provisions of behavioral healthcare services are subject to
extensive and evolving state and federal regulation. The Company is subject to
certain state laws and regulations, including those governing: (i) the
licensing of insurance companies, HMOs, PPOs, TPAs and companies engaged in
utilization review and (ii) the licensing of healthcare professionals,
including restrictions on business corporations from practicing, controlling
or exercising excessive influence over behavioral healthcare services through
the direct employment of psychiatrists or, in a few states, psychologists and
other behavioral healthcare professionals. These laws and regulations vary
considerably among states and the Company may be subject to different types of
laws and regulations depending on its activities in a state and the specific
regulatory approach adopted by a state to regulate the provision of managed
behavioral healthcare treatment services. In addition, the Company may be
subject to certain federal laws as a result of the role the Company assumes in
connection with managing its customers' employee benefit plans. The regulatory
scheme generally applicable to the Company's managed care operations is
described in this section. The Company's managed care operations are also
indirectly affected by laws and regulations applicable to the operations of
behavioral healthcare clinics and facilities.
The Company believes its operations are structured to comply with
applicable laws and regulations, in all material respects. However, regulation
of the managed healthcare industry is evolving, with new
<PAGE> 13
11
legislative enactments and regulatory initiatives at the state and federal
levels being implemented on a regular basis. Consequently, it is possible that a
court or regulatory agency may take a position under existing or future laws or
regulations, or as a result of a change in the interpretation thereof, that such
laws or regulations apply to the Company in a different manner than the Company
believes such laws or regulations apply. Moreover, any such position may require
significant alterations to the Company's business operations in order to comply
with such laws or regulations, or interpretations thereof. Expansion of the
Company's business to cover additional geographic area, to serve different types
of customers, to provide new services or to commence new operations could also
subject the Company to additional licensure requirements and/or regulation.
Insurance, HMO and PPO Activities. To the extent that the Company
operates or is deemed to operate in one or more states as an insurance company,
HMO, PPO or similar entity, it may be required to comply with certain laws and
regulations that, among other things, may require the Company to maintain
certain types of assets and minimum levels of deposits, capital, surplus,
reserves or net worth. In many states, entities that assume risk under contracts
with licensed insurance companies or HMOs have not been considered by state
regulators to be conducting an insurance or HMO business. As a result, the
Company has not sought licensure as either an insurer or HMO in certain states.
The National Association of Insurance Commissioners (the "NAIC")
has undertaken a comprehensive review of the regulatory status of entities
arranging for the provision of healthcare services through a network of
providers that, like the Company, may assume risk for the cost and quality of
healthcare services, but that are not currently licensed as an HMO or similar
entity. As a result of this review, the NAIC developed a "health organizations
risk-based capital" formula, designed specifically for managed care
organizations, that establishes a minimum amount of capital necessary for a
managed care organization to support its overall operations, allowing
consideration for the organization's size and risk profile. The NAIC
initiative may result in the adoption of a model NAIC regulation in the area
of health plan standards, which could be adopted by individual states in whole
or in part, and could result in the Company being required to meet additional
or new standards in connection with it existing operations. Individual states
have also recently adopted their own regulatory initiatives that may subject
entities such as the Company to regulation under state insurance laws. These
include, but are not limited to, requiring licensure as an insurance company
or HMO and requiring adherence to specific financial solvency standards.
Licensure as an insurance company, HMO or similar entity could also subject
the Company to regulations covering reporting and disclosure, mandated
benefits, and other traditional insurance regulatory requirements. PPO
<PAGE> 14
12
regulations to which the Company may be subject may require the Company to
register with a state authority and provide information concerning its
operations, particularly relating to provider and payor contracting.
Based on the information presently available to it, the Company
does not believe that the imposition of requirements related to maintaining
certain types of assets, prescribed levels of deposits, capital, surplus,
reserves or net worth, or complying with other regulatory requirements
applicable to its insurance company, HMO, PPO or similar operations, would
have a material adverse effect on the Company. Notwithstanding the foregoing,
the imposition of such requirements could increase the Company's cost of doing
business and could delay the Company's conduct or expansion of its business in
some areas. The licensure process under state insurance laws can be lengthy
and, unless the applicable state regulatory agency allows the Company to
continue to operate while the licensure process is ongoing, the Company could
experience a material adverse effect on its operating results and financial
condition while its licensure application is pending. In addition, failure by
the Company to obtain and maintain required licenses typically also constitutes
an event of default under the Company's contracts with its customers. The loss
of business from one or more of the Company's major customers as a result of
such an event of default or otherwise could have a material adverse effect on
the Company.
Utilization Review and Third-Party Administrator Activities. Certain
states have adopted, or are expected to adopt, regulations governing entities
engaging in utilization review and TPA activities. Utilization review
regulations typically impose requirements with respect to the qualifications of
personnel reviewing proposed treatment, timeliness and notice of the review of
proposed treatment, and other matters. TPA regulations typically impose
requirements regarding claims processing and payments and the handling of
customer funds. Although compliance with utilization review and TPA regulations
has not had a material adverse effect on the Company, there can be no assurance
that specific regulations adopted in the future would not have such a result,
particularly since the nature, scope and specific requirements of such
provisions vary considerably among states that have adopted regulations of
this type.
In certain circumstances, the Company believes that its activities
performed for its self-insured employee benefit plan customers are exempt from
otherwise applicable state licensing or registration requirements based upon
federal preemption under the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"). Existing case law is not uniform on the applicability of
ERISA preemption with respect to state regulation of utilization review or TPA
activities. There can be no assurance that additional licensure will not be
required with respect to utilization review or TPA activities in certain states.
<PAGE> 15
13
Prohibition on Fee Splitting and Corporate Practice of Professions
The law of some states limit the ability of a business corporation
to directly provide, control or exercise excessive influence over behavioral
healthcare services through the direct employment of psychiatrists,
psychologists, or other behavioral healthcare professionals. In addition, the
laws of some states prohibit psychiatrists, psychologists, or other healthcare
professionals from splitting fees with other persons or entities. These laws and
their interpretations vary from state to state and enforcement by the courts and
regulatory authorities may vary from state to state and may change over time.
The Company believes that its operations as currently conducted are in material
compliance with the applicable laws, however, there can be no assurance that the
Company's existing operations and its contractual arrangements with
psychiatrists, psychologists and other healthcare professionals will not be
successfully challenged under state laws prohibiting fee splitting or the
practice of a profession by an unlicensed entity, or that the enforceability of
such contractual arrangements will not be limited. The Company believes that it
could, if necessary, restructure its operations to comply with changes in the
interpretation or enforcement of such laws and regulations, and that such
restructuring would not have a material adverse effect on its operations.
<PAGE> 16
14
the provision of treatment services, rather than with unlicensed intermediary
companies. In such states, the Company's customary model of contracting directly
with its customers may need to be modified so that, for example, the IPAs
(rather than the Company) contract directly with the HMO or insurance company,
as appropriate, for the provision of treatment services. The Company intends to
work with a number of these HMO customers to restructure existing contractual
arrangements, upon contract renewal or in renegotiations, so that the entity
which contracts with the HMO directly is an IPA. The Company does not expect
this method of contracting to have a material adverse effect on its operations.
Other Regulation of Healthcare Providers
The Company's business is affected indirectly by regulations imposed
upon healthcare providers. Regulations imposed upon healthcare providers include
provisions relating to the conduct of, and ethical considerations involved in,
the practice of psychiatry, psychology, social work and related behavioral
healthcare professions and, in certain cases, the common law duty to warn others
of danger or to prevent patient self-injury. Confidentiality and patient privacy
requirements are particularly strict in the field of behavioral healthcare
services, and additional legislative initiative relating to confidentiality are
expected. The Health Insurance Portability and Accountability Act of 1996
("HIPAA") included a provision that prohibits the wrongful disclosure of certain
"individually identifiable health information." HIPAA requires the Secretary of
the United States Department of Health and Human Services (the "Department") to
adopt standards relating to the transmission of such health information by
healthcare providers and healthcare plans. Although the Company believes that
such regulations do not at present materially impair the Company's operations,
there can be no assurance that such indirect regulation will not have a material
adverse effect on the Company in the future.
ERISA
Certain of the Company's services are subject to the provisions of
ERISA. ERISA governs certain aspects of the relationship between
employer-sponsored healthcare benefit plans and certain providers of services to
such plans through a series of complex laws and regulations that are subject to
periodic interpretation by the Internal Revenue Service and the Department of
Labor. In some circumstances, and under certain customer contracts, the Company
may be expressly named as a "fiduciary" under ERISA, or be deemed to have
assumed duties that make it an ERISA fiduciary, and thus be required to carry
out its operations in a manner that complies with ERISA requirements in all
material respects. There can be no assurance that continuing ERISA compliance
efforts or any future changes to the applicable ERISA requirements will not have
a material adverse effect on the Company.
<PAGE> 17
15
The Budget Act
In August 1997, Congress enacted the Budget Act. The
Medicare-related provisions of the Budget Act are designed to reduce Medicare
expenditures over the next five years by $115 billion, compared to projected
Medicare expenditures before adoption of the Budget Act. The Congressional
Budget Office projected in July 1997 that $43.8 billion of the reductions would
come from reduced payments to hospitals, $21.8 billion from increased enrollment
in managed care plans and $11.7 billion from reduced payments to physicians and
ambulatory care providers. The five-year savings in projected Medicare payments
to physicians and hospitals would be achieved under the Budget Act by reduced
fee-for-service reimbursement and by changes in managed care programs designed
to increase enrollment of Medicare beneficiaries in managed care plans. The
increase in Medicare enrollment in managed care plans would be achieved in part
by allowing provider-sponsored organizations and preferred provider
organizations to compete with Medicare health maintenance organizations for
Medicare enrollees.
Prior to adoption of the Budget Act, the states were prohibited from
requiring Medicaid recipients to enroll in managed care products that covered
only Medicaid recipients. The Medicaid laws required that the states enroll
Medicaid recipients in products that also covered a specific number of
commercial enrollees. This requirement of the Medicaid laws was intended to
limit the ability of states to reduce coverage levels for Medicaid recipients
below those offered to commercial enrollees. Under prior law, the Secretary of
the Department of Health and Human Services could waive the prohibition. The
Medicaid-related provisions of the Budget Act give states broad flexibility to
require most Medicaid recipients to enroll in managed care products that only
cover Medicaid recipients, without obtaining a waiver from the Secretary of the
Department. The Budget Act also allows states to limit the number of managed
care organizations with which the state will contract to deliver care to
Medicaid beneficiaries. These changes could have a positive impact on the
Company's business, if they result in increased enrollment of Medicaid
beneficiaries on managed care organizations and increased Medicaid spending on
managed care. However, these changes also may have an adverse effect on the
Company if a number of states decide to limit the number of managed care
organizations with which they will contract and to select the organization
solely on the basis of the cost of care, which could result in increased cost
competition for state contracts.
The Company cannot predict the effect of the Budget Act, or other
healthcare reform measures that may be adopted by Congress or state
legislatures, on its managed care operations and no assurance can be given that
either the Budget Act or other healthcare reform measures will not have an
adverse effect on the Company.
Other Proposed Legislation
In the last five years, legislation has periodically been introduced
at the state and federal level providing for new regulatory programs and
materially revising existing regulatory programs. Any such legislation, if
enacted, could materially adversely affect the Company's business, financial
condition or results of operations. Such legislation could include both federal
and state bills affecting the Medicaid programs which may be pending in or
recently passed by state legislatures and which are not yet available for review
and analysis. Such legislation could also include proposals for national health
insurance and other forms of federal regulation of health insurance and
healthcare delivery. It is not possible at this time to predict whether any such
legislation will be adopted at the federal or
<PAGE> 18
16
state level, or the nature, scope or applicability to the Company's business of
any such legislation, or when any particular legislation might be implemented.
No assurance can be given that any such federal or state legislation will not
have a material adverse effect on the Company
CAUTIONARY STATEMENTS--THE COMPANY
This Form 10-K includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. Although the Company believes that its plans, intentions and expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such plans, intentions or expectations will be achieved.
Important factors that could cause actual results to differ materially from the
Company's forward-looking statements are set forth below and elsewhere in this
Form 10-K. All forward-looking statements attributable to the Company or persons
acting on behalf of the Company are expressly qualified in their entirety by the
cautionary statements set forth below. Additional cautionary statements
regarding the Company's franchise operations business are set forth below.
Employees
At December 31, 1997, the Company employed approximately 900
employees. The Company has not experienced any significant difficulty in
filling open positions with qualified clinicians. None of the Company's
employees is represented by a labor union and the Company is not aware of any
current activities to organize any of its employees. Management considers the
relationship between the Company and its employees to be good.
Insurance
The Company maintains malpractice as well as errors and omissions
insurance coverage for all professionals who perform services on behalf of the
Company and its managed entities. Along with the coverage of individuals, the
Company also has the same coverages for all owned and managed entities. The
insurance is a primary coverage level of $1 million per occurrence/$3 million
in the aggregate and excess coverage of $4 million per occurrence/$4 million in
the aggregate. The Company also enters into facility management contracts, which
are personal service agreements with the Company's staff to perform services
and provide medical direction. Any actions performed by the Company's staff are
directly covered by the malpractice policy; any actions taken by the Company's
staff at a facility under a facility management contract at the direction of
the facility's medical staff are covered under the errors and omission portion
of the malpractice policy. Insurance for the facility, its staff and the entity
are the responsibility of that facility. The Company believes its coverage's
and limits are adequate for current operations.
<PAGE> 19
17
Executive Officers of the Company
Certain information with respect to the executive officers of the
Company is set forth below:
<TABLE>
<CAPTION>
Age at
December
Name Position with the Company 31, 1997
- ------------------------------- ------------------------------------ ---------
<S> <C> <C>
John H. Foster................. Chairman of the Board, Chief
Executive Officer and Director 55
Lawrence M. Davies............. President, Chief Operating Officer
and Director 39
Mark D. Gibson................. Corporate Controller and Chief
Financial Accounting Officer 31
Massoud G. Hampton, Ph.D....... Vice President of Clinical Services 47
Stanley F. Szczygiel........... Vice President of Finance and
Secretary 45
</TABLE>
JOHN H. FOSTER, has been Chairman of the Board and Chief Executive
Officer of the Company since March 1991. Mr. Foster has been Chairman of the
Board and Chief Executive Officer of NovaCare, Inc., a leading national provider
of comprehensive medical rehabilitation services ("NovaCare"), since December
1984. Mr. Foster is a director of Corning Incorporated, an international
corporation with business interests in specialty materials and communications.
Mr. Foster is the founder and Chairman of the Board of Foster Management
Company, an investment advisor, and general partner of various venture capital
investment funds.
LAWRENCE M. DAVIES, has been a director of the Company since January
1992 and its President since June 1993. Mr. Davies was Vice President of the
Central Division of the Contract Services Group of NovaCare from June 1992 to
May 1993 and Division Vice President of the Midwest Region of the Contract
Services Group of NovaCare, from September 1988 to May 1992. From January 1987
to August 1988, Mr. Davies was Director of Corporate Development for NovaCare.
Mr. Davies was manager of Mergers and Acquisitions for Foster Medical
Corporation from August 1984 to December 1986.
MARK D. GIBSON has been Corporate Controller and Chief Accounting
Officer of the Company since August 1997. From August 1995 to August 1997, Mr.
Gibson was the Director of Financial Planning and Analysis for the Company. From
1992 to 1995, Mr. Gibson worked in the Auditing Services Group for Price
Waterhouse LLP and from 1988 to 1991 was employed in the audit department of
Laventhol & Horwath.
MASSOUD G. HAMPTON, Ph.D. has been Vice President of Clinical
Services for the Company since February 1994. Dr. Hampton was the founder and
Director of the Institute of Aging at St. Vincent Hospital and Healthcare
Centers from December 1985 to January 1994. Dr. Hampton is a licensed clinical
psychologist and hold a Ph.D. in Life Span Developing and Aging from Indiana
University and an M.S. in Developmental Psychology from Indiana State
University. Dr. Hampton has also completed a post doctoral fellowship
<PAGE> 20
18
in geriatric psychology at the University of Notre Dame. Dr. Hampton has served
as Chairman for the Central Indiana Council on Aging and as a delegate to the
White House Conference on Aging. In 1993, Dr. Hampton received the Indiana
Public Foundation Award for Gerontology. From 1987 to 1993, Dr. Hampton was an
adjunct professor of psychology at Indiana University.
STANLEY F. SZCZYGIEL has been Vice President of Finance and
Secretary of the Company since October 1993. From January 1993 to October 1993,
Mr. Szczygiel managed Acquisition Management Services, Inc., a mergers and
acquisition consulting company. From 1986 to 1992, Mr. Szczygiel was the Vice
President of Finance from 1987 to 1992 and Corporate Controller from 1986 to
1987 of Abbey Home Healthcare. From 1973 to 1985, Mr. Szczygiel held various
financial management positions at Exxon Corporation, Memorex Corporation and
Coopers & Lybrand.
No family relationship exists between any of the directors or
executive officers of the Company. Executive officers serve at the discretion of
the Board of Directors.
ITEM 2. PROPERTIES.
The Company's principal executive offices are located at 1060 First
Avenue, King of Prussia, Pennsylvania. In addition, the Company leases other
office space and clinical facilities in various locations across the United
States. See Note 13 of Notes to the Company's Consolidated Financial Statements
for information concerning the Company's leases for its office and patient care
facilities. The Company does not anticipate that it will experience any
difficulty in renewing any such leases upon their expiration or obtaining
different space on comparable terms if such leases are not renewed. The Company
believes that these facilities are well maintained and are of adequate size for
present needs and planned expansion in the near future.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company is a party to certain claims, suits
and complaints which arise in the ordinary course of business. During 1996,
certain Medicare Part B and related co-insurance billings previously submitted
by one of the Apogee subsidiaries were selected for review by the Office of the
Inspector General of the Department of Health and Human Services ("OIG") and the
Department of Justice ("DOJ"). Apogee has been informed by the DOJ that the
review is a civil matter relating to billings for services to Medicare patients
in long-term care facilities in the State of Florida during the period from
approximately January 1994 through mid-1995. During the pendency of this review,
the Medicare intermediary has suspended all Medicare payments to this
subsidiary. It is the Company's policy to comply with all federal, state and
local laws, including those applicable to the Medicare program. In December
1997, the Company and representatives from the United States Attorney's office
reached an agreement in principle that would settle all of the OIG's civil
claims against the Company relating to this matter for a payment of $3,000. This
tentative agreement is subject to the final approval by the appropriate officers
of the DOJ and OIG. Throughout this process, the Company has been fully
cooperating with the review and anticipates reaching a definitive agreement in
1998. The Company has established a reserve for the above amount, which is
included with Accrued Expenses and Other Accrued Liabilities, in the
accompanying 1997 Consolidated Balance
<PAGE> 21
19
Sheet. The final agreement, when reached, is not expected to materially differ
from the terms outlined above.
In March 1998, the Company received notification that the Medicare
intermediary in California has completed a post payment medical review of
billings previously submitted and paid between 1990 and 1994. Based on the
results of their review, the intermediary has requested a refund of
approximately $1,200,000. Services were denied primarily on the basis of medical
necessity and incomplete documentation. The Company has not yet completed its
review of the intermediary's findings, but anticipates requesting an
administrative hearing. At December 31, 1997, the Company fully reserved the
above amount.
Currently, there are no other such claims, suits or complaints
which, in the opinion of management, would have a material adverse effect on the
Company's financial position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
<PAGE> 22
20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company Common Stock is quoted on the American Stock Exchange
under the symbol APG. As of March 31, 1998, there were approximately 100
shareholders of record and over 1,500 beneficial holders of the common stock.
The following table sets forth the reported high and low sale prices of the
company common stock for the periods indicated. The Company's common stock was
quoted on the National Association of Securities Dealers Automated Quotation
National Market System ("NASDAQ") prior to July 11, 1997. All stock price data
prior to July 11, 1997 reflect the high and low sale prices as reported on
NASDAQ. The Company has never paid cash dividends on the Company
Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal Year Ended December 31, 1996
First Quarter ........................... 10 3/4 3 1/2
Second Quarter .......................... 8 1/4 5 3/8
Third Quarter ........................... 7 5 1/4
Fourth Quarter .......................... 6 15/16 3 1/8
Fiscal Year Ended December 31, 1997
First Quarter ........................... 4 5/8 3 3/8
Second Quarter .......................... 4 9/16 2 7/8
Third Quarter ........................... 4 5/8 2 3/8
Fourth Quarter .......................... 3 1/4 1 11/16
</TABLE>
Over the past several years, the Company's common stock price has
been subject to significant volatility. If net revenues or earnings fail to meet
expectations of the investment community, there could be an immediate and
significant adverse impact on the trading price for the Company's common stock.
No dividends have been declared on the common stock since the
Company's inception. The Company does not expect to declare any cash dividends
in the foreseeable future.
<PAGE> 23
21
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data should be read in conjunction
with the Company's consolidated financial statements and the accompanying notes
presented elsewhere herein.
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT
DATA:
Net revenues ........ $ 70,144 $ 78,727 $ 68,269 $ 33,473 $ 6,626
Gross profit ........ 15,942 18,640 17,737 8,216 403
(Loss) income from
operations .......... (59,672) (12,826) (2,924) 149 (2,445)
Net (loss) income ... (61,218) (13,594) (2,451) 387 (2,831)
Basic and diluted net
(loss) income per
common share (1) .... (6.17) (1.39) (0.26) 0.06 (0.68)
Weighted average shares
outstanding basic
and diluted (1) ..... 9,921,374 9,786,599 9,414,839 6,883,215 4,154,864
<CAPTION>
BALANCE SHEET DATA: AS OF DECEMBER 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Current assets ...... $ 9,958 $ 16,445 $ 29,886 $ 42,179 $ 2,653
Total assets ........ 43,600 97,783 109,051 95,123 9,061
Current liabilities . 37,604 23,547 23,305 12,990 2,536
Total debt .......... 14,700 12,808 11,246 10,040 9,880
Stockholders' equity
(deficit) ........... 4,713 65,181 78,739 74,561 (4,427)
</TABLE>
(1) The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS 128") which establishes new standards for
computing and presenting earnings per share by replacing the presentations
of weighted shares outstanding, inclusive of common stock equivalents,
with a dual presentation of basic and diluted earnings per share. Basic
earnings per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share reflects the
dilutive effect of all stock options, shares contingently payable in
connection with certain acquisitions and convertible debentures. Prior
period earnings per share information has been restated in accordance with
SFAS 128.
<PAGE> 24
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The Company operates multi-disciplinary outpatient behavioral health
group practices and is one of the largest providers of outpatient behavioral
health services in the United States. The Company provides behavioral health and
related services, principally at free-standing clinics. The Company operates
behavioral health clinics located in 13 states and the District of Columbia. At
December 31, 1997, the Company's outpatient operations were principally
concentrated in Florida, Maryland, New Jersey, Pennsylvania, Virginia and
Wisconsin.
Largely through its Integra Division, the Company also provides
managed behavioral health services through full and shared risk arrangements
with employers and managed care organizations to perform behavioral health
services on a capitated, sub- capitated and case rate basis. In addition, the
Company provides an array of managed behavioral health services including:
employee assistance programs; third party clinical case management and claims
adjudication.
During December 1997, the Company announced its plans to sell and
divest its outpatient behavioral health group practice operations (the "Sale").
The Company entered into an agreement to sell substantially all of the assets of
the outpatient behavioral health group practice business, except for practices
located in the Western region of the United States which the Company plans to
divest. See Notes 3 and 12 in the accompanying Consolidated Financial Statements
of the Company. The consummation of the Sale will result in the divestiture by
the Company of substantially all the assets and business of the Company's
outpatient behavioral health practices. As of December 31, 1997, the outpatient
behavioral health practice business accounted for approximately eighty-four
percent (84%) of the assets of the Company (before the impact of the write down
of assets held for sale and the impact of the restructuring charge - see below);
and for the year ended December 31, 1997 approximately eighty-three percent
(83%) of the Company's net revenues. After the Closing Date, the Company will no
longer operate outpatient behavioral health practices and its primary business
activity will be managed behavioral healthcare through its Integra Division. As
a result of the Sale, the Company will be a significantly smaller company in
terms of revenues and assets.
The Company's Board of Directors believes the terms of the Sale are
fair to, and in the best interest of the Company and its shareholders. In making
its recommendation, the Company considered the condition, prospects and
strategic direction of the Company's outpatient business. The Company also
considered the current constraints on its ability to finance future growth and
the positive effect the sale of assets and the repayment of debt would have on
the Company's ability to obtain additional financing. If the Sale is not
consummated, the Company will pursue other strategic alternatives and will be
required to refinance its revolving Credit Facility and obtain additional
financing. See "Liquidity and Capital Resources."
Results of Operations
The consolidated financial statements include the accounts of the
Company and all wholly owned and beneficially owned subsidiaries. Because of
corporate practice of medicine laws in certain states in which the Company
operates, the Company does not own the professional corporations which operate
the professional and clinical aspects of the
<PAGE> 25
23
outpatient behavioral healthcare practices in those states, but instead has the
contractual right to designate, in its sole discretion and at any time, the
licensed professional who is the owner of the capital stock of the professional
corporation at a nominal cost ("Nominee Arrangements"). In addition, the Company
enters into exclusive long-term management services agreements ("Management
Services Agreements") with the professional corporations. Through the Management
Services Agreements, the Company has exclusive authority over decision making
relating to all major ongoing operations of the underlying professional
corporations with the exception of the professional aspects of the practice of
psychiatry, psychology and other professional behavioral healthcare services as
required by certain state laws. Under the Management Services Agreements, the
Company establishes annual operating and capital budgets for the professional
corporations and compensation guidelines for the clinical professionals. The
Management Services Agreements generally have initial terms of ten years or
greater. The method of computing the management fees varies by contract.
Management fees are based on either (i) billings of the affiliated practice less
the amounts necessary to pay professional compensation and other professional
expenses or (ii) a license fee per location, reimbursement of direct costs,
reimbursement of marketing costs plus a markup, and a flat administrative fee or
(iii) a percentage of gross receipts of the affiliated practice. In all cases,
these fees are meant to compensate the Company for expenses incurred in
providing covered services plus a profit. These interests are unilaterally
saleable and transferable by the Company and fluctuate based upon the actual
performance of the operations of the professional corporations.
Through the Nominee Arrangements, the Company has a significant
long-term financial interest in the affiliated practices and, therefore,
according to Emerging Issues Task Force No. 97-2 "Application of FASB Statement
No. 94, Consolidation of All Majority-Owned Subsidiaries, and APB Opinion No.
16, Business Combinations, to Physician Practice Management Entities and Certain
Other Entities with Contractual Management Arrangement", the Company must
consolidate the results of the affiliated practices with those of the Company.
Because the Company must present consolidated financial statements, net revenues
are presented in the accompanying Consolidated Statements of Operations. All
significant intercompany accounts and transactions, including management fees,
have been eliminated.
<PAGE> 26
24
The following table sets forth, for the periods indicated, the
relative percentages which certain items in the Company's Consolidated
Statements of Operations bear to net revenues:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Patient service revenue 85.1% 92.1% 93.4%
Premium revenue 14.9% 7.9% 6.6%
----- ----- -----
Total net revenues 100.0% 100.0% 100.0%
Gross profit 22.7% 23.7% 26.0%
Selling and administrative expenses 14.9% 14.2% 14.4%
Provision for doubtful accounts 6.0% 5.0% 5.0%
Amortization of assets held for sale
and excess cost over fair value of
net assets acquired 3.5% 2.9% 2.7%
Write down of assets held for sale 54.7%
Restructuring and other charges 28.7% 17.9% 8.2%
----- ----- -----
Loss from operations (85.1%) (16.3)% (4.3)%
Interest expense (includes other expenses) 2.1% 1.0% .8%
Interest (income) (.1)% (.2)% (1.6)%
----- ----- -----
Loss before income taxes (87.1%) (17.1)% (3.5)%
Provision for income taxes .2% .2% .1%
----- ----- -----
Net loss (87.3)% (17.3)% (3.6)%
===== ===== =====
</TABLE>
Total Net Revenues
Patient Service Revenue
Patient service revenue is reported when earned at time of service
at the estimated amounts to be realized through payments from patients, third
party payors and others for services rendered. Third party reimbursement is
initially billed at "usual, customary and reasonable" market rates. Aggregate
billings are adjusted when recorded to reflect the estimated amounts realizable
from third party payors based on the Company's historical experience and
contractual rates established with the payors. Patient service revenue
represents billings of the Company's operations other than its behavioral
managed care division, Integra, which are principally comprised of the
outpatient group practice business and long-term care behavioral health business
which the Company exited in December 1996.
Patient service revenue for 1997 decreased to $59,719 from $72,495
in 1996. This decrease is primarily a result of the impact of operations which
were discontinued or downsized in conjunction with the Company's restructuring
in the fourth quarter of 1996 including the Company's long term care operations.
After adjusting for the impact of these operations, base business revenues
decreased approximately $5,000, primarily as a result of continued reimbursement
pricing pressure from managed care and other third party payors and the
disappointing operating results of selected Western Region outpatient practices.
Patient service revenue for 1996 increased to $72,495 from $63,760
in 1995. This increase is a result of acquisitions made during 1995 and 1996.
After adjusting for the impact of closing certain long term care operations as a
result of the Company's 1995 restructuring, base business revenues decreased
approximately $4,400, primarily as a result of: 1) reduced revenue volume in
certain long term care markets where the Company continued to provide service
during 1996, but was not actively replacing terminated direct care providers;
and 2) the loss of several group practice contracts in late 1995, partially
offset by increased volumes from other payors/patients.
Premium Revenue
Premium revenues pertain to the Company's Integra Division which
maintains a portfolio of agreements with managed care organizations and
corporations to provide inpatient and outpatient behavioral health services.
Revenues are primarily generated by capitated managed behavioral health and
employee assistance programs. The fees are defined by contract and are primarily
calculated on a fixed per-member per month fee. Revenues under these contracts
are recorded in the month for which the member is entitled to services.
Generally, these membership contracts are on a one to three year basis subject
to cancellation by either party without cause at any time with thirty to ninety
days written notice. Integra had approximately 600,000, 425,000 and 350,000
covered lives at December 31, 1997, 1996 and 1995, respectively.
<PAGE> 27
25
The Company estimates the cost of providing services under these
agreements, including a reserve for services incurred, but not reported, based
upon authorized services, past claim payment experience for member groups and
other facts. The Company typically does not subcapitate the risk of providing
services under these contracts, but arranges discounted fee-for-service rates
with independent inpatient and outpatient behavioral health providers, which the
Company manages. Integra utilizes certain Apogee outpatient behavioral health
practices as part of the provider network. The Company anticipates that where
practicable, it will continue to utilize these outpatient behavioral health
practices as network providers at the existing or comparable rates which it
believes are at fair market. The Company believes there is a ready supply of
service providers in these markets, and accordingly, is not dependent on the
Apogee outpatient behavioral health practices for the delivery of service to
their contracts.
Under capitated contracts, the Company is responsible for ensuring
appropriate access to care and bears the risk for utilization levels and pricing
of the cost of services performed under these contracts. The Company believes
the future revenues under these contracts will exceed the costs of services it
will be required to provide under the terms of the contracts. An underestimation
in the utilization or price of services for these contracts could result in
material losses to the Company. Historically, Integra has managed these
capitated contracts profitably. The Company maintains no re-insurance against
the risk of loss under these contracts, however the Company maintains
malpractice and errors and omission insurance coverage for all professionals who
perform services on behalf of the Company.
Premium revenues for 1997 increased 67% to $10,425 from $6,232 in
1996. Approximately 58% of this increase was from expansion of services provided
under managed care contracts principally due to securing additional Medicaid
lives through a contract with a health maintenance organization in New York. The
remaining increase was a result of new contracts and increased enrollment in the
Company's employee assistance programs and third party clinical case management
and claims adjudication services.
Premium revenues for 1996 increased 38% to $6,232 from $4,509 in
1995 primarily due to new contracts and increased enrollment in the Company's
employee assistance programs and third party clinical care management and claims
adjudication services.
Gross Profit
Gross profit comprises net revenues less personnel, field
management, facility and other costs and expenses directly associated with the
delivery of services. Gross profit decreased to $15,942 in 1997 from $18,640 in
1996. This decrease is primarily a result of the impact of operations which were
discontinued or downsized in conjunction with the Company's restructuring in the
fourth quarter of 1996. After adjusting for the impact of these operations,
gross profit from base business decreased approximately $200 due largely to
continued reimbursement pricing pressure from managed care and other third party
payors and the disappointing operating results of selected Western Region
outpatient practices, partially offset by the continued expansion of the
Company's behavioral managed care business.
Gross profit increased to $18,640 in 1996 from $17,737 in 1995. This
increase is due to acquisitions made during 1995 and 1996. After adjusting for
the impact
<PAGE> 28
26
of closing certain long term care operations as a result of the Company's 1995
restructuring, gross profit from base business decreased approximately $2,000,
primarily as a result of: 1) the loss of several group practice contracts in
late 1995; 2) clinician turnover/productivity at certain group practice
operations; and 3) investment in clinical and field support positions.
Selling and Administrative Expenses
Selling and administrative expenses are primarily comprised of
corporate office, regional management and centralized billing expenses. Selling
and administrative expenses decreased to $10,447 in 1997 from $11,179 in 1996,
due to a combination of reduced administrative costs as a result of discontinued
or downsized operations and the Company's ongoing administrative cost
containment initiatives.
Selling and administrative expenses increased to $11,179 in 1996
from $9,839 in 1995. This increase is a result of continued investment in
infrastructure and selling and administrative expenses from the businesses
acquired in 1995 and 1996. Selling and administrative expenses as a percentage
of net revenues remained consistent at 14%.
Provision for Doubtful Accounts
The provision for doubtful accounts increased to $4,226 in 1997 from
$3,886 in 1996. This increase is primarily attributable to increased allowances
recorded for the Western Region outpatient operations in connection with the
Company's exit from these markets. The provision for doubtful accounts increased
to $3,886 in 1996 from $3,408 in 1995. This increase is attributable to higher
net revenues as the provision for doubtful accounts remained consistent at 5% of
net revenues for both years. The provision for doubtful accounts is estimated
based on an ongoing review of collectibility of the Company's accounts
receivable. The Company believes the provision for doubtful accounts and the
associated allowance for doubtful accounts are adequate based on management's
ongoing review of collectibility. At December 31, 1997 and 1996, the Company's
balance sheet allowance for doubtful accounts contained $3,742 and $3,956,
respectively, in allowances associated with long-term care billings and
outpatient locations which the Company has shut down. See Note 5 in the
accompanying 1997 Consolidated Financial Statements.
The Company recorded additional accounts receivable reserves of
$1,400 and $2,700 in 1997 and 1996, respectively, pertaining largely to the
Company's long-term care business which the Company exited in 1996. The amounts
were included as a component of "Restructuring and Other Charges" in the
accompanying Consolidated Statements of Operations (see Restructuring and Other
Charges below). Including these amounts, the provision for doubtful accounts
would have been 8% of net revenues in both 1997 and 1996.
The Company recorded additional accounts receivable reserves of
$2,700 and $1,025 in 1996 and 1995, pertaining to the Company's long-term care
business. The amounts were included as a component of "Restructuring Charges" in
the accompanying Consolidated Statements of Operations (see Restructuring and
Other Charges below). Including these amounts, the provision for doubtful
accounts would have been 8% and 6% of net revenues in 1996 and 1995,
respectively. This increase is attributable to the
<PAGE> 29
27
increased reserves and allowances for long-term care receivables which the
Company recognized in connection with its decision to exit this market.
Amortization of Intangible Assets and Excess Cost Over Fair Value of Net Assets
Acquired
Amortization of intangible assets and excess cost over fair value of
net assets acquired increased to $2,441 in 1997 from $2,301 in 1996. After the
completion of the Sale and divestiture, the Company will be substantially
smaller in terms of both assets and net revenues. In light of the repositioning
of the Company as a managed behavioral healthcare company and continuing changes
in the managed health care industry, the Company in the fourth quarter of 1997,
changed its estimated useful life for the excess of cost over fair value of
assets acquired from 40 years to 25 years. Amortization expense increased
approximately $300 in the fourth quarter as a result of this change in estimate.
Amortization of intangible assets and excess cost over fair value of
net assets acquired increased to $2,301 in 1996 from $1,814 in 1995. This
increase was due to additional businesses acquired in 1996 and the full year of
amortization for businesses acquired in 1995.
Write Down of Assets Held For Sale
Based on the fair market value established by the Purchase Agreement
with PsychPartners, the Company recorded a charge of $38,400 to write down the
carrying amounts of these businesses to their estimated fair value less cost to
sell. The Sale will close as soon as practicable after approval of the Purchase
Agreement by the holders of a majority of the outstanding shares of the Company
Common Stock. The Company anticipates completing this Sale in the second quarter
of 1998. Net revenues for the outpatient group practices were approximately
$58,056, $61,237 and $48,349 and recorded (loss) income from operations of
($2,696), ($783), and $836 in 1997, 1996 and 1995, respectively, excluding the
above write down of assets and restructuring and other charges.
Restructuring and Other Charges
This charge is comprised of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1997 1996 1995
------- -------- -------
<S> <C> <C> <C>
Restructuring charges ................ $14,200 $ 9,650 $ 5,600
Long-term care reserves .............. 5,900 4,450
------- ------- -------
$20,100 $14,100 $ 5,600
======= ======= =======
</TABLE>
Restructuring Charges:
In December 1997, the Company recorded a provision for restructuring
pertaining to the Company's decision to divest the outpatient group practices
which were not sold to PsychPartners and to reorganize corporate office
functions to reflect the exit from the outpatient business. The writedown of
assets includes a goodwill impairment
<PAGE> 30
28
charge of $10,287 associated with the operations the Company is exiting. The
remainder of the write down of assets consists primarily of fixed assets related
to the discontinued operations. Contract termination costs pertain primarily to
accrued costs for lease terminations, and storage of clinical records. Employee
severance costs include the accumulation of benefits set forth in the Company's
severance policy which will be paid to approximately 200 of the Company's
employees who will be terminated as a result of the restructuring plan. The
primary employee groups affected include clinical and administrative personnel
at Western Region clinic locations and regional and corporate staff. At December
31, 1997, the full balance remained for both contract termination costs and
employee severance as no amounts were paid out prior to year end. The Company
anticipates the restructuring plan will be substantially completed in 1998.
Subsequent to completion of this plan and the Sale to PsychPartners,
the Company's operations will consist primarily of its Integra Division through
which the Company provides managed behavioral health services. The Company
believes the benefit of exiting the outpatient behavioral health business will
be the opportunity to focus full management and Company resources to the Integra
Division which historically has been profitable and has generated strong same
store revenue growth.
The following unaudited pro forma results of operations were
prepared as if the discontinuation and sale of the Company's operations other
than the Integra Division were effective January 1, 1996. This pro forma
financial information is presented for informational purposes only, and is not
necessarily indicative of the results that would have actually occurred or the
results that may occur in the future.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1997 1996
-------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C>
Net revenues ............................... $10,425 $ 6,232
Income from operations ..................... 1,224 19
</TABLE>
During 1997, the Company also completed execution of the 1996
restructuring plan which discontinued the Company's long-term care operations,
exited and consolidated underperforming outpatient locations and reduced
management and overhead costs. Under these plans, approximately 300 of the
Company's employees were terminated and the Company wrote off assets consisting
primarily of goodwill in the amount of $5,850.
The following summarizes the Company's restructuring activity:
<TABLE>
<CAPTION>
Restructure Restructure
1995 1996 Amounts Balance at 1997 Amounts Balance at
Restructure Restructure Utilized in December Restructure Utilized December
Provision Provision 1995 & 1996 31, 1996 Provision in 1997 31, 1997
---------- ---------- ---------- --------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Write down of assets $4,400 $7,975 $11,272 $1,103 $11,622 $12,477 $248
Contract Termination 726 985 726 985 2,253 645 2,593
Employee severance costs 474 690 549 615 325 563 377
------ ------ ------- ------ ------- ------- ------
$5,600 $9,650 $12,547 $2,703 $14,200 $13,685 $3,218
====== ====== ======= ====== ======= ======= ======
</TABLE>
<PAGE> 31
29
Long-Term Care Reserves:
The long-term care reserves pertain largely to reserves established
by the Company for billings for services to Medicare patients in long-term care
facilities. At December 31, 1996, the Company established a reserve for
potential settlement of the Florida Medicare review of $1,300, which it believed
to be adequate based on the preliminary results of the review at this time. As
explained below, the Company reached a tentative agreement of $3,000 to settle
this matter in December 1997. Accordingly, the Company has reserved an
additional $1,700 at December 31, 1997, to cover the anticipated settlement of
this review. The Company also reserved $1,400 against the suspended accounts
receivable with the Florida intermediary.
In March 1998, the Company received notification that the Medicare
intermediary in California has completed a post payment medical review of
billings previously submitted and paid between 1990 and 1994. Based on the
results of their review, the intermediary has requested a refund of
approximately $1,200. Services were denied primarily on the basis of medical
necessity and incomplete documentation. The Company has not yet completed its
review of the intermediary's findings, but anticipates requesting an
administrative hearing. At December 31, 1997, the Company fully reserved the
above amount. In addition, the Company has recorded a reserve of $1,600 for
other potential exposures pertaining to long-term care services.
Although management believes that established reserves for the above
are sufficient, it is possible that the final resolution of these matters may
exceed the established reserves by an amount which could be material to the
Company's results of operations. The Company does not believe the ultimate
outcome of these matters will have a material adverse effect on the Company's
overall financial condition, liquidity or operations.
Of the total 1997 restructuring and other charges, approximately
$5,000 related to amounts to be paid in cash. The non-cash portion of the
charges relates to the write-off of certain assets, principally goodwill
associated with Western Region outpatient operations and reserves established
for long-term care services for denied claims.
Interest Expense
Interest expense increased to $1,474 in 1997 from $763 in 1996 due
primarily to a higher average outstanding debt balance during 1997 than in 1996.
Interest expense increased to $763 in 1996 from $498 in 1995 due primarily to a
higher average outstanding debt balance during 1996 than in 1995.
Interest Income
Interest income decreased to $30 in 1997 from $116 in 1996 due to a
lower average outstanding investment portfolio balance during 1997. Interest
income decreased to $116 in 1996 from $1,078 in 1995 due to a lower average
outstanding investment portfolio balance during 1996.
Medicare Review
During 1996, certain of the Company's Medicare Part B and related
co-insurance billings previously submitted were selected for review by the
Office of the
<PAGE> 32
30
Inspector General of the Department of Health and Human Services ("OIG") and the
Department of Justice ("DOJ"). The Company has been informed by the DOJ that the
review is a civil matter relating to billings for services to Medicare patients
in long-term care facilities in the State of Florida during the period from
approximately January 1994 through mid-1995. During the pendency of this review,
the Medicare intermediary has suspended all Medicare payments to this
subsidiary. It is the Company's policy to comply with all federal, state and
local laws including those applicable to the Medicare program. In December 1997,
the Company and representatives from the United States Attorney's office reached
an agreement in principle that would settle all of the OIG's civil claims
against the Company relating to this matter for a payment of $3,000. This
tentative agreement is subject to the final approval by the appropriate officers
of the DOJ and OIG. Throughout this process, the Company has been fully
cooperating with the review and anticipates reaching a definitive agreement in
1998. As described above in "Long Term Care Reserves," the Company has
established a reserve for the above amount, which is included with Accrued
Expenses and Other Accrued Liabilities in the accompanying 1997 Consolidated
Balance Sheet. The final agreement, when reached, is not expected to materially
differ from the terms outlined above.
Liquidity and Capital Resources
Net cash provided by operations was $1,792 in 1997, compared to net
cash provided by operations of $2,531 in 1996. Cash and cash equivalents
remained fairly consistent, decreasing from $2,299 at December 31, 1996 to
$2,154 at December 1997. In 1997, the Company used $1,293 in cash for capital
expenditures compared with $1,345 in 1996.
At December 31, 1997, the Company had a working capital deficit of
$27,646. This deficit is primarily attributable to the current classification of
the Company's revolving credit facility ("Credit Facility") and accrued
liabilities of $9,018 which pertain to the Company's sale of and exit from
outpatient behavioral group practice business and reserves established for its
long term care operations which were discontinued in 1996.
In April 1996, the Company entered into an agreement with PNC Bank
to establish the revolving Credit Facility for up to a maximum of $15,000.
Borrowings availability under this Credit Facility are based on the Company's
earnings before interest, income taxes, depreciation and amortization, and the
value of selected assets, principally accounts receivable and property and
equipment; subject to various financial and non-financial covenants; and secured
by substantially all of the assets of the Company. Borrowings under this
facility bear interest at the bank's prime rate plus 1.0% or LIBOR plus 2.85%.
The weighted average interest rate on outstanding borrowings at December 31,
1997 was 8.8%. The proceeds of this Credit Facility are available for future
acquisitions, working capital and general corporate purposes. In March 1997, the
Credit Facility was amended to reset various financial covenants to reflect the
Company's restructuring and other charges incurred in 1996. In addition, the
bank retained discretion for borrowings in excess of $12,000.
At December 31, 1997, the Company was in default of certain
financial covenants contained in the Credit Facility. The bank has waived the
covenant violations and extended the additional borrowings contingent upon
consummation of the Sale to PsychPartners at which point the Company has agreed
to repay all existing bank debt with proceeds from the Sale. Through March 25,
1998, total advances under the Credit Facility
<PAGE> 33
31
were $14,300 and are payable at the earlier of April 30, 1998 or the closing
date of the sale to PsychPartners.
The Company anticipates that the net proceeds from the Sale to
PsychPartners will primarily be used to repay bank debt, fund payment of
acquisition notes and contingent consideration and settlement of the Florida
Medicare review (see above). The Company estimates that approximately $4,000 of
the net proceeds of the Sale will be available to the Company for general
corporate purposes and to invest in future growth. The Sale is expected to close
in the second quarter of 1998. The Company intends to establish a new credit
facility with the bank after the original Credit Facility is repaid. The Company
expects this facility will provide between $7,000 and $10,000 in borrowings
availability in future periods.
If the Sale is not consummated, the Company will be required (i) to
either continue operating the outpatient behavioral healthcare business or
attempt to locate another buyer for the outpatient behavioral healthcare
business and (ii) to refinance its revolving Credit Facility and obtain
additional financing. The Company estimates additional cash needs of
approximately $7.0 million will be required during 1998 for contingent payments,
seller notes and for restructure related activities. The Company has obtained a
letter of intent from PNC Bank indicating their present intention to keep the
existing Credit Facility in place and to expand the Credit Facility to $22,000.
The preceding letter of intent would be subject to, among other things, PNC Bank
obtaining guarantees to partially collateralize the Credit Facility.
The Company has entered into an agreement with the Investment
Partnerships which are significant stockholders of the Company and are managed
by Foster Management Company, an affiliated party, to obtain their commitment to
guarantee the additional $7,000 of financing. In return, the investment funds
will receive the following: (i) a commitment fee of 2% of the guaranteed amount;
(ii) a draw down fee of 2% on borrowings in excess of $15,000; (iii) an unused
commitment fee of 1/2% per annum; and (iv) the Apogee Warrants to purchase
400,000 shares of Company Common Stock at a price of $0.05 per share or, in the
event the Sale is not consummated, a transaction fee of $3,500 payable on April
30, 1999. The Investment Partnerships have indicated to the Company that they
intend to seek one or more financial institutions as participants in such
guarantees. In recognition of the Company's need to evaluate other potential
guarantors and the terms they may offer, the Company was given the right to
accept proposals from other potential guarantors. In the event the Company
terminates the Investment Partnerships' obligations because it has secured more
favorable financing arrangements, the Company shall be obligated to pay such
Investment Partnerships the commitment fee described in clause (i) above. In
addition, the Company shall be obligated to pay (a) 30% of the Apogee Warrants
if such termination occurs on or after March 30 and before April 6, 1998, (b)
60% of the Apogee Warrants if such termination occurs on or after April 6, 1998
and before April 13, 1998 and (c) 90% of the Apogee Warrants if such termination
occurs thereafter.
The Company believes that the cash flow generated by the Company's
operations, together with its existing cash and either the proceeds from the
Sale, or in the event the Sale is not consummated the availability of additional
borrowings under the expanded Credit Facility, will be sufficient to meet the
Company's cash requirements in 1998.
<PAGE> 34
32
The Company's current ratio, working capital and debt to equity
ratio are set forth below for the dates indicated:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
---------------- ----------------
<S> <C> <C>
Current Ratio .26:1 .70:1
Working Capital
Deficit ($27,646) ($ 7,102)
Debt to Equity 3.1:1 .20:1
</TABLE>
Inflation
A significant portion of the Company's operating expenses have been
subject to inflationary increases, including clinical and administrative
salaries and rent expense. Based on management's assessment, the Company has
historically been unable to substantially offset inflationary increases through
price increases but believes the Company has somewhat mitigated the effect by
expanding services and increasing operating efficiencies. There can be no
assurance that the Company will be able to offset future inflationary increases
in expenses, if any which would result in a dilutive impact on the Company's
future earnings.
CAUTIONARY STATEMENT
Matters discussed above contain forward-looking statements that are
based on the Company's estimates, assumptions and projections. Major factors
which could cause results to differ materially from those expected by management
include the timing and nature of reimbursement charges, the nature of changes in
laws and regulations that govern various aspects of the Company's business, new
criteria adopted to determine medical necessity for behavioral health services,
the outcome of post-payment reviews of the Company's billings to Medicare
patients in long-term care facilities, including a review in the State of
Florida by the Department of Justice, successful renegotiation of the Company's
Credit Facility, changes in procedures by third party payors, pricing of managed
care and other third party contracts, the number and productivity of clinicians,
the direction and success of competitors, management retention and unanticipated
market changes.
<PAGE> 35
33
INTEGRA OPERATIONS AFTER THE CLOSING OF THE SALE
The Company intends to operate as an independent behavioral managed
care organization ("BMCO") under the name Integra, providing employee assistance
programs and managed care services to employers and health maintenance
organizations ("HMOs") after the Closing Date of the Sale. The behavioral
managed care market is a $3.5 billion market and covered lives in this market
have been growing at average annual rate of 14% since 1993. The Company intends
to leverage its existing care outcomes protocols and clinical data systems
developed by Integra to compete aggressively for greater market share.
BUSINESS
Integra has a portfolio of agreements with managed care
organizations and corporations to provide inpatient and outpatient behavioral
health services. Revenues are primarily generated by capitated managed
behavioral health and employee assistance programs. The fees are defined by
contract and are primarily calculated on a fixed per-member per month fee.
Revenues under these contracts are recorded in the month for which the member is
entitled to services. Generally, these membership contracts are on a one to
three year basis subject to cancellation by either party without cause at any
time with thirty to ninety days written notice. Integra had approximately
600,000, 425,000 and 350,000 covered lives at December 31, 1997, 1996 and 1995,
respectively.
The Company estimates the cost of providing services under these
agreements, including a reserve for services incurred, but not reported, based
upon authorized services, past claim payment experience for member groups and
other factors. The Company typically does not subcapitate the risk of providing
services under these contracts, but arranges discounted fee-for-service rates
with independent inpatient and outpatient behavioral health providers, which the
Company manages. Integra utilizes certain Apogee outpatient behavioral health
practices as part of the provider network. The Company anticipates that where
practicable, it will continue to utilize these outpatient behavioral health
practices as network providers at the existing or comparable rates which it
believes are at fair market. The Company believes there is a ready supply of
service providers in these markets, and accordingly, is not dependant on the
Apogee outpatient behavioral health practices for the delivery of service to
these contracts.
Under capitated contracts, the Company is responsible for ensuring
appropriate access to care and bears the risk for utilization levels and pricing
of the cost of services performed under these contracts. The Company believes
the future revenues under these contracts will exceed the costs of services it
will be required to provide under the terms of the contracts. An underestimation
in the utilization or price of services for these contracts could result in
material losses to the Company. Historically, Integra has managed these
capitated contracts profitably. The Company maintains no re-insurance against
the risk of loss under these contracts, however the Company maintains
malpractice and errors and omission insurance coverage for all professionals and
facilities that perform services on behalf of the Company.
MANAGEMENT
The Integra division currently has sufficient experienced operations
management, clinical management, information systems and network management
resources to implement the planned business strategy. In addition, management
has experience in pricing and managing contracts on a capitated basis.
Historically, Integra has managed capitated
<PAGE> 36
34
contracts profitably. Once the Sale is completed, the Company's corporate
finance and senior management personnel will be consolidated with the Integra
division to form the Company's management team. The Company plans to add sales
and marketing personnel as well as clinical research staff once the Sale is
completed.
MARKETING
Integra expects to expand the promotion of its proprietary clinical
outcomes data system, Compass(TM), as a differentiator of its "core EAP" and
managed care products. Compass(TM) is one of the few clinical outcomes data
systems available with the ability to provide data concurrent with treatment.
The Company has hired additional sales personnel and expects to add additional
staff, during 1998. The Company will focus on large Fortune 1000 customers and
HMOs which desire quality managed behavioral care and clinical data driven
decision making in their employee benefit plans. In addition, Integra will
attempt to expand the use of Compass(TM) in other venues such as pharmaceutical
data sharing and reseller agreements with health care information software
companies.
ACQUISITIONS
Once the Sale is completed, the Company expects to pursue
acquisitions of smaller EAP and privately owned BMCO organizations on a
selective basis. These candidates will fit an acquisition criteria which
includes a clinical philosophy compatibility, anticipated ease of consolidation
into Integra's operations and a complementary customer mix.
Year 2000 Compliance
The Company is in the process of assessing the effects of Year 2000
software issues on its present information technology structure. As of December
31, 1997, that assessment, including a determination of the exposure of the
Company's business processes to these issues and the need for, and estimated
costs associated with, any necessary conversions had not been completed.
<PAGE> 37
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<PAGE> 38
36
APOGEE, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
ASSETS DECEMBER 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,154 $ 2,299
Accounts receivable, net of allowance for doubtful
accounts 5,939 11,096
Other accounts receivable 1,455 1,643
Other current assets 410 1,407
-------- --------
Total current assets 9,958 16,445
Property and equipment, net 2,426 3,359
Intangible assets and excess cost over fair value
of net assets acquired, net 31,031 77,381
Other assets 185 598
-------- --------
$ 43,600 $ 97,783
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 13,891 $ 4,584
Accounts payable 2,283 2,196
Accrued expenses and other current liabilities 21,430 16,767
-------- --------
Total current liabilities 37,604 23,547
Long-term debt 809 8,224
Other long-term liabilities 128 485
Deferred income tax liability 346 346
-------- --------
Total liabilities 38,887 32,602
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 20,000,000
shares authorized; issued and outstanding
10,029,325 in 1997 and 9,822,570 in 1996 100 98
Capital in excess of par value 86,349 85,624
Accumulated deficit (81,707) (20,489)
Deferred compensation (29) (52)
-------- --------
Total stockholders' equity 4,713 65,181
-------- --------
$ 43,600 $ 97,783
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE> 39
37
APOGEE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net revenues:
Patient service revenue $ 59,719 $ 72,495 $ 63,760
Premium revenue 10,425 6,232 4,509
----------- ----------- -----------
Total net revenues 70,144 78,727 68,269
----------- ----------- -----------
Cost of revenues:
Patient service costs 48,383 56,700 48,619
Premium service costs 5,819 3,387 1,913
----------- ----------- -----------
Total cost of revenues 54,202 60,087 50,532
----------- ----------- -----------
Gross profit 15,942 18,640 17,737
Selling and administrative expenses 10,447 11,179 9,839
Provision for doubtful accounts 4,226 3,886 3,408
Amortization of intangible assets and
excess cost over fair value of net assets acquired 2,441 2,301 1,814
Writedown of assets held for sale 38,400
Restructuring and other charges 20,100 14,100 5,600
----------- ----------- -----------
Loss from operations (59,672) (12,826) (2,924)
Non-operating expenses (income):
Interest expense 1,474 763 498
Interest income (30) (116) (1,078)
Other expenses 30
----------- ----------- -----------
Loss before income taxes (61,116) (13,473) (2,374)
Provision for income taxes 102 121 77
----------- ----------- -----------
Net loss ($ 61,218) ($ 13,594) ($ 2,451)
=========== =========== ===========
Basic and diluted net loss per common share ($ 6.17) ($ 1.39) ($ 0.26)
=========== =========== ===========
Weighted average shares outstanding,
basic and diluted 9,921,374 9,786,599 9,414,839
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE> 40
38
APOGEE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Common Shares
------------------
Capital in
excess of Accumulated Deferred
Number Par value par value deficit compensation Total
-------- --------- --------- --------- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994 9,277 $ 93 $ 79,008 ($ 4,444) ($ 96) $ 74,561
Common stock issued in
connection
with acquisitions 458 4 6,491 6,495
Exercise of stock options 2 2
Common stock issued for
services
rendered 6 111 111
Amortization of deferred
compensation 21 21
Net loss (2,451) (2,451)
-------- -------- -------- -------- -------- --------
Balance at December 31,
1995 9,741 97 85,612 (6,895) (75) 78,739
Common stock issued in
connection
with acquisitions 122 1 743 744
Common stock reversal (40) (731) (731)
Amortization of deferred
compensation 23 23
Net loss (13,594) (13,594)
-------- -------- -------- -------- -------- --------
Balance at December 31,
1996 9,823 98 85,624 (20,489) (52) 65,181
Common stock issued in
connection
with acquisitions 206 2 725 727
Amortization of deferred
compensation 23 23
Net loss (61,218) (61,218)
-------- -------- -------- -------- -------- --------
Balance at December 31,
1997 10,029 $ 100 $ 86,349 ($81,707) ($ 29) $ 4,713
======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE> 41
39
APOGEE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
------ ------ -----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($61,218) ($13,594) ($ 2,451)
Adjustments to reconcile net loss to net cash
provided by operations:
Depreciation and amortization 3,289 3,309 2,554
Provision for doubtful accounts 4,226 3,886 3,408
Non cash portion of asset write down,
restructuring and other charges 58,500 11,507 4,400
Changes in assets and liabilities, net of
effects of businesses acquired:
Increase in accounts receivable (657) (3,989) (6,211)
Decrease (increase) in other current assets 626 (548) (1,506)
Increase in accounts payable 87 739 603
(Decrease) increase in accrued expenses and
other current liabilities (3,090) 1,829 3,516
Increase (decrease) in other assets and
other liabilities 29 (608) (77)
-------- -------- --------
Net cash provided by operating activities 1,792 2,531 4,236
-------- -------- --------
Cash flows from investing activities:
Acquisition of business:
Payments for acquisition of businesses, net of
cash acquired
of $524 in 1996, $795 in 1995 (4,108) (10,102)
Additional payments for businesses acquired in
prior years (2,590) (6,770) (5,964)
-------- -------- --------
Net cash outlay for acquisition of businesses (2,590) (10,878) (16,066)
Disposition of businesses 100
Purchases of property and equipment (1,293) (1,345) (2,515)
-------- -------- --------
Net cash used in investing activities (3,783) (12,223) (18,581)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 111
Proceeds from exercise of common stock options 2
Proceeds from issuance of notes payable 6,420 6,650 275
Principal payments on long-term obligations (4,574) (6,608) (3,375)
-------- -------- --------
Net cash provided by (used in) financing
activities 1,846 42 (2,987)
-------- -------- --------
Net decrease in cash and cash equivalents (145) (9,650) (17,332)
Cash and cash equivalents at beginning of period 2,299 11,949 29,281
-------- -------- --------
Cash and cash equivalents at end of period $ 2,154 $ 2,299 $ 11,949
======== ======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 1,403 $ 694 $ 431
======== ======== ========
Income taxes paid $ 210 $ 234 $ 269
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE> 42
40
APOGEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Note 1 - Organization and Operation
Apogee, Inc. ("Apogee" or the "Company"), a Delaware corporation, was
formed to provide behavioral health services and commenced operations on March
15, 1991. The Company operates multi-disciplinary outpatient behavioral health
group practices, principally at free standing clinics and is one of the largest
providers of outpatient behavioral health services in the United States. The
Company currently operates behavioral health clinics located in 13 states and
the District of Columbia. At December 31, 1997, Apogee's outpatient operations
were principally concentrated in Florida, Maryland, New Jersey, Pennsylvania,
Virginia and Wisconsin.
Largely through its Integra Division ("Integra"), the Company also
provides managed behavioral health services through full and shared risk
arrangements with employers and managed care organizations to perform behavioral
health services on a capitated, sub-capitated and case rate basis. In addition,
the Company provides an array of managed behavioral health services including:
employee assistance programs; third party clinical case management and claims
adjudication.
During December 1997, the Company announced it plans to sell and divest
its outpatient behavioral health group practice operations. The Company entered
into an agreement to sell substantially all of the assets of the outpatient
behavioral health group practice business (hereafter referred to as the "Sale"),
except for practices located in the Western region of the United States, which
the Company plans to divest. The consummation of the Sale will result in the
divestiture by the Company of substantially all the assets and business of the
Company's outpatient behavioral health practices. As of December 31, 1997, the
outpatient behavioral health practice business accounted for approximately
eighty-four percent (84%) of the assets of the Company (before the impact of the
write down of assets held for sale and the impact of the restructuring charges);
and for the year ended December 31, 1997 approximately eighty-three percent
(83%) of the Company's net revenues. After the closing date, the Company will no
longer operate outpatient behavioral health practices and its primary business
activity will be managed behavioral healthcare through its Integra Division. As
a result of the Sale, the Company will be a significantly smaller company in
terms of revenues and assets.
The Company's Board of Directors believes the terms of the sale are fair
to and in the best interest of the Company and its shareholders for the
long-term growth of the Integra business. In making its recommendation to exit
the outpatient behavioral health practice business, the Company considered the
recent operating results, future prospects and strategic direction of the
outpatient behavioral health practice business. The Company also considered the
current constraints on its ability to finance future growth and the positive
effect the sale of assets and the repayment of debt would have on the Company's
ability to obtain additional financing.
The above Sale and effect on the Company is further described in Notes 3
and 12. If the Sale is not consummated, the Company will pursue other strategic
alternatives and will be required to refinance its revolving Credit Facility
(see Note 4).
Note 2 - Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and all wholly owned and beneficially owned subsidiaries. Because of corporate
practice of medicine laws in certain states in which the Company operates, the
Company does not own the professional corporations which operate the
professional and clinical aspects of the outpatient behavioral healthcare
practices in those states, but instead has the contractual right to designate,
in its sole discretion and at any time, the licensed professional who is the
owner of the capital stock of the professional corporation at a nominal cost
("Nominee Arrangements"). In addition, the Company enters into exclusive
long-term management services agreements ("Management Services Agreements") with
the professional corporations. Through the Management Services Agreements, the
Company has exclusive authority over decision making relating to all major
ongoing operations of the underlying professional corporations with the
exception of the professional aspects of the practice of psychiatry, psychology
and other professional behavioral healthcare services as required by certain
state
<PAGE> 43
41
APOGEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
laws. Under the Management Services Agreements, the Company establishes annual
operating and capital budgets for the professional corporations and compensation
guidelines for the clinical professionals. The Management Services Agreements
generally have initial terms of ten years or greater. The method of computing
the management fees varies by contract. Management fees are based on either (i)
billings of the affiliated practice less the amounts necessary to pay
professional compensation and other professional expenses or (ii) a license fee
per location, reimbursement of direct costs, reimbursement of marketing costs
plus a markup, and a flat administrative fee or (iii) a percentage of gross
receipts of the affiliated practice. In all cases, these fees are meant to
compensate the Company for expenses incurred in providing covered services plus
a profit. These interests are unilaterally saleable and transferable by the
Company and fluctuate based upon the actual performance of the operations of the
professional corporations.
Through the Nominee Arrangements, the Company has a significant long-term
financial interest in the affiliated practices and, therefore, according to
Emerging Issues Task Force No. 97-2 "Application of FASB Statement No. 94,
Consolidation of All Majority-Owned Subsidiaries, and APB Opinion No. 16,
Business Combinations, to Physician Practice Management Entities and Certain
Other Entities with Contractual Management Arrangement", the Company must
consolidate the results of the affiliated practices with those of the Company.
Because the Company must present consolidated financial statements, net revenues
are presented in the accompanying Consolidated Statements of Operations. All
significant intercompany accounts and transactions, including management fees,
have been eliminated.
Reclassification
Certain prior year amounts have been reclassified to conform to the
current year presentation.
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, liabilities, revenues
and expenses. Actual results could differ from those estimates.
Cash and cash equivalents
Cash and cash equivalents include cash on hand and short-term investments
with original maturities of 90 days or less.
Revenue recognition
Patient service revenue is reported when earned at time of service at the
estimated amounts to be realized through payments from patients, third party
payors and others for services rendered. Third party reimbursement in initially
billed at "usual, customary and reasonably" market rates. When recorded,
aggregated billings are adjusted to reflect the estimated amounts realizable
from third party payors based on the Company's historical experience and
contractual rates established with the payors. Patient service revenue
represents billings of the Company's operations other than its behavioral
managed care division, Integra, which are principally comprised of the
outpatient group practice business and long-term care behavioral health business
which the Company exited in December 1996.
Premium revenue pertains to the Company's Integra Division and are
primarily generated by capitated managed behavioral health and employee
assistance programs. The fees are defined by contract and are primarily
calculated on a fixed per-member per-month fee. Capitated revenues are recorded
in the month for which the member is entitled to services (see Note 13).
Property and equipment
Property and equipment are stated at cost less accumulated depreciation
and amortization. Additions and betterments are capitalized and maintenance and
repairs are charged to current operations. The cost of assets retired or
otherwise disposed of and the related accumulated depreciation and amortization
are removed from the accounts
<PAGE> 44
42
APOGEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
and the gain or loss on such dispositions is reflected in current operations.
Depreciation is provided using the straight-line method. Estimated useful lives
of the assets are:
<TABLE>
<CAPTION>
<S> <C>
Furniture and fixtures ...... 5 to 7 years
Office equipment ............ 3 to 5 years
</TABLE>
Long lived and intangible assets
Identifiable assets and liabilities acquired in connection with business
combinations accounted for under the purchase method are recorded at their
respective fair values. Deferred taxes have been recorded to the extent of
differences between the fair value and the tax basis of the assets acquired and
liabilities assumed. The excess of the purchase price over the fair value of
tangible net assets acquired is amortized on a straight-line basis over the
estimated useful life of the intangible assets. Allocation of intangible assets
between identifiable intangibles and goodwill was performed by Company
management with the assistance of independent appraisers. Intangible assets
other than goodwill include patient lists and covenants not to compete which are
amortized over one and five years, respectively.
After the completion of the Sale and divestiture, the Company will be
substantially smaller in terms of both assets and net revenues. In light of the
repositioning of the Company as a managed behavioral healthcare company and
continuing changes in the managed health care industry, the Company in the
fourth quarter of 1997, changed its estimated useful life for the excess of cost
over fair value of assets acquired from 40 years to 25 years. Amortization
expense increased approximately $300 in the fourth quarter as a result of this
change in estimate.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"), which
establishes accounting standards for the impairment of long-lived assets,
certain identified intangible assets and goodwill related to those assets to be
held and used and for long-lived assets and certain intangible assets to be
disposed of. In accordance with SFAS 121, the Company reviews the realizability
of long-lived assets, certain intangible assets and goodwill whenever events or
circumstances occur which indicate recorded cost may not be recoverable. The
Company also reviews the overall recoverability of goodwill based primarily on
estimated future undiscounted cash flows.
If the expected future cash flows (undiscounted) are less than the
carrying amount of such assets, the Company recognizes an impairment loss for
the difference between the carrying amount of the assets and their estimated
fair value. In estimating future cash flows for determining whether an asset is
impaired, and in measuring assets that are impaired, assets are grouped by
geographic region.
Financial instruments
The carrying value of cash and cash equivalents, accounts receivable and
payable and accrued liabilities approximates fair value due to the short-term
maturities of these assets and liabilities.
Income taxes
The Company accounts for certain items of income and expense in different
time periods for financial reporting and income tax purposes. Provisions for
deferred income taxes are made in recognition of such temporary differences,
where applicable. A valuation allowance is established against deferred tax
assets unless the Company believes it more likely than not that the benefit will
be realized.
Earnings per share
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS 128") which establishes new standards for
computing and presenting earnings per share by replacing the presentations of
weighted shares outstanding, inclusive of common stock equivalents, with a dual
presentation of basic and diluted
<PAGE> 45
43
APOGEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
earnings per share. Basic earnings per share includes no dilution and is
computed by dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflects the dilutive effect of all stock options, shares
contingently payable in connection with certain acquisitions and convertible
debentures. All prior period earnings per share information has been restated in
accordance with SFAS 128.
Note 3 - Sale of Outpatient Business to PsychPartners, LLC
On December 26, 1997, the Company entered into an agreement of Purchase
and Sale (the "Purchase Agreement") with PsychPartners MidAtlantic, Inc.,
PsychPartners, Inc., and PsychPartners, LLC (collectively "PsychPartners" or the
"Purchasers"). Pursuant to the Purchase Agreement, the Company will sell to the
Purchasers substantially all of the assets and business of the Company's
outpatient behavioral healthcare business, which consists of (i) all of the
capital stock of one of the subsidiaries of the Company (the "Subsidiary Stock")
operating two outpatient behavioral health practices and (ii) substantially all
of the assets (the "Assets") relating to 20 of the Company's outpatient
behavioral health practices (the 22 practices are collectively, the
"Practices"). In consideration for the sale of the Practices, the Purchasers
will pay to the Company a purchase price consisting of (a) $27,000 in cash, (b)
a warrant contingently issuable to purchase 400,000 Common Units of
PsychPartners at a purchase price of $.05 per Common Unit (the "Warrant") and
(c) the assumption of certain liabilities of the Company and the Practices
(collectively, the "Purchase Price"). The Purchase Price is subject to certain
adjustments. The Purchase Price may be adjusted if the cash, accounts
receivable, deposits and prepaid expenses of the Practices are less than the
liabilities and future contingent payment obligations of the Practices. As of
December 31, 1997 the net amount of assets which would be acquired less
liabilities which would be assumed is approximately $1,700. The estimated future
earnout payments to be assumed by PsychPartners are approximately $1,850. As of
December 31, 1997, the Company would have a net asset adjustment to reduce the
Purchase Price by $150. The Company believes that any adjustment, if required,
would not exceed $500.
The Warrant entitles the Company to purchase 400,000 Common Units of
PsychPartners during the five (5) year period following the Closing Date. The
issuance of the Warrant to the Company is contingent on the achievement of
certain future operating profit thresholds of two of the Practices during a
one-year period after the closing of the Sale as defined in the agreement. The
Company will not assign a value to the Warrant until the contingency is resolved
and the Warrant is issued. Neither the Warrant nor the Common Units underlying
the Warrant have been registered under the Securities Act of 1933, as amended,
and the Warrant does not provide for either the Warrant or the Common Units to
be registered by PsychPartners.
The Sale will close as soon as is practicable after the approval of the
Purchase Agreement by the holders of a majority of the outstanding shares of
Company Common Stock at the Special Meeting (the "Closing Date"). The
Company anticipates the closing date will be in the second quarter of 1998.
The respective obligations of the Company and the Purchasers to close the
Sale are subject to the satisfaction on or prior to the Closing Date of various
closing conditions. Such conditions include, among others, the approval and
adoption of the Purchase Agreement by the holders of a majority of the
outstanding shares of Company Common Stock, the correctness in all material
respects of the representations and warranties of the parties to the Purchase
Agreement and the Company having complied with the agreements and conditions set
forth in the Purchase Agreement. Certain of these conditions (other than the
approval and adoption of the Purchase Agreement by the Company's shareholders)
may be waived by PsychPartners and the Purchasers. If the Company's shareholders
do not approve the Sale, the Company's Board of Directors will pursue other
strategic options.
The Purchase Agreement may, under certain specified circumstances, be
terminated and the sale abandoned at any time prior to the Closing,
notwithstanding approval of the Purchase Agreement by the shareholders of the
Company. The Company may terminate the Purchase Agreement (i) with the mutual
written consent of the Purchasers, in the event a condition to the Company's or
the Purchasers' obligation to the Closing has not been met or waived on or prior
to April 30, 1998 or (ii) because the Board of Directors of the Company
determines, in the exercise of its judgment as to its fiduciary duties to the
shareholders after consultation with counsel, that such termination is required
<PAGE> 46
44
APOGEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
by reason of any competing proposal to purchase all or any significant portion
of the Subsidiary Stock or the Assets, or any similar transaction (a "Competing
Transaction").
Pursuant to the Purchase Agreement, at the Closing, the Purchasers, the
Company and certain of its subsidiaries will enter into an Interim Services
Agreement pursuant to which the Company and the subsidiaries will assist the
Purchasers in obtaining certain consents in connection with the Sale and will
provide certain management and other services, including billing services to the
Purchasers to operate and manage the Practices in connection with the transition
of the Practices to the Purchasers.
Based on the fair market value established by the Purchase Agreement, the
Company recorded a charge of $38,400 to write down the carrying amounts of these
businesses to their estimated fair value less cost to sell. Net revenues for all
the Company's outpatient group practices, including Western region practices,
were approximately $58,056, $61,237 and $48,349 and recorded income (loss) from
operations of ($2,696), ($783), and $836 in 1997, 1996 and 1995, respectively,
excluding the above write down of assets and restructuring and other charges.
Note 4 - Liquidity, Capital Resources and Use of Proceeds
At December 31, 1997, the Company had a working capital deficit of
$27,646. This deficit is primarily attributable to the current classification of
the Company's Credit Facility and accrued liabilities of $9,018 which pertain to
the Company's sale and exit of outpatient behavioral group practice business and
reserves established for its long-term care operations which were discontinued
in 1996.
The Company anticipates that the net proceeds from the sale to
PsychPartners will primarily be used to repay bank debt, fund payment of
acquisition notes (See Note 9) and contingent consideration (See Note 6), and
for settlement of the Florida Medicare review (See Note 13). The Company
estimates that approximately $4,000 of the net proceeds of the sale will be
available to the Company for general corporate purposes and to invest in future
growth. The Sale is expected to close in the second quarter of 1998. The Company
intends to establish a new credit facility with the bank after the original
Credit Facility is repaid. The Company expects this facility will provide
between $7,000 and $10,000 in borrowings availability in future periods.
If the Sale is not consummated, the Company will be required (i) to either
continue operating the outpatient behavioral healthcare business or attempt to
locate another buyer for the outpatient behavioral healthcare business, and (ii)
to refinance its revolving Credit Facility (See Note 9). The Company is
currently party to a credit agreement with PNC Bank that includes a $15,000 term
loan, of which PNC Bank retains discretion for borrowings in excess of $12,000.
Borrowings outstanding under the Credit Facility were approximately $12,100 as
of December 31, 1997, and $14,300 as of March 15, 1998. The Company is currently
in technical default of certain covenants contained in the Credit Facility. PNC
Bank has temporarily waived these covenants and authorized borrowings in excess
of the $12,000, both of which are contingent upon consummation of the Sale. The
Company estimates additional cash needs of approximately $7,000 will be required
during 1998 for contingent payments, seller notes and for restructure related
activities. The Company has obtained a letter of intent from PNC Bank indicating
their present intention to keep the existing Credit Facility in place and to
expand the Credit Facility to $22,000. The preceding letter of intent would be
subject, among other things, to PNC Bank obtaining guarantees to partially
collateralize the Credit Facility. The Company has entered into an agreement
with certain investment funds which are significant stockholders of the Company
and are managed by Foster Management Company, an affiliated party, to obtain
their commitment to guarantee the additional $7,000 of financing. In return, the
investment funds will receive the following: (i) a commitment fee of 2% of the
guaranteed amount; (ii) a draw down fee of 2% on borrowings in excess of
$15,000; (iii) an unused commitment fee of 1/2% per annum; and (iv) warrants to
purchase 400,000 shares of Apogee common stock at a price of $0.05 per share or,
in the event the Sale is not consummated, a transaction fee of the greater of
$3,500 or an amount that would equate to an internal rate of return of 50% on
the maximum amount drawn down under the increased portion of the Credit
Facility, payable on or before April 30, 1999. In recognition of the Company's
need to evaluate other potential guarantors and the terms they may offer, the
Company was given the right to accept proposals from other potential guarantors.
In the event the Company terminates the investment funds' obligations because it
has secured more favorable financing arrangements, the Company shall be
obligated to pay such investment
<PAGE> 47
45
APOGEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
funds the commitment fee described in clause (i) above. In addition, the Company
shall be obligated to pay (a) 30% of the warrants if such termination occurs on
or after March 30 and before April 6, 1998, (b) 60% of the warrants if such
termination occurs on or after April 6, 1998 and before April 13, 1998 and (c)
90% of the warrants if such termination occurs thereafter.
The Company believes that the cash flow generated by the Company's
operations, together with its existing cash and either the proceeds from the
Sale, or in the event the Sale is not consummated the availability of additional
borrowings under the expanded bank Credit Facility, will be sufficient to meet
the Company's cash requirements in 1998.
Note 5 - Receivables and Third Party Reimbursements
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
December 31
---------------------
1997 1996
---- ----
<S> <C> <C>
Accounts receivable, net of contractual
allowances $13,287 $20,402
Less: Allowance for doubtful accounts 7,348 9,306
------- -------
$ 5,939 $11,096
======= =======
</TABLE>
The Company's services are primarily reimbursed by third party payors,
including Medicare, Medicaid, managed care organizations and commercial
insurance companies. Approximately 7%, 16%, and 21% of the Company's net
revenues for 1997, 1996 and 1995, respectively, were directly billed to Medicare
which is subject to Federal regulation. The Company believes the allowance for
doubtful accounts is adequately estimated based on its ongoing review of
collectibility.
As further explained in Notes 11 and 13, the Company has been undergoing
post payment review of selected billings to Medicare patients in long-term care
facilities in the States of Florida and California. During the pendency of this
review, the Florida intermediary has suspended all long-term care Medicare
payments to the Company. At December 31, 1997, the above amounts include $1,818
in net billings which have been suspended for which the Company has established
a full allowance. At December 31, 1996 the above amounts included $4,216 in
long-term care billings for which the Company established an allowance for
doubtful accounts of $2,139 primarily as a result of the above matters. In
addition the Company also had allowances of $1,924 and $1,817 at December 31,
1997 and 1996, respectively, associated with outpatient locations which the
Company has shut down.
Note 6 - Business Acquisitions
During 1996 and 1995, the Company acquired 6 and 19 businesses,
respectively. No businesses were acquired during 1997. These acquisitions have
been accounted for using the purchase method of accounting. The results of
operations of the acquired practices are included in the consolidated financial
statements from the respective dates of acquisition.
<PAGE> 48
46
APOGEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
The following unaudited pro forma consolidated results of operations of
the Company, including restructuring and other charges, give effect to the 1996
acquisitions as if they had occurred on January 1, 1996:
<TABLE>
<CAPTION>
Year Ended
December 31,
1996
---------------
(Unaudited)
<S> <C>
Net revenues ................................ $ 83,383
Loss from operations ........................ (12,391)
Net loss .................................... (13,367)
Net loss per common share ................... ($ 1.35)
</TABLE>
The above pro forma information is not necessarily indicative of the
results of operations that would have occurred had the acquisitions been made as
of the beginning of the respective periods or of the results which may occur in
the future.
Information with respect to businesses acquired are as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
--------------------
1996 1995
---- ----
<S> <C> <C>
Cash paid (net of cash acquired) ....................................... $ 4,108 $10,102
Common stock issued .................................................... 191 5,424
Subordinated promissory notes issued ................................... 1,205 3,640
Other deferred purchase price .......................................... -- 1,570
------- -------
5,504 20,736
Liabilities assumed .................................................... 819 3,329
------- -------
6,323 24,065
Fair value of assets acquired, principally accounts receivable, property
and equipment and certain identified intangible assets ................. 630 4,467
------- -------
Cost in excess of fair value of net assets acquired ........... $ 5,693 $19,598
======= =======
</TABLE>
In connection with certain acquisitions, the Company has entered into
contractual arrangements whereby additional shares of the Company's common stock
and cash may be issued to former owners of acquired companies
<PAGE> 49
47
APOGEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
upon attainment of specified financial criteria (i.e. contingent consideration)
over periods of two to four years as set forth in the respective agreements. The
number of shares of common stock to be issued cannot be determined until the
earn-out periods expire and the attainment of criteria is established. If such
criteria are attained, but not exceeded, the Company will be obligated to make
cash payments of approximately $4,925 and issue approximately 244,507 shares of
common stock over the next three years. A lesser amount of cash would be paid
and a lesser number of shares of common stock would be issuable under certain
acquisition agreements if the financial criteria are not met and a greater
amount of cash would be paid and a greater number of shares of common stock
would be issuable under certain acquisition agreements if the financial criteria
are exceeded. Under the terms of the Purchase and Sale Agreement with
PsychPartners, the Company's obligation for contingent consideration for periods
subsequent to the closing date for the practices acquired will be assumed by
PsychPartners.
The Company paid $2,590, $2,829 and $1,492 in cash and issued 206,755,
86,408 and 61,733 shares of common stock in 1997, 1996 and 1995, respectively,
in connection with businesses acquired in prior years. This consideration was
accounted for as additional goodwill.
Note 7 - Property and Equipment
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1996
------ ------
<S> <C> <C>
Furniture, fixtures and equipment....................... $3,679 $5,201
Less: Accumulated depreciation ................ 1,253 1,842
------ ------
$2,426 $3,359
====== ======
</TABLE>
Depreciation expense was $848, $1,008 and $791 for 1997, 1996 and 1995,
respectively.
Note 8 - Intangible Assets
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1996
------ ------
<S> <C> <C>
Excess cost over fair value of net assets acquired $36,044 $80,951
Patient lists .................................... 75 92
Covenants not to compete ......................... 364 368
------- -------
36,483 81,411
Less: Accumulated amortization ................... 5,452 4,030
------- -------
$31,031 $77,381
======= =======
</TABLE>
As further described in Note 3, the Company recorded a charge of $38,400
to write down the carrying amount of the assets to be sold to PsychPartners. In
addition, the Company wrote down $10,287 of intangible assets pertaining to the
exit of the Western Region practices (See Note 11). In accordance with SFAS 121,
these charges are primarily reflected as a reduction of goodwill at December 31,
1997.
<PAGE> 50
48
APOGEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Note 9 - Borrowings
Note payable to bank
In April 1996, the Company entered into an agreement with a bank to
establish a revolving credit facility ("Credit Facility") for up to a maximum of
$15,000. Borrowings availability under this Credit Facility are based on the
Company's earnings before interest, income taxes, depreciation and amortization,
and the value of selected assets, principally accounts receivable and property
and equipment; subject to various financial and non-financial covenants; and
secured by substantially all of the assets of the Company. Borrowings under this
facility bear interest at the bank's prime rate plus 1.0% or LIBOR plus 2.85%.
The weighted average interest rate on outstanding borrowings at December 31,
1997 was 8.8%. The proceeds of this Credit Facility are available for future
acquisitions, working capital and general corporate purposes. In March, 1997,
the Credit Facility was amended to reset various financial covenants to reflect
the Company's restructuring and other non-recurring charges incurred in 1996. In
addition, the bank retained discretion for borrowings in excess of $12,000.
At December 31, 1997, the Company was in default of certain
financial covenants contained in the Credit Facility. The bank has waived the
covenant violations and extended the additional borrowings contingent upon
consummation of the Sale to PsychPartners at which point the Company has agreed
to repay all existing bank debt with proceeds from the sale. Through March 15,
1998, total advances under the Credit Facility were $14,300 and are payable at
the earlier of April 30, 1998 or the closing date of the sale to PsychPartners.
The advances under this Credit Facility are classified as a current liability in
the accompanying financial statements. See Note 4 for the Company's discussion
of liquidity, capital resources and use of proceeds.
In 1994, the Company issued $2,550 of subordinated convertible
debentures at 5% - 6% in connection with business acquisitions. The debentures
are convertible, at the option of the holders, into shares of the Company's
common stock at conversion prices ranging from $16 to $18 a share. The
debentures are redeemable, in whole or in part, at the option of the Company.
These debentures were fully repaid in 1997.
<PAGE> 51
49
APOGEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Long- term debt
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
----- -----
<S> <C> <C>
5.0% - 9.0% subordinated promissory notes
issued in connection with business
acquisitions, payable through 2000 ..................... $ 2,624 $ 6,251
Revolving Credit Facility (prime rate plus 1.0%
or LIBOR plus 2.85% expiring November 1998) ............ 12,070 5,650
Subordinated convertible debentures, payable
through 1997 ........................................... 825
Various installment loans payable through
October 1998, interest rates from 7.0% to
9.5% ................................................... 6 82
------- -------
14,700 12,808
Less: Amounts due within one year ............. 13,891 4,584
------- -------
$ 809 $ 8,224
======= =======
Minimum repayments of long-term debt are:
1998 .......................................... $13,891
1999 .......................................... 778
2000 .......................................... 31
-------
$14,700
=======
</TABLE>
The carrying amount of the Company's borrowings under its long-term
revolving credit facility approximates fair value. Based on the borrowing rates
currently available to the Company for loans with similar terms and maturity,
the fair value of the Company's remaining debt at December 31, 1997, and 1996
was $2,571 and $6,958, respectively.
<PAGE> 52
50
APOGEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Note 10 - Income Taxes
The components of the provision for income tax expense for 1997, 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
Years Ended December
31,
---------------------------------------
1997 1996 1995
---- ---- ----
Current:
<S> <C> <C> <C>
Federal............................................. ($56) $204 $41
State............................................... 158 135 36
----- --- ---
102 339 77
----- --- ---
Deferred:
Federal............................................. ----- (169) -----
State............................................... ----- (49) -----
----- ----- -----
----- (218) -----
----- ----- -----
$102 $121 $77
==== ==== ===
</TABLE>
Deferred tax assets (liabilities) comprise the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
------ -----
<S> <C> <C>
Net operating loss carryforwards .............................. $ 3,950 $ 800
Accruals and reserves not currently deductible for tax purposes 1,073 181
Restructuring reserve ......................................... 14,097 4,040
-------- --------
Gross deferred tax assets ..................................... 19,120 5,021
Valuation reserve ............................................. (16,349) (5,021)
-------- --------
Total deferred tax assets ..................................... 2,771 --
Temporary differences pertaining to acquired companies ........ (3,117) (346)
-------- --------
Net deferred tax liabilities .................................. ($ 346) ($ 346)
======== ========
</TABLE>
The reconciliation of the federal statutory tax rate to the effective tax rate
is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal statutory tax rate....................................................... (34%) (34%) (34%)
State income taxes, less related federal tax benefit............................. (2) (4) 2
Non-deductible amortization of excess cost over fair value of net assets
acquired......................................................................... 2 10
Business expense disallowance.................................................... 2 2
Original issue discount.......................................................... (4)
Non-deductible portion of restructuring charge................................... 16 10 26
Loss for which no tax benefit was provided....................................... 20 25 28
Net operating losses utilized.................................................... (27)
---- ---- ------
0% 1% 3%
==== ==== =====
</TABLE>
<PAGE> 53
51
APOGEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
At December 31, 1997, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $10,000. Their use is limited to
future taxable earnings of the Company and, as specified in the Internal Revenue
Code, use of certain of the net operating loss carryforwards is limited as they
were acquired by the Company in a purchase of the stock of other companies. The
carryforwards expire in varying amounts through 2012. A valuation reserve has
been established against the potential future benefit of the net operating loss
carryforwards.
Note 11 - Restructuring and Other Charges
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Restructuring charges.............................................. $14,200 $9,650 $5,600
Long-term care reserves............................................ 5,900 4,450
------- ------- -------
$20,100 $14,100 $5,600
======= ======= ======
</TABLE>
Restructuring charges:
In December 1997, the Company recorded a provision for restructuring
pertaining to the Company's decision to divest the outpatient group practices
which were not sold to PsychPartners and to reorganize corporate office
functions to reflect the exit of the outpatient business. The write-down of
assets includes a goodwill impairment charge of $10,287 associated with the
operations the Company is exiting. The remainder of the write down of assets
consists primarily of fixed assets related to the discontinued operations.
Contract termination costs pertain primarily to accrued costs for lease
termination and storage of clinical records. Employee severance costs include
the accumulation of benefits set forth in the Company's severance policy which
will be paid to approximately 200 of the Company's employees who will be
terminated as a result of the restructuring plan. The primary employee groups
affected include clinical and administrative personnel at Western Region clinic
locations and regional and corporate staff. The Company anticipates the
restructuring plan will be substantially completed in 1998. Subsequent to
completion of this plan and the Sale to PsychPartners, the Company's operations
will consist primarily of its Integra Division through which the Company
provides managed behavioral health services. The Company believes the benefit of
exiting the outpatient behavioral health business will be the opportunity to
focus full management and Company resources on Integra which historically has
been profitable and has generated strong same store revenue growth (see Note 12
for pro forma operating results of this division).
During 1997, the Company also completed execution of the 1996
restructuring plan which discontinued the Company's long term care operations,
exited and consolidated underperforming outpatient locations and reduced
management and overhead costs. Under these plans, approximately 300 of the
Company's employees were terminated and the Company wrote off assets consisting
primarily of goodwill in the amount of $5,850 and fixed assets related to the
restructured operations.
<PAGE> 54
52
APOGEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
During 1996, the Company completed the execution of the 1995 restructuring
plan which reorganized certain long term care operations and reduced management
and overhead costs. The Company completed the employee reduction program by
terminating 120 of the Company's employees and also wrote off assets consisting
primarily of goodwill in amount of $1,850 and fixed assets of $1,275.
<PAGE> 55
53
APOGEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
The following summarizes the Company's restructuring activity:
<TABLE>
<CAPTION>
Amounts Restructure Restructure
1995 1996 Utilized in Balance at 1997 Amounts Balance at
Restructuring Restructuring 1995 & December 31, Restructuring Utilized in December 31,
Provision Provision 1996 1996 Provision 1997 1997
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Write-down of
assets $4,400 $7,975 $11,272 $1,103 $11,622 $12,477 $248
Contract
termination costs 726 985 726 985 2,253 645 2,593
Employee
severance costs 474 690 549 615 325 563 377
------------ --------- ---------- -------- --------- ---------- --------
$5,600 $9,650 $12,547 $2,703 $14,200 $13,685 $3,218
====== ====== ======= ====== ======== ========= ======
</TABLE>
Long-term care reserves:
At December 31, 1996, the Company established a reserve for potential
settlement of the Florida Medicare review of $1,300, which it believed to be
adequate based on the preliminary results of the review at the time. As further
explained in Note 13, the Company reached a tentative agreement of $3,000 to
settle this matter in December 1997. Accordingly, the Company has reserved an
additional $1,700 at December 31, 1997, to cover the anticipated settlement of
this review. The Company also reserved $1,400 against the suspended accounts
receivable with this Intermediary.
In March 1998, the Company received notification that the Medicare
intermediary in California has completed a post payment medical review of
billings previously submitted and paid between 1990 and 1994. Based on the
results of their review, the Intermediary has requested a refund of
approximately $1,200. Services were denied primarily on the basis of medical
necessity and incomplete documentation. The Company has not yet completed its
review of the Intermediary's findings, but anticipates requesting an
administrative hearing. At December 31, 1997, the Company fully reserved the
above amount. In addition, the Company has recorded a reserve of $1,600 for
other potential exposures pertaining to long-term care services.
During 1996, both the Florida and California Medicare Part B
Intermediaries adopted new payment review procedures for behavioral health
services performed in long-term care facilities. The Company, both individually
and in conjunction with coalitions of behavioral healthcare providers, requested
additional training and guidance on the revised payment review standards. The
Company believes it was unable to obtain adequate training and guidance on the
new standards despite the fact the Intermediaries were applying the new review
standards to the claims submitted by the Company. As further described above, in
the fourth quarter of 1996 the Company elected to discontinue its long-term care
operations. Concurrent with the exit of long-term care at December 31, 1996, the
Company has established a $3,150 reserve for denied claims, potential refunds,
and accounts receivable which the Company believes were impaired as a result of
the restructuring plan.
Although management believes that established reserves for the above
claims are sufficient, it is possible that the final resolution of these matters
may exceed the established reserves by an amount which could be material to the
Company's results of operations. The Company does not believe the ultimate
outcome of these matters will have a material adverse effect on the Company's
overall financial condition, liquidity or operations.
<PAGE> 56
54
APOGEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Note 12 - Integra Division
Subsequent to the sale of the outpatient business to PsychPartners and the
shut down of the Western Region outpatient operations, the Company will be
substantially smaller in terms of both assets and net revenue. The Company's
primary line of business will be managed behavioral healthcare through the
Integra division which offers full and shared risk arrangements to employers and
managed care organizations to perform behavioral health services on a capitated,
sub-capitated and case rate basis. In addition, Integra provides other
behavioral health services including: employee assistance programs, third party
clinical case management and claims adjudication.
The following unaudited pro forma results of operations were prepared as
if the discontinuation and sale of the Company's operations other than Integra
were effective January 1, 1996. This pro forma financial information is
presented for informational purposes only, and is not necessarily indicative of
the results that would have actually occurred or the results that may occur in
the future.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1997 1996
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Net revenues ................ $10,425 $ 6,232
Income from operations ...... 1,224 19
</TABLE>
Note 13 - Commitments and Contingencies
Operating leases
The Company leases office and patient care facilities as well as equipment
under noncancellable operating leases which require future minimum annual
rentals as follows:
<TABLE>
<CAPTION>
Practices
to be Sold Integra Other Total
---------- ------- ----- -----
<S> <C> <C> <C> <C>
1998 ........... $2,275 $ 344 $ 478 $3,097
1999 ........... 1,651 347 387 2,385
2000 ........... 1,196 231 341 1,768
2001 ........... 689 249 938
2002 ........... 155 47 202
------ ------ ------ ------
$5,966 $ 922 $1,502 $8,390
====== ====== ====== ======
</TABLE>
Practices to be sold represent the lease obligations associated with the
clinics sold and, under the terms of the Agreement of Purchase and Sale, these
obligations will be assumed by PsychPartners. The other lease obligations
pertain to clinics shut down and exited. The Company is currently in the process
of negotiating subleases or buyouts for these locations.
<PAGE> 57
55
APOGEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Certain of the leases contain renewal options and escalation clauses which
require payments of additional rent to the extent of increases in related
operating costs. Rent expense was $3,695, $3,800 and $2,918 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Capitated contracts
Integra has a portfolio of agreements with managed care organizations
and corporations to provide inpatient and outpatient behavioral health services.
Revenues are primarily generated by capitated managed behavioral health and
employee assistance programs. The fees are defined by contract and are primarily
calculated on a fixed per-member per month fee. Revenues under these contracts
are recorded in the month for which the member is entitled to services.
Generally, these membership contracts are on a one to three year basis subject
to cancellation by either party without cause at any time with thirty to ninety
days written notice. Integra had approximately 600,000, 425,000 and 350,000
covered lives at December 31, 1997, 1996 and 1995, respectively. Integra's
revenues were approximately 15%, 8%, and 7% of the Company's net revenues in
1997, 1996 and 1995, respectively.
The Company estimates the cost of providing services under these
agreements, including a reserve for services incurred, but not reported, based
upon authorized services, past claim payment experience for member groups and
other factors. The Company typically does not subcapitate the risk of providing
services under these contracts, but arranges discounted fee-for-service rates
with independent inpatient and outpatient behavioral health providers, which the
Company manages. Integra utilizes certain Apogee outpatient behavioral health
practices as part of the provider network. The Company anticipates that where
practicable, it will continue to utilize these outpatient behavioral health
practices as network providers at the existing or comparable rates which it
believes are at fair market. The Company believes there is a ready supply of
service providers in these markets, and accordingly, is not dependant on the
Apogee outpatient behavioral health practices for the delivery of service to
these contracts.
Under capitated contracts, the Company is responsible for ensuring
appropriate access to care and bears the risk for utilization levels and pricing
of the cost of services performed under these contracts. The Company believes
the future revenues under these contracts will exceed the costs of services it
will be required to provide under the terms of the contracts. An underestimation
in the utilization or price of services for these contracts could result in
material losses to the Company. Historically, Integra has managed these
capitated contracts profitably. The Company maintains no re-insurance against
the risk of loss under these contracts, however the Company maintains
malpractice and errors and omission insurance coverage for all professionals and
facilities that perform services on behalf of the Company.
Medicare Review
During 1996, certain Medicare Part B and related co-insurance billings
previously submitted by one of the Apogee subsidiaries were selected for review
by the Office of the Inspector General of the Department of Health and Human
Services ("OIG") and the Department of Justice ("DOJ"). Apogee has been informed
by the DOJ that the review is a civil matter relating to billings for services
to Medicare patients in long-term care facilities in the State of Florida during
the period from approximately January 1994 through mid-1995. During the pendency
of this review, the Medicare intermediary has suspended all Medicare payments to
this subsidiary. It is the Company's policy to comply with all federal, state
and local laws; including those applicable to the Medicare program. In December
1997, the Company and representatives from the United States Attorney's office
have reached an agreement in principle that would settle all of the OIG's civil
claims against the Company relating to this
<PAGE> 58
56
APOGEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
matter for a payment of $3,000. This tentative agreement is subject to the final
approval by the appropriate officers of the DOJ and OIG. Throughout this
process, the Company has been fully cooperating with the review and anticipates
reaching a definitive agreement in 1998. The Company has established a reserve
for the above amount, which is included with Accrued Expenses and Other Accrued
Liabilities, in the accompanying 1997 Consolidated Balance Sheet. The final
agreement, when reached, is not expected to materially differ from the terms
outlined above.
Note 14 - Accrued Expenses and Other Current Liabilities
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
------ -----
<S> <C> <C>
Clinician fees and medical claims................ $3,291 $3,019
Acquisition related costs........................ 5,006 4,896
Salaries and vacation............................ 1,507 1,989
Restructuring costs.............................. 3,218 2,703
Long-term care reserves.......................... 5,800 1,300
Other............................................ 2,608 2,860
------- -------
$21,430 $16,767
======= =======
</TABLE>
Acquisition related costs pertain to consideration payable to former
owners of acquired businesses based upon the resolution of purchase price
contingencies.
Note 15 - Mandatorily Redeemable Preferred Stock
The Company's Board of Directors may, without further action of the
Company's stockholders, direct the issuance of shares of redeemable preferred
stock. Satisfaction of dividend preferences on preferred stock would reduce the
amount of funds available for the payment of dividends on the Company's common
stock. Holders of preferred stock would be entitled to preference payments in
the event of any liquidation, dissolution or winding-up of the Company. At
December 31, 1997, 10,000 of such shares were authorized and none were issued.
Note 16 - Benefit Plans
Stock Option Plan
Effective April 19, 1994, the Company's Board of Directors ratified and
approved the establishment of an employee stock option plan ("the Plan") under
which options to purchase up to 400,000 shares of the Company's common stock may
be granted to employees, officers and directors. Each option granted under the
Plan must be exercised within a fixed period which may not exceed 10 years and
may not be for a price which is less than the fair market value on the date of
grant. Options granted vest over four years and, at December 31, 1997, the
weighted average remaining contractual life of the outstanding options was 8
years.
<PAGE> 59
57
APOGEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
The following summarizes the activity of the stock option plan:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
Options:
<S> <C> <C> <C>
Outstanding at beginning of year................ 157,170 83,875 62,225
Granted......................................... 101,000 104,350 39,750
Exercised....................................... ------- 200 150
Canceled........................................ 106,220 30,855 17,950
------- ------- ------
Outstanding at end of year...................... 151,950 157,170 83,875
======= ======= ======
Option Price Per Share Ranges:
Outstanding at beginning of year................ $4.25- $12.25- $12.25
$14.75 $14.75
Granted......................................... $3.25-$4.13 $4.25-$4.75 $12.25-
$14.75
Exercised....................................... ------ $4.75 $12.25
Outstanding at end of year...................... $3.25- $4.25- $12.25-
$14.75 $14.75 $14.75
Options exercisable at end of year.............. 55,520 54,304 33,010
Exercisable option price ranges................. $3.25- $4.25- $12.25-
$14.75 $14.75 $14.75
Options available for grant at end of year under
the 1994 Stock Option Plan...................... 247,700 242,480 315,975
</TABLE>
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), but applies Accounting Principles Board Opinion No.
25 and related interpretations in accounting for the plan. The table below sets
forth the pro forma information as if the Company had adopted the compensation
recognition provisions of SFAS 123:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Increase to:
Net loss .............. $ 127 $ 112 $ 50
Net loss per share .... $ .01 $ .01 --
Assumptions:
Expected life (years) . 4.0 4.0 4.0
Risk-free interest rate 6.5% 6.3% 5.1%
Volatility ............ 37.0% 40.0% 68.0%
Dividend yield ........ N/A N/A N/A
</TABLE>
The weighted average fair value of the stock options, calculated using the
Black-Scholes option pricing model, granted in 1997, 1996 and 1995 were $1.56,
$1.78 and $8.13, respectively.
Retirement Plan
The Company has a defined contribution 401(k) plan covering substantially
all of its employees. In general, eligible employees may contribute up to 6% of
their compensation to this plan. Effective July 1, 1995, employee contributions
are matched at the rate of 15% and Company matching contributions were $136,
$115 and $49 for 1997, 1996 and 1995, respectively.
<PAGE> 60
58
APOGEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Note 17 - Related Party Transactions
Commencing July 1993, the Company leased space from an affiliated entity.
The rent expense under this lease is equal to the amount paid by the affiliated
party under the leasehold agreement and was $129, $168 and $104 for 1997, 1996
and 1995, respectively. In addition, the Company provides services under an
Employee Assistance Plan to an affiliated entity. The revenues from this
contract were $526, $460 and $519 in 1997, 1996 and 1995, respectively.
The Company has entered into an agreement with certain investment funds,
which are significant stockholders of the Company, to obtain their commitment to
guarantee additional financing. Under the terms of the agreement, these funds
will receive warrants to purchase 400,000 shares of Apogee common stock (See
Note 4).
<PAGE> 61
59
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
Apogee, Inc.
In our opinion, the accompanying consolidated financial statements listed in the
index appearing under Item 14(a)(1) in page 62 present fairly, in all material
respects, the financial position of Apogee, Inc. and its subsidiaries at
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As explained in Notes 3 and 11, in December 1997 the Company announced plans to
sell and divest its outpatient behavioral health practice business. Shareholder
approval of an agreement of purchase and sale authorizing the Company to sell
substantially all of its outpatient behavioral health practice business is
required. The Company has recorded a loss of $58.5 million for the write down of
assets, restructuring and other charges for the year ended December 31, 1997.
Management's plans with respect to the consummation of the proposed Sale are
described in Note 4.
Price Waterhouse LLP
Philadelphia, PA
March 23, 1998
<PAGE> 62
60
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
<PAGE> 63
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding the Company's executive officers is contained in
Part I under "Item 1. Business - Executive Officers of the Company." Information
regarding directors will be contained in the Company's definitive Proxy
Statement (the "Proxy Statement") for its 1998 Annual Meeting of Stockholders
under the caption "Election of Directors" and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
For the information concerning this Item, see the table and text under the
captions "Executive Compensation," "Compensation of Directors," "Compensation
Committee Interlocks and Insider Participation" and "Employment Arrangements" to
be contained in the Proxy Statement, which information is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
For the information concerning this Item, see the table and text under the
caption "Information Concerning Certain Stockholders" to be contained in the
Proxy Statement, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
For the information concerning this Item, see the text under the caption
"Compensation Committee Interlocks and Insider Participation" and "Certain
Transactions" to be contained in the Proxy Statement, which information is
incorporated herein by reference.
<PAGE> 64
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Report:
1. Financial Statements
Description Page
----------- ----
Consolidated Balance Sheets as of December 31, 1997 and
December 31, 1996............................................... 36
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995................................ 37
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 1997, 1996 and 1995................ 38
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995................................ 39
Notes to Consolidated Financial Statements........................... 40
Report of Independent Accountants.................................... 59
<PAGE> 65
2. Financial Statement Schedule
Page
----
Schedule II Valuation and Qualifying Accounts........................
3. Exhibits
The exhibits required to be filed as part of this Annual Report on
Form 10-K are contained in the attached Index to Exhibits.
(b) Current Reports on Form 8-K:
During the Company's fiscal quarter ended December 31, 1997, the Company
filed:
(i) The Company's Current Report on Form 8-K dated December 26,1997.
(c) Exhibits required by Item 601 of Regulation S-K:
Exhibits required to be filed by the Company pursuant to Item 601 of
Regulation S-K are contained in Exhibits listed in response to Item 14(a)(3),
and are incorporated herein by reference.
<PAGE> 66
POWER OF ATTORNEY
The registrant and each person whose signature appears below hereby
appoint John H. Foster, Lawrence M. Davies and Mark Gibson as attorneys-in-fact
with full power of substitution, severally, to execute in the name and on behalf
of the registrant and each such person, individually and in each capacity stated
below, one or more amendments to the annual report which amendments may make
such changes in the report as the attorney-in-fact acting in the premises deems
appropriate and to file any such amendment to the report with the Securities and
Exchange Commission.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: April 13, 1998
APOGEE, INC.
By /s/ John H. Foster
------------------------
John H. Foster
Chairman of the Board,
Chief Executive Officer
and Director
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Dated: April 13, 1998
By /s/ John H. Foster
------------------------
John H. Foster
Chairman of the Board,
Chief Executive Officer
and Director
<PAGE> 67
Dated: April 13, 1998
By /s/ Lawrence M. Davies
---------------------------------------
Lawrence M. Davies
President, Chief Operating
Officer and Director
Dated: April 13, 1998
By /s/ Mark Gibson
---------------------------------------
Mark Gibson
Corporate Controller and
Chief Accounting Officer
Dated: April 13, 1998
By /s/ Harvey V. Fineberg, M.D.
---------------------------------------
Harvey V. Fineberg, M.D.
Director
Dated: April 13, 1998
By /s/ Timothy E. Foster
---------------------------------------
Timothy E. Foster
Director
Dated: , 1998
By
---------------------------------------
Irwin Lehrhoff, Ph.D.
Director
Dated: April 13, 1998
By /s/ R. Bruce Mosbacher
---------------------------------------
R. Bruce Mosbacher
Director
Dated: April 13, 1998
By /s/ Shawkat Raslan
---------------------------------------
Shawkat Raslan
Director
<PAGE> 68
Accountants Report on Schedules
None.
<PAGE> 69
SCHEDULE II
APOGEE, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1997, 1996, and 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
Additions
Balance at Additions Charged to Balance
Beginning Charged to Other at End
of Period Expenses(C) Accounts(B) Deductions(A) of Period
Description ------------- -------------- --------------- --------------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Allowance for doubtful accounts............. $9,306 4,226 -- 6,184 $7,348
Year ended December 31, 1996:
Allowance for doubtful accounts............. $8,052 6,586 200 5,532 $9,306
Year ended December 31, 1995:
Allowance for doubtful accounts............. $4,890 4,433 2,610 3,881 $8,052
</TABLE>
(A) Write off of accounts deemed uncollectible.
(B) Represents the allowances for doubtful accounts acquired through the
purchases of businesses.
(C) Includes $2,700 and $1,025 in reserves established against receivables in
1996 and 1995, respectively, which were recorded in connection with the
Company's restructurings and other non recurring charges.
<PAGE> 70
Index to Exhibits*
Page
----
2(a) Agreement of Purchase and Sale dated as of July 1,
1994 by and among Integra, Inc., Peter L. Brill, M.D.
and the Company (incorporated by reference to Exhibit
2(a) to the Company's Current Report on Form 8-K
dated July 31, 1994). --
2(b) Agreement of Purchase and Sale dated as of September
1, 1994 by and among Brea Mental Health Associates,
Southern California Mental Health Network Medical
Group, Inc., Warren R. Taff, M.D., Gregg A. Sentenn,
M.D. and the Company (incorporated by reference to
Exhibit 2 to the Company's Current Report on Form 8-K
dated September 30, 1994). --
2(c) Agreement of Purchase and Sale dated as of November
1, 1994 by and among Metropolitan Psychiatric Group,
Inc. ("MPG"), DOC Systems, Inc., the partners of MPG
and the Company (incorporated by reference to Exhibit
2(b) to the Company's Current Report on Form 8-K
dated November 18, 1994). --
2(d) Agreement and Plan of Reorganization dated as of
October 1, 1995 by and among Arista Behavioral
Health, Inc., a New Jersey corporation, Arista
Counseling & Psychological Services, P.C., a New York
professional corporation, Arista Counseling &
Psychological Services, P.C., a New Jersey
professional corporation, Apogee of Pennsylvania,
Inc., a Delaware corporation, the Company and
Hadassah Gurfein, Ph.D. (incorporated by reference to
Exhibit 2 to the Company's Current Report on Form 8-K
dated October 25, 1995). --
2(e) Agreement of Purchase and Sale dated December 26, 1997
by and among PsychPartners, L.L.C, PsychPartners, Inc.,
PsychPartners Midatlantic, Inc., Apogee, Inc. and certain
subsidiaries of Apogee (incorporated by reference to
Exhibit 2 to the Company's Current Report on Form 8-K dated
December 26,1997) --
2(f) Asset Purchase Agreement dated December 31, 1997
by and among Apogee and Corphealth, Summit
Behavioral Partners - Nevada, Inc. --
3(a) Certificate of Incorporation of the Company, as
amended to date (incorporated by reference to Exhibit
3(a) to the Company's Registration Statement on Form
S-1 (Registration No. 33-78034) filed with the
Commission on April 22, 1994). --
3(b) By-Laws of the Company (incorporated by reference to
Exhibit 3(c) to the Company's Registration Statement
on Form S-1 (Registration No. 33-78034) filed with
theCommission on April 22, 1994).
- --------
* Copies of exhibits filed with this Annual Report on Form 10-K or
incorporated by reference herein do not accompany copies hereof for
distribution to stockholders of the Company. The Company will furnish a
copy of any of such exhibits to any stockholder requesting the same for a
nominal charge to cover duplicating costs.
E-1
<PAGE> 71
Index to Exhibits
(continued)
Page
----
4 Stock Option Plan (incorporated by reference to
Exhibit 4 to the Company's Registration Statement on
Form S-1 (Registration No. 33-78034) filed with the
Commission on April 22, 1994) --
10(a) Stockholders Agreement dated March 15, 1991 between
the Company and Irwin Lehrhoff, individually and as
trustee under the Irwin Lehrhoff Trust No. 1
(incorporated by reference to Exhibit 10(a) to the
Company's Registration Statement on Form S-1
(Registration No. 33-78034) filed with the Commission
on April 22, 1994). --
10(b) Stock Purchase Agreement dated March 6, 1992 between
the Company and Lawrence M. Davies (incorporated by
reference to Exhibit 10(g) to the Company's
Registration Statement on Form S-1 (Registration No.
33-78034) filed with the Commission on April 22,
1994). --
10(c) Stock Purchase Agreement dated August 1, 1992 between
the Company and R. Bruce Mosbacher (incorporated by
reference to Exhibit 10(i) to the Company's
Registration Statement on Form S-1 (Registration No.
33-78034) filed with the Commission on April 22,
1994). --
10(d) Employment Letter dated March 2, 1993 between the
Company and Lawrence M. Davies (incorporated by
reference to Exhibit 10(j) to the Company's
Registration Statement on Form S-1 (Registration No.
33-78034) filed with the Commission on April 22,
1994). --
10(e) Stock Purchase Agreement dated June 21, 1993 between
the Company and Timothy E. Foster (incorporated by
reference to Exhibit 10(n) to the Company's
Registration Statement on Form S-1 (Registration No.
33-78034) filed with the Commission on April 22,
1994). --
E-2
<PAGE> 72
Index to Exhibits
(continued)
Page
----
10(f) Stock Purchase Agreement dated June 22, 1993
between the Company and Lawrence M. Davies
(incorporated by reference to Exhibit 10(o) to
the Company's Registration Statement on Form S-1
(Registration No. 33-78034) filed with the
Commission on April 22, 1994). --
10(g) Employment Letter dated August 18, 1993 between
the Company and Stanley F. Szczygiel
(incorporated by reference to Exhibit 10(q) to
the Company's Registration Statement on Form S-1
(Registration No. 33-78034) filed with the
Commission on April 22, 1994). --
10(h) Stock Purchase Agreement dated December 6, 1993
between the Company and Harvey V. Fineberg, M.D.
(incorporated by reference to Exhibit 10(u) to
the Company's Registration Statement on Form S-1
(Registration No. 33-78034) filed with the
Commission on April 22, 1994). --
10(i) Employment Letter, dated December 17, 1993
between the Company and Massoud G. Hampton, Ph.D
(incorporated by reference to Exhibit 10(v) to
the Company's Registration Statement on Form S-1
(Registration No. 33-78034) filed with the
Commission on April 22, 1994) --
10(j) Stock Purchase Agreement dated January 10, 1994
between the Company and Stanley F. Szczygiel
(incorporated by reference to Exhibit 10(w) to
the Company's Registration Statement on Form S-1
(Registration No. 33-78034) filed with the
Commission on April 22, 1994). --
10(k) Consulting Agreement dated January 20, 1994
between the Company and Sean C. McCrossen
(incorporated by reference to Exhibit 10(x) to
the Company's Registration Statement on Form S-1
(Registration No. 33-78034) filed with the
Commission on April 22, 1994). --
10(l) Stock Purchase Agreement dated January 28, 1994
between the Company and Shawkat Raslan
(incorporated by reference to Exhibit 10(y) to
the Company's Registration Statement on Form S-1
(Registration No. 33-78034) filed with the
Commission on April 22, 1994). --
E-3
<PAGE> 73
Index to Exhibits
(continued)
Page
----
10(m) Stock Purchase Agreement dated February 8, 1994
between the Company and Massoud G. Hampton,
Ph.D. (incorporated by reference to Exhibit
10(z) to the Company's Registration Statement on
Form S-1 (Registration No. 33-78034) filed with
the Commission on April 22, 1994). --
10(n) Stock Purchase Agreement dated February 22, 1994
between the Company and R. Bruce Mosbacher,
Trustee or Successor Trustee under the
Mosbacher/Ditz Living Trust U/A/D 8/30/93
(incorporated by reference to Exhibit 10(ee) to
the Company's Registration Statement on Form S-1
(Registration No. 33-78034) filed with the
Commission on April 22, 1994). --
10(o) Confidentially and Non-Competition Agreement
dated April 14, 1994 between the Company and
Massoud G. Hampton, Ph.D (incorporated by
reference to Exhibit 10(v) to the Company's
Registration Statement on Form S-1 (Registration
No. 33-78034) filed with the Commission on April
22, 1994). --
10(p) Credit Agreement with PNC Bank, National
Association dated on April 11, 1996
(incorporated by reference to the Company's
current report on Form 8-K dated April 11,
1996). --
10(q) Amendment dated March 11, 1997 to credit
agreement with PNC Bank, National Association
(incorporated by reference to Exhibit 10(u) to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1996). --
10(r) Amendment dated August 8, 1997 to Credit
Agreement with PNC Bank, National Association. --
10(s) Amendment dated December 22, 1997 to Credit
Agreement with PNC Bank, National Association. --
10(t) Amendment dated January 29, 1998 to Credit
Agreement with PNC Bank, National Association. --
10(u) Amendment dated February 27, 1998 to Credit
Agreement with PNC Bank, National Association. --
E-4
<PAGE> 74
Index to Exhibits
(continued)
Page
----
10(v) Amendment dated March 31, 1998 to Credit
Agreement with PNC Bank, National Association. --
21 Subsidiaries of the Company. --
23 Consent of Independent Accountants. --
24 Powers of Attorney (See "Power of Attorney" in
Form 10-K). --
27 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information only and not filed. --
E-5
<PAGE> 1
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement (the "Agreement") is made and entered
into as of this 31st day of December, 1997, by and among Apogee, Inc., a
Delaware corporation ("Apogee"), Apogee Health Services, Inc., a California
corporation ("AHS") (Apogee and AHS are collectively called "Seller") and
Corphealth, Inc., a Texas corporation ("Corphealth") d/b/a Summit Behavioral
Partners and Summit Behavioral Partners-Nevada, Inc., a Nevada corporation a
wholly owned subsidiary of Corphealth ("Buyer"). Joining herein is Nevada
Psychological Associates, Inc., a Nevada corporation ("NPA") for purposes of
being bound hereby.
PREMISES:
A. Seller is the owner and operator of three Clinics engaged in the
delivery of behavioral health care services in Las Vegas, Nevada (the "Clinics"
as more particularly described);
B. Buyer desires to purchase, and Seller desires to sell its
interest in substantially all of the assets of the Clinics as more fully
described herein, subject to the terms and conditions of this Agreement; and
C. Buyer desires to obtain an option to purchase one additional
clinic owned and operated by Seller and NPA.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth, the receipt and legal sufficiency of which are hereby acknowledged,
the parties hereto agree as follows:
ARTICLE I
Definitions
1.1 Accounts Receivable shall mean all accounts and notes
receivable, negotiable instruments and chattel paper, the rights to which were
generated by the Clinics, and other evidences of indebtedness of, and rights to
receive payments from, any person which relate to the operation of the Clinics,
as such exists on The Closing Date.
1.2 Assets shall mean the assets and properties, tangible and
intangible, used in the Clinics and located on
<PAGE> 2
2
the real property leased by Seller upon which one of the Clinics is located and
located in or at the facilities at which clinical services are rendered, all as
more particularly described in Schedule 1.3 hereof (the "Clinic Locations"), and
in which Seller has any right, title or interest, as the same may exist on the
Closing Date, excluding the Excluded Assets, but including, without limitation
and by way of example only, all of Seller's right, title and interest in and to
the following:
a. All fixtures, improvements and construction in progress
located on or at the Clinic covered by the Real Property Lease ("Leasehold
Improvements");
b. All equipment, furniture, furnishings, fixtures, tools and
similar property owned by Seller, used in connection with the Clinics, and
located on the Clinics Locations, and being more particularly described on
Schedule 1.2(b) attached hereto ("Equipment");
c. All of the current and usable inventory of the Clinics,
located at the Clinics Locations, as the same shall exist as of the close of
business on the Closing Date, including, without limitation, tests and testing
materials, office, medical and other supplies used in connection with the
Clinics ("Inventory");
d. All of the rights, benefits and interest of Seller under
the contracts and agreements, written or oral (including all amendments and
letter agreements pertaining thereto) related to the operation of the Clinics
and listed on Schedule 1.2(d) attached hereto ("Contracts");
e. All administrative and clinical policies and procedures,
used by the staff at the Clinics Locations to operate the Clinics on a day to
day basis, ("Policies");
f. All books, records, documents and other writings used in
connection with the operations of the Clinics and located at the Clinic
Locations, exclusive of employee records for which consent to assignment has not
been obtained and excluding any patient records ("Books and Records");
g. All assignable permits, licenses,certificates and
governmental authorizations, approvals, license applications or related
certifications obtained in connection with the operation of the Clinics and
listed on Schedule 1.2(g) attached hereto ("Permits");
<PAGE> 3
3
h. All data processing programs, software programs, computer
printouts, data bases and hardware and related items used in the conduct of the
Clinics and located at the Clinics Locations, including accounting, invoices,
auditing, pension and data processing bases and programs ("Software");
i. The real property lease relating to one of the Clinics and
listed on Schedule 1.2(i) attached hereto ("Real Property Lease");
j. The personal property or equipment leases relating to the
Clinics listed on Schedule 1.2(j) attached hereto ("Personal Property Lease");
k. All of Seller's interest in the tradename Hess &
Associates, and any derivation thereof ("Tradename"); and
l. The research and development data and procedures developed
or compiled at the Clinics Locations relating to the research and development
grants identified on Schedule 1.2(1) ("R&D").
1.3 Clinics shall mean the Clinics owned and operated by Seller in
Las Vegas, Nevada, which are more particularly described on Schedule 1.3
attached hereto.
1.4 Closing shall mean the consummation of the transactions
contemplated herein pursuant to the terms and conditions of this Agreement (the
"Closing") and shall be held on the 31st day of December, 1997, at 9:00 a.m. in
the offices of McLean & Sanders, in Fort Worth, Texas or on such other date or
at such other time or place or in such other manner as is mutually agreed upon
by the parties hereto.
1.5 Closing Date shall mean the date on which the Closing actually
occurs.
1.6 Excluded Assets shall mean all assets owned by Seller which are
described in Schedule 1.6 hereof.
1.7 Encumbrances shall mean all security interests, liens, pledges,
claims, charges, escrows, encumbrances, encroachments, rights of first refusal,
mortgages, indentures, easements, licenses, restrictions or other covenants,
agreements, understandings, obligations, defects or irregularities affecting
title to any of the Assets.
<PAGE> 4
4
ARTICLE II
Sale and Purchase of the Assets
2.1 Sale and Purchase of Assets. Upon the terms and subject to the
conditions of this Agreement, at the Closing, Seller shall sell, transfer,
assign, convey and deliver the Assets to Buyer, and Buyer shall purchase the
Assets from Seller, free and clear of all Encumbrances, except for the
encumbrances listed on Schedule 2.1 attached hereto ("Permitted Encumbrances"),
for the consideration set forth in this Agreement. Seller shall retain, and
Buyer shall not purchase, the Excluded Assets. The sale, transfer, assignment
and conveyance of the Assets shall be made by the execution and delivery at
Closing of a bill of sale substantially in the form of Exhibit A attached hereto
(the "Bill of Sale") and such other recordable deeds and instruments of
assignment, transfer and conveyance as Buyer shall request.
ARTICLE III
Assumption of Certain Obligations
3.1 Assumption of Certain Obligations. At the Closing, Seller shall
assign to Buyer and Buyer shall assume and agree to pay, perform and otherwise
discharge, all obligations of Seller arising or accruing from and after the
Closing Date under the contracts, leases, licenses and agreements specifically
described on Schedule 3.1 attached hereto (the "Assumed Liabilities"), pursuant
to an Assignment and Assumption Agreement substantially in the form attached
hereto as Exhibit B (the "Assumption Agreement"). Except as specifically set
forth in the immediately preceding sentence of Paragraph 3.1, Buyer shall not
assume, and shall have no liability for, any debts, liabilities, obligations,
expenses, taxes, contracts or commitments of Seller of any kind, character or
description, whether accrued, absolute, contingent or otherwise, arising out of
any act or omission occurring or state of facts existing prior to, on, or after
the Closing Date. Seller agrees to satisfy, in the ordinary course, all of its
liabilities, indebtedness and obligations not assumed by Buyer pursuant to this
Agreement and the Assumption Agreement.
<PAGE> 5
5
ARTICLE IV
Purchase Price
4.1 Purchase Price. The total purchase price for the Assets (the
"Purchase Price") shall be Eight Hundred One Thousand Dollars ( $801,000.00)
payable as follows:
a. The sum of Four Hundred Sixteen Thousand Two Hundred Fifty
Dollars ($416,250.00) shall be payable in cash at the Closing; and
b. The sum of Three Hundred Eighty Four Thousand Seven Hundred
Fifty Dollars ($384,750.00) shall be payable pursuant to the terms of a
Promissory Note, which is the joint and several obligation of Buyer and
Corphealth bearing interest at the rate of five percent (5%) per annum, payable
in two annual installments of principal, with the first installment due and
payable one year from the Closing Date, with such Note to be secured by the
Assets. Such Promissory Note shall be in the form and content as the Promissory
Note attached hereto as Exhibit "C" (the "Note"), and the Security Agreement
covering the Assets shall be substantially in the form and content of the
Security Agreement attached hereto as Exhibit "D" (the "Security Agreement").
4.2 Allocation of Purchase Price. The Purchase Price represents the
amount agreed upon by the parties to be the value of the Assets, it being
further agreed that the Purchase Price shall be allocated among the Assets as
set forth on Schedule 4.2 attached hereto. Seller and Buyer shall report the
purchase and sale of the Assets in accordance with the allocation of the
Purchase Price set forth on Schedule 4.2 for all federal, state and local tax
purposes.
ARTICLE V
Representations, Warranties and Covenants of Seller
Apogee and AHS jointly and severally hereby represent and warrant
to, and covenant with, Corphealth and Buyer as follows:
5.1 Organization of Seller. Apogee is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
AHS is a corporation duly organized, validly existing and in good standing under
the laws of the State of California, and is
<PAGE> 6
6
qualified to do business and is in good standing in the State of Nevada. NPA is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Nevada.
5.2 Authorization. Seller has full power and authority to execute,
deliver and perform this Agreement and all agreements and transactions
contemplated hereby. The execution, delivery and performance of this Agreement
and all transactions contemplated hereby have been duly authorized by the Board
of Directors of Seller. This Agreement has been duly and validly executed and
delivered by Seller, and constitutes, and each of the other agreements to be
executed pursuant to the terms hereof upon execution and delivery will
constitute, legal, valid and binding obligations of Seller, enforceable in
accordance with their terms except as enforceability may be limited by
bankruptcy, insolvency, reorganization, or other similar laws affecting
creditor's rights generally or by general principles of equity ("Debtor Relief
Laws"). The execution, delivery and performance of this Agreement or any
document related hereto by Seller and the consummation by Seller of all of the
transactions contemplated hereby or thereby, will not (with or without the
giving of notice or the lapse of time or both): (a) violate or require any
consent or approval under any applicable provision of any order, writ,
injunction, decree, rule, regulation or law; (b) require any consent under,
conflict with, result in termination of, accelerate the performance required by,
result in a breach of, constitute a default under, or otherwise violate the
terms of any agreements, instruments or obligations to which Seller is a party
or by which it or any of the Assets may be bound or affected; (c) require any
consent or approval by, notice to or registration with any governmental
authority, except as otherwise provided on Schedule 5.2 attached hereto; (d)
violate any provision of the certificate of incorporation of the Seller or its
bylaws, as amended; or (e) result in the creation of a lien, security interest,
charge or encumbrance upon any of the Assets except as set forth in Schedule 5.2
attached hereto, and except for violations, failures to obtain a consent or
approval, conflicts, breaches, liens or other matters which would not either
individually or in the aggregate have a material adverse effect on the
condition, financial or otherwise, or operations of the Clinics, taken as a
whole (a "Material Adverse Effect").
<PAGE> 7
7
5.3 Title to Assets.
a. Seller has good and marketable title to all of the Assets,
free and clear of all Encumbrances, except those Encumbrances disclosed on
Schedule 5.3 attached hereto.
b. The Assets constitute all of the assets of Seller necessary
for the operations of the Clinics, and are at the levels used in the operations
of the Clinics during the preceding twelve month period, except for assets which
need consent to assignment which has not been obtained, the Excluded Assets and
such changes in any of the Assets which may have occurred in the ordinary course
of business since the date of the Financial Statements (as hereinafter defined).
Immediately following the Closing, Buyer shall have sufficient title in and to
the Assets to operate and conduct the Clinics in the same fashion as Seller was
conducting the Clinics in the ordinary course prior to the Closing Date;
provided, however, that no representation is made concerning consents which have
not been obtained, non-transferable licenses and the Excluded Assets.
c. The Bill of Sale and the assignments and other instruments
to be executed and delivered by Seller at the Closing will be valid, binding and
enforceable in accordance with its terms, subject to Debtor Relief Laws, and
will effectively vest in Buyer good and indefeasible title to all of the Assets.
5.4 Financial Statements. Attached hereto as Schedule 5.4 are the
income statements for the period ended January 31, 1996 and October 31, 1997 for
the Clinics (collectively, the "Financial Statements"). The Financial Statements
are complete and correct in all material respects; have been prepared in
conformity with generally accepted Accounting Principles ("GAAP"); and fairly
present in all material respects the financial condition of the Clinics as of
the date thereof and the results of operations, earnings and retained earnings
of the Clinics for such periods.
5.5 Absence of Certain Changes or Events. From the date of the
Financial Statement through the Closing Date, Seller has operated the Clinics in
the ordinary course of business and used its best efforts to preserve the
Assets, the patients, all personnel at the Clinics and the good will of the
Clinics, and there has not occurred any event which could have a Material
Adverse Effect.
<PAGE> 8
8
5.6 Litigation. Except as set forth in Schedule 5.6 attached hereto,
Seller is not subject to any judgment or order of any court or governmental or
regulatory authority or body of any jurisdiction which relates to the Clinics or
Assets. Except as set forth on Schedule 5.6, there is not any pending or, to the
best knowledge of Seller, threatened any action, dispute, claim, litigation,
arbitration, investigation or other judicial proceeding or before any
governmental or other administrative agency affecting the Clinics. All matters
disclosed on Schedule 5.6, subject only to the standard deductible, are fully
covered by and within the limits of coverage contained in any insurance policy,
including, without limitation, the professional malpractice insurance policy
maintained by Seller.
5.7 Contracts and Leases. Schedule 5.7(a) contains a complete list
and brief description of all written or oral material contracts, commitments,
leases, subleases, instruments and agreements which are material to the Clinics
and to which Seller is a party or by which Seller is bound. Each of the
agreements, leases,contracts, commitments, instruments or obligations required
to be listed on any schedule or exhibit to this Agreement is valid and in full
force and effect and to the knowledge of Seller after inquiry there exists no
default or event of default or occurrence, condition, commitment or act
(including the consummation of the transactions contemplated hereby), which,
with the giving of notice, the lapse of time or both, would cause a default or
event of default thereunder except for defaults which would not have a Material
Adverse Effect. Each of such contracts and agreements contains terms and
conditions negotiated in good faith with independent third parties at
arms-length and is freely assignable and transferable from Seller to Buyer
without the consent of any other person or entity except as set forth on
Schedule 5.7(b), and Buyer will after the Closing enjoy and have full benefit of
all of the rights of Seller thereunder, except to the extent consents which were
required have not been obtained.
5.8 Tax Matters.
a. Seller has timely filed all federal, state, local and other
tax returns and tax reports, if any, required to be filed with respect to the
Clinics and Assets with the appropriate governmental agency. All such returns
and reports are true, correct and complete in all material respects, and except
as set forth in Schedule 5.8(a) attached hereto, all amounts shown as owing on
them have been paid, including all interest, penalties, deficiencies
<PAGE> 9
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and assessments, if any, heretofore levied or assessed against Seller with
respect to the Clinics. Seller has duly withheld, collected and timely paid
over, or holds for such payment, to the proper governmental authorities all
taxes required to be withheld or collected by it in connection with the Clinics.
There is no agreement for extension of time of assessment or payment of any
taxes as relates to the Clinics. No waiver of any statute of limitations has
been executed by Seller for any tax year which remains open or unsettled.
b. All federal, state, local and foreign income, profits,
franchise, sales, use, occupation, property, excise, Federal Insurance
Contribution Act, payroll, other withholding taxes and other taxes (including
interest and penalties), if any, payable by Seller or relating to or chargeable
against the Assets or chargeable against the revenue or income of the Clinics
have been fully paid or are not past due and are fully disclosed and accrued on
the books and records of Seller as such relate to the Clinics, and the proper
amount of reserves exist for the payment thereof.
5.9 Permits and Licenses. Seller has all federal, state and local
permits, certificates, licenses, approvals and other authorizations materially
necessary in the conduct of the Clinics, Schedule 5.9 attached hereto contains a
list of all such governmental licenses and permits (none of which are
transferable unless otherwise indicated by an asterisk). To the knowledge of
Seller, all such licenses and permits of Seller are in full force and effect,
and no material violations are or have been recorded in respect thereof; and no
proceeding is pending or to the knowledge of Seller, threatened to revoke or
limit any thereof. Seller shall cooperate with and assist Buyer at Buyer's
expense in all respects concerning the transfer or re-issuance to Buyer of all
permits, licenses, consents or approvals required by all applicable laws.
5.10 Employee Benefit Plans.
Seller has no "Employee Benefit Plan" as defined in Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA") which
will impose any liability or obligation on Buyer from and after the Closing
Date, or which could have an effect upon the Assets or the Clinics after the
Closing Date.
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5.11 Employment Matters.
a. Schedule 5.11 attached hereto contains a list of all
current health care providers, employees and consultants of Seller at the
Clinics, together with the current job title and aggregate compensation rate for
each such person and a list of all employees of Seller at the Clinics who were
paid bonuses during the last twelve (12) months, plus the amount thereof. Except
as set forth in Schedule 5.11, Seller is not a party to any written employment
agreement or agreement to loan to or guarantee any loan to any employee, nor is
Seller a party to any agreement (written or oral) relating to a bonus, severance
pay or similar plan, agreement, arrangement or understanding relating to any
employee at the Clinics. Consummation of the transactions contemplated by this
Agreement will not subject Buyer to any obligation or liability to any employee
of Seller at the Clinics, or any other employee of Seller including, without
limitation, pursuant to any employment agreement or severance policy maintained
by Seller.
b. At the Clinics, Seller is in compliance in all material
respects with all federal, state and local laws and regulations respecting
employment and employment practices, terms and conditions of employment and
wages and hours.
5.12 Compliance with Laws. Except as set forth in Schedule 5.12, the
Clinics are in compliance in all material respects with all applicable federal,
state and local laws, regulations, orders, judgments and decrees applicable to
the Clinics, including, without limitation, matters relating to the environment,
antitrust and anti-competitive practices, discrimination, employment and health
and safety. Except as set forth in Schedule 5.12, Seller has not received any
notice of any material, unremedied violation of any applicable law, rule,
regulation, order, write or decree of any court or any governmental agency or
instrumentality relating to the Clinics.
5.13 Insurance. Seller maintains in effect the insurance coverage
set forth on Schedule 5.13 hereof covering the assets and business of the
Clinics and any liabilities relating thereto. All such policies are valid and in
full force and effect and, with respect to their amounts and types of coverage,
are commercially reasonable and in accordance with good business practices. With
respect to the Clinics, except as set forth on Schedule 5.13, Seller has been
continuously insured for professional malpractice claims for at least the past
four (4) years.
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5.14 Inventory. Seller has, and on the Closing Date will have, the
levels and amounts of inventory maintained at the Clinics over the past one
year. The inventories of Seller at the Clinics are fully usable in all material
respects in the normal course of the business of Seller.
5.15 Environmental Matters. At the Clinics, to Seller's knowledge,
Seller is in compliance with all federal, state and local environmental laws,
rules, regulations, standards and requirements, including, without limitation,
those respecting hazardous or biomedical materials and/or wastes. There is no
action pending before any court, governmental agency or board or other forum or,
to the knowledge of Seller, threatened by any person or entity for (a)
noncompliance by Seller with any environmental law, rule or regulation, (b)
personal injury, wrongful death or other wrongful conduct relating to materials,
commodities or products used, sold, transferred or disposed of by Seller, or (c)
relating to the release into the environment by Seller of any pollutant, toxic,
biomedical or hazardous material or waste generated by Seller, occurring at or
on any property used or leased by the Clinics. Seller makes no representations
or warranties with respect to the actions or conduct of any owner of the real
property upon which the Clinics are located, or any prior operator or tenant on
any of the real property upon which the Clinics are located.
5.16 Regulatory Licensure or Other Violation. Seller represents and
warrants that no violations have occurred at the Clinics other than those listed
on Schedule 5.16 with respect to regulatory agreements, health care and/or other
licensing or inspection authorities for which a fine or penalty may be levied
which violation would have a Material Adverse Effect.
5.17 Fraud and Abuse. Seller, its partners, officers and directors,
and persons and entities providing professional services for the Clinics, have
not engaged in any activities which are prohibited under U.S.C. ss. 1320a-7b, or
the regulations promulgated thereunder pursuant to such statutes, or related
state or local statutes or regulations, or which are prohibited by rules of
professional conduct, including but not limited to the following: (a) knowingly
and willfully making or causing to be made a false statement or representation
of a material fact in any application for any benefit or payment: (b) knowingly
and willfully making or causing to be made any false statement or representation
of a material fact for use in determining rights to any benefit or payment; (c)
knowingly and willfully soliciting
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or receiving any remuneration (including any kickback, bribe, or rebate),
directly or indirectly, overtly or covertly, in cash or in kind (i) in return
for referring an individual to a person for the furnishing or arranging for the
furnishing of any item or service for which payment may be made in whole or in
part by Medicare or Medicaid, or (ii) in return for purchasing, leasing, or
ordering or arranging for or recommending purchasing, leasing, or ordering any
good, facility, service, or item for which payment may be made in whole or in
part by Medicare or Medicaid; and (d) knowingly and willfully offering or paying
any remuneration (including any kickback, bribe, or rebate), directly or
indirectly, overtly or covertly, in cash or in kind to any person to induce such
person (i) to refer an individual to a person for the furnishing or arranging
for the furnishing of any item or service for which payment may be made in whole
or in part under Medicare or Medicaid or (ii) to purchase, lease, order, or
arrange for or recommend purchasing, leasing, or ordering any good, facility,
service, or item for which payment may be made in whole or in part under
Medicare or Medicaid.
5.18 Mirkil Services, Inc. Mirkil Services, Inc., a Nevada
professional corporation, owns no assets used in connection with the Clinics,
and the joinder of Mirkil Services, Inc. in this Agreement is not necessary for
Seller to convey to Buyer and Corphealth to all of the Assets in accordance with
the terms hereof.
5.19 Disclosures. No representation or warranty made by Seller in
this Agreement, and no statement made by Seller in any Schedule, Exhibit or
certificate or other writing delivered or to be delivered pursuant to this
Agreement contains or will contain any untrue statement of a material fact or
omits any statement of a material fact necessary to make the statements
contained herein or therein not misleading.
ARTICLE VI
Representations and Warranties of Buyer and Corphealth
Buyer and Corphealth, jointly and severally, hereby represent and
warrant to Seller as follows:
6.1 Corporate Organization. Corphealth is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Texas, and has all requisite corporate power to own and operate its business as
it is now being conducted. Buyer is a corporation duly
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organized, validly existing and in good standing under the laws of the State of
Nevada, and has all requisite corporate power to own and operate its business as
it is now being conducted. Both Corphealth and Buyer are in good standing in
each other jurisdiction wherein the failure to so qualify would have a material
adverse affect on its business or properties.
6.2 Authority. Buyer and Corphealth have full power and authority to
execute, deliver and perform this Agreement and all agreements and transactions
contemplated hereby. The execution, delivery and performance of this Agreement
and all transactions contemplated will have been duly authorized by the
respective Boards of Directors of Buyer and Corphealth. This Agreement has been
duly and validly executed and delivered by Buyer and Corphealth, and
constitutes, and each of the other agreements to be executed pursuant to the
terms hereof upon execution and delivery will constitute, legal, valid and
binding obligations of Buyer and Corphealth enforceable in accordance with its
terms subject to Debtor Relief Laws. The execution, delivery and performance of
this Agreement or any document related hereto by Buyer and Corphealth, and the
consummation by Buyer and Corphealth of all the transactions contemplated hereby
or thereby, will not (with or without the giving of notice or the lapse of time
or both): (a) violate or require any consent or approval under any applicable
provision of any order, writ, injunction, decree, rule, regulation or law; (b)
require any consent under, conflict with, result in the termination of,
accelerate the performance required by, result in the breach of, constitute a
default under or otherwise violate the terms of any agreements, instruments or
other obligations to which Buyer or Corphealth is a party or by which it or any
of its assets may be bound or affected; (c) require any consent or approval by,
notice to or registration with any governmental authority; or (d) violate any
provision of the certificate of incorporation or bylaws of Buyer or Corphealth,
as amended.
6.3 Compliance With Applicable Law. Neither Buyer nor Corphealth is
in default under any, and has complied in all material respects with all,
statutes, ordinances, regulations, orders, judgments and decrees of any court or
governmental entity or agency, relating to its businesses or its assets. Neither
Buyer nor Corphealth has knowledge of any basis for assertion of any material
violation of the foregoing or for any claim for compensation or damages or
otherwise arising out of any violation of the foregoing. Neither Buyer nor
Corphealth has received any notification of any asserted present or past failure
to comply with any of the foregoing which has not been
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satisfactorily responded to in the time period required thereunder.
6.4 Litigation; Disputes. There are no material claims, disputes,
actions, suits, investigations or proceedings pending or, to the best of the
knowledge of Buyer and Corphealth, threatened against or naming as a party Buyer
or Corphealth which would have a material adverse effect on the business or
operations of either Buyer or Corphealth or any of the properties or assets of
Buyer or Corphealth. Neither Buyer nor Corphealth has knowledge of any default
under any such material action, suit or proceeding.
6.5 Disclosure. No representation or warranty made by Buyer or
Corphealth in this Agreement, and no statement made by Buyer or Corphealth in
any certificate or other writing delivered or to be delivered pursuant to this
Agreement contains or will contain any untrue statement of a material fact or
omits any statement of a material fact necessary to make the statements
contained herein or therein not misleading.
6.6 Fraud and Abuse. Neither Buyer nor Corphealth, or their
respective partners, officers and directors, and persons and entities providing
professional services for any clinics owned by Buyer or Corphealth or any of
their affiliates, have engaged in any activities which are prohibited under
U.S.C. ss. 1 320a-7b, or the regulations promulgated thereunder pursuant to such
statutes, or related state or local statutes or regulations, or which are
prohibited by rules of professional conduct, including but not limited to the
following: (a) knowingly and willfully making or causing to be made a false
statement or representation of a material fact in any application for any
benefit or payment (b) knowingly and willfully making or causing to be made any
false statement or representation of a material fact for use in determining
rights to any benefit or payment; (c) knowingly and willfully soliciting or
receiving any remuneration (including any kickback, bribe, or rebate), directly
or indirectly, overtly or covertly, in cash or in kind (i) in return for
referring an individual to a person for the furnishing or arranging for the
furnishing of any item or service for which payment may be made in whole or in
part by Medicare or Medicaid, or (ii) in return for purchasing, leasing, or
ordering or arranging for or recommending purchasing, leasing, or ordering any
good, facility, service, or item for which payment may be made in whole or in
part by Medicare or Medicaid; and (d) knowingly and willfully offering or paying
any remuneration (including any kickback, bribe, or rebate), directly or
indirectly,
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overtly or covertly, in cash or in kind to any person to induce such person (i)
to refer an individual to a person for the furnishing or arranging for the
furnishing of any item or service for which payment may be made in whole or in
part under Medicare or Medicaid, or (ii) to purchase, lease, order, or arrange
for or recommend purchasing, leasing, or ordering any good, facility, service,
or item for which payment may be made in whole or in part under Medicare or
Medicaid.
6.7 Financial Statements. Attached hereto as Schedule 6.7 is the
unaudited balance sheet for Corphealth for the period ended November 30, 1997,
(the "Financial Statements"). The Financial Statements are complete and correct
in all material respects; have been prepared in conformity with generally
accepted accounting principals ("GAAP"); and fairly present in all material
respects the financial condition of Corphealth as of the date thereof. From the
date of the Financial Statements through the Closing Date, there has been no
material adverse change in the business or operations of Corphealth.
ARTICLE VII
Covenants and Agreements
7.1 Insurance. From and after the Closing Date, Seller shall name
Buyer as an additional insured to Seller's liability policies relating to the
Clinics; which remain in effect after the Closing Date, and with respect to
Seller's liability policies that are on a claims made basis, Seller shall
service and maintain such policies for four (4) years following the Closing Date
and secure, "tail" coverage covering the operations of the Clinics prior to the
Closing Clinics and Buyer.
7.2 Employees. As of the Closing Date, Seller shall terminate all of
Seller s employees at the Clinics, and shall be fully responsible for all
claims, obligations and liabilities relating to such employees and the
termination of such employees including without limitation severance benefits
and accrued vacation. Buyer shall use its reasonable efforts to offer employment
to Seller's employees at the Clinics sites at substantially the same rate of
salary or wages as with their employment with Seller at the time of such
employees termination of employment. Nothing in this Agreement shall confer upon
Buyer any obligation to hire Seller's employees at the Clinics, confer upon an
employee of Seller the right to employment or continued employment with Buyer,
or confer upon Buyer any
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obligation to offer any employee benefits in excess of the standard employment
benefits offered by Buyer to its other employees.
7.3 Patient Records. Buyer is not acquiring title to any patient
records at the Clinics, but Buyer shall be entitled to make and maintain copies
of such records. Seller shall retain and remove from the Clinics all original
patient records at the Clinics. In the event Seller needs access to the copies
of the patient records retained by Buyer, or for any reason desires or requires
access to patient records created by Buyer at the Clinics, Seller shall bear all
costs and expenses in obtaining all necessary consents to the delivery of such
records, as well as all costs and expenses of Buyer's employees incurred in
connection with delivering such records. Notwithstanding anything to the
contrary herein contained, Buyer shall have no obligation to Seller to deliver
any patient records if to do so would require Buyer to violate any laws, rules
or regulations relating to patient records.
7.4 Collection of Accounts Receivable. Buyer hereby covenants and
agrees following the Closing for a period of 120 days to collect the accounts
receivables of Seller outstanding on the Closing Date or arising from or related
to periods prior to the Closing (the "Pre-Closing Receivables") on behalf of
Seller. Seller shall pay to Buyer a fee equal to 5% of all accounts receivable
collected by Buyer on Seller's behalf. Buyer agrees to use its normal collection
efforts to collect the Pre-Closing Receivables, but in no event shall Buyer be
obligated to institute collection proceedings of any nature. Buyer shall remit
to Seller on a monthly basis the Pre-Closing Receivables actually collected by
Buyer during such monthly period and shall cooperate with Seller to verify the
actual collections. Buyer shall have no liability to Seller whatsoever for the
failure or inability to collect any Pre-Closing Receivables.
7.5 Prorations. Utility charges, real estate and personal property
taxes and assessments, both general and special, and similar proratable items
which are attributable to the Assets, shall be apportioned between Buyer and
Seller at the Closing as follows: any item which relates to the period prior to
the Closing Date shall be apportioned to and paid by Seller at the Closing, and
any such item which relates to the period on or after the Closing Date shall be
apportioned to and paid by Buyer at the Closing.
7.6 Real Estate Lease Security Deposit. Buyer is not acquiring the
Security Deposit in the amount of
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$4,327.00 (the "Security Deposit") under the Real Estate Lease; provided
however, Buyer shall not be obligated to return or reimburse Seller for the
Security Deposit until the expiration date of the initial term of the Real
Estate Lease.
7.7 Agreements Regarding Bechtel. Buyer covenants and agrees not to
renew the existing Bechtel Nevada purchase order number 16553 between Seller and
Bechtel Nevada (the "Existing Purchase Order") beyond its present term in the
event Buyer continues to provide the services set forth under the Existing
Purchase Order but rather to enter a new purchase order; provided, however, in
the event Buyer is able to have Seller released from its obligations and
liabilities under the Existing Purchase Order, then Buyer shall be permitted to
renew the Existing Purchase Order. Buyer further covenants and agrees not to
alter, modify or amend the duties, liabilities or obligations of Seller set
forth in the Existing Purchase Order without the prior written consent of Seller
which consent shall not be unreasonably withheld.
ARTICLE VIII
8.1 Option to Acquire Nevada Psychological Associates. Seller and
NPA hereby grant to Buyer and Corphealth an option to acquire the clinic, assets
and operations of NPA (the "NPA Clinic"), exercisable for a period of thirty
(30) days following the Closing Date. Buyer and Corphealth shall deliver written
notice to Seller and NPA of its election to acquire the NPA Clinic within such
thirty day period, and the closing of such acquisition shall occur on or before
fifteen (15) days following Seller's and NPA's receipt of such notice. In the
event Buyer and Corphealth elect to purchase the NPA Clinic, NPA shall be deemed
a Seller for all purposes under this Agreement, and such transaction shall be
governed by all of the terms and conditions of this Agreement, except that no
additional Purchase Price shall be payable with respect to the NPA Clinic.
Throughout the thirty day period following the Closing Date, Seller and NPA
agree to give to Buyer and Corphealth full and complete access to all of the
books, records and assets of the NPA Clinic. At the Closing of the purchase of
the NPA Clinic by Buyer and Corphealth, Seller and NPA shall deliver revised
schedules to this Agreement, to the extent necessary which schedules shall be
deemed incorporated into this Agreement for all intents and purposes.
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ARTICLE IX
Closing Procedures
9.1 Seller's Obligations. At the Closing, Seller shall:
a. Deliver to Buyer and Corphealth consents to the assignment
and assumption of the Contracts, Real Property Lease and Personal Property
Leases, unless the delivery of such consent at the Closing has been waived in
writing by Buyer;
b. Execute and deliver the Bill of Sale:
c. Execute and deliver the Assignment and Assumption
Agreement;
d. Execute and deliver the Security Agreement;
e. Execute and deliver a Lease Assignment in the form of
Exhibit "E" attached hereto (the "Lease Assignment"); and
f. Deliver certified copies of Resolutions of Seller
authorizing the execution, delivery and performance of this Agreement and all
agreements incident hereto.
9.2 Buyer's and/or Corphealth's Obligations. At the Closing, Buyer
and Corphealth shall:
a. Deliver to Seller the sum of Four Hundred Sixteen Thousand
Two Hundred Fifty Dollars ($416,250.00) in cash or by wire transfer;
b. Execute and deliver the Note;
c. Execute and deliver the Security Agreement;
d. Execute and deliver the Assumption Agreement;
e. Execute and deliver the Lease Assignment;
f. Deliver certified copies of Corporate Resolutions
authorizing the execution, delivery and performance of this Agreement, and all
agreements incident hereto.
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ARTICLE X
Survival of Representations
and Warranties; Indemnification
10.1 Survival of Representations and Warranties. The representations
and warranties of the parties hereto made herein shall not be affected by any
information furnished to, or any investigation conducted by, any of them or
their representatives in connection with the subject matter of this Agreement,
and such representations and warranties shall survive the Closing for the
respective periods set forth below:
a. The representations and warranties set forth in Section
5.15 Environmental Matters shall survive the Closing with respect to each
Clinics' site until the longer of (i) one year after the expiration of the lease
covering such Clinics' site, or the expiration of the applicable statute of
limitations; and
b. All other representations and warranties contained in this
Agreement shall survive the Closing until two years after the Closing Date.
10.2 Indemnification of Buyer and Corphealth.
a. Seller, jointly and severally, shall indemnify, defend and
hold harmless Buyer and Corphealth and each of its shareholders, subsidiaries,
affiliates, officers, directors, agents and permitted assigns from, against, for
and in respect of:
(i) any and all damages, losses, settlement payments,
obligations, liabilities, claims, actions or causes of action, encumbrances and
reasonable costs and expenses suffered, sustained, incurred or paid by any
indemnified party because of (A) the claims of any broker or finder engaged by
Seller; (B) the untruth, inaccuracy or breach of any representation, warranty,
agreement or covenant of Seller contained in or made in connection with this
Agreement; (C) the assertion against Buyer or Corphealth or the Assets of any
liability or obligation relating to the operations of the Clinics or any of the
Assets prior to the Closing Date arising out of or related to liabilities and
obligations other than to the Assumed Liabilities; (D) all claims and litigation
and potential claims and litigations against Buyer or Corphealth with respect to
incidents or other matters which occurred prior to the Closing Date related to
the Clinics except for matters arising out or related to the Assumed
Liabilities;
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(E) any and all claims, liabilities, obligations or causes of action relating in
any manner to employees of the Clinics arising from or related to the period
prior to Closing which are not Assumed Liabilities or any benefit plan
maintained by Seller for employees of the Clinics arising from or related to the
period prior to Closing which are not Assumed Liabilities; (F) any other
liabilities of Seller, whether absolute or contingent, known or unknown, matured
or unmatured and not expressly assumed by Buyer hereunder pursuant to the
Assumption Agreement; and
(ii) all reasonable costs and expenses (including, without
limitation, attorneys' fees, interest and penalties) incurred by any indemnified
party in connection with any action, suit, proceeding, demand, assessment or
judgment incident to any of the matters indemnified against in this Paragraph
10.2.
10.3 Indemnification of Seller.
a. Buyer and Corphealth, jointly and severally, shall
indemnify, defend and hold harmless Seller and each of their shareholders,
subsidiaries, affiliates, officers and directors from, against, for and in
respect of:
(i) any and all damages, losses, settlement payments,
obligations, liabilities, claims, actions or causes of action, encumbrances and
reasonable costs and expenses suffered, sustained, incurred or paid by any
indemnified party because of: (A) the claims of any broker or finder engaged by
Buyer or Corphealth; (B) the untruth inaccuracy or breach of any representation,
warranty, agreement or covenant of Buyer or Corphealth contained in or made
pursuant to this Agreement; (C) the assertion against Seller of any liability or
obligation relating to the operations of the Clinics after the Closing Date or
arising out of or related to the Assumed Liabilities; (D) all claims and
litigation and potential claims and litigations against Seller with respect to
incidents or other matters occurring after the Closing Date related to the
Clinics unless they relate to liabilities or obligations retained by Seller
pursuant to the terms of this Agreement or the Assumption Agreement; and (E) any
other liabilities of Buyer or Corphealth whether absolute or contingent, known
or unknown, matured or unmatured; and
(ii) all reasonable costs and expenses (including, without
limitation, attorneys' fees, interest and penalties) incurred by any indemnified
party in connection with any action, suit, proceeding, demand,
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assessment or judgment incident to any of the matters indemnified against in
this Paragraph 10.3.
10.4 Rules Regarding Indemnification.
a. The obligations and liabilities of each indemnifying party
hereunder with respect to claims resulting from the assertion of liability by
the other party or third parties shall be subject to the following terms and
conditions:
(i) The indemnified party shall give prompt written notice to
the indemnifying party of any claim which might give rise to a claim by the
indemnified party against the indemnifying party based on the indemnity
agreements contained in Paragraphs 10.2 and 10.3 hereof, stating the nature and
basis of said claims and the amounts thereof, to the extent known; and
(ii) The indemnified party shall not make any settlement of
any claims without the written consent of the indemnifying party, which consent
shall not be unreasonably withheld or delayed, except as set forth in c. below.
b. Neither the failure nor the delay on the part of an
indemnified party hereunder in notifying the indemnifying party of any claim
which might give rise to a claim by the indemnified party against the
indemnifying party shall relieve the indemnifying party from any obligation
hereunder unless (and then solely to the extent) the indemnifying party thereby
is prejudiced.
c. In the case of third party claims, the indemnified party
shall, within ten (10) days of receipt of notice of such claim, notify the
indemnifying party of its intention to assume the defense of such claim at its
own expense. If the indemnifying party shall not assume the defense of any such
claim or litigation resulting therefrom, the indemnified party may defend
against any such claim or litigation in such manner as it may deem appropriate
and the indemnified party may settle such claim or litigation on such terms as
it may deem appropriate. Payment of the damages shall be made within ten (10)
days of a final determination of a claim.
A final determination of a disputed claim shall be (i) a judgment of
any court determining the validity of a disputed claim, if no appeal is pending
from such judgment or if the time to appeal therefrom has elapsed, (ii) an award
of any arbitration determining the validity of such disputed claim, if there is
not pending any motion to set
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aside such award or if the time within which to move to set such award aside has
elapsed, (iii) a written termination of the dispute with respect to such claim
signed by all of the parties thereto or their attorneys, (iv) a written
acknowledgment of the indemnified party that it no longer disputes the validity
of such claim, or (v) such other evidence of final determination of a disputed
claim as shall be acceptable to the parties.
d. Agreements Concerning Indemnification. It is specifically
understood and agreed that:
(i) Seller shall not be obligated to indemnify Buyer and
Corphealth for Buyer's or Corphealth's damages unless and until the aggregate
amount of such damages exceeds $5,000.00 (the "Deductible");
(ii) Buyer and Corphealth shall have the right to, at its
option, set-off against the Note for the amount of Seller's liability to Buyer
or Corphealth under section 10.2 hereof. Buyer and Corphealth shall give Seller
thirty (30) days prior written notice of their intention to act-off against the
Note which notice shall state the basis for the set-off and the amount thereof;
(iii) Damages payable to an indemnified party shall be reduced
by any insurance proceeds actually received by any indemnified party on account
of such indemnification at the time the indemnification payment occurs, it being
understood that in no event shall any indemnification payment be delayed in
anticipation of the receipt of any insurance proceeds. In the event that
insurance recovery is made by an indemnified party, with respect to any
indemnification payment for which an indemnification claim has been made, such
indemnified party shall pay to the indemnifying party the amount of the
insurance recovery, but not more than the amount of such indemnification
payment; and
(iv) In any event, Seller's liability to Buyer and Corphealth
for indemnification, in the aggregate, shall not exceed the total amount of the
Purchase Price for the Assets.
e. The sole and exclusive remedy for any untruth, inaccuracy
or breach of any representation or warranty, agreement or covenant to be
performed prior to the Closing (it being understood and agreed that this
limitation shall not apply to covenants or agreements to be performed subsequent
to the Closing) hereunder on the part of any
<PAGE> 23
23
party shall be indemnification as set forth in and limited by the provisions of
this Article X.
ARTICLE XI
Restrictive Covenant
11.1 Restrictive Covenant.
a. During the Restrictive Period (defined below), Seller
agrees that it will not collectively or individually Compete (defined below)
with Buyer in the Territory (defined below).
b. For all purposes of this Agreement, the terms defined below
shall have the respective meaning specified, and the following definitions shall
be equally applicable to the singular and plural forms of the terms defined:
(i) "Business" means owning or managing outpatient behavioral
treatment service providers; providing behavioral treatment services; or
conducting or engaging in any other activity currently provided by the Clinics
with the expectation of remuneration excluding the Integra Business (as
hereinafter defined).
(ii) "Compete" means, directly or indirectly, on its own
behalf or on behalf of any other Person: (A) organizing or owning any interest
in a business which engages in the Business in the Territory; (B) engaging in
the Business in the Territory; or (C) assisting any Person (as a director,
officer, employee, agent, consultant, lender, lessor or otherwise) to engage in
the Business in the Territory.
(iii) "Person" means any entity, including, without
limitation, any natural person, company, partnership, corporation, trust,
association, organization, (but only those then in existence) governmental unit
or any affiliate of Seller.
(iv) "Restrictive Period" means the period beginning on the
Effective Date and ending five (5) years thereafter.
(v) "Territory" means a 100 mile radius around the center of
the city of Las Vegas, Nevada.
<PAGE> 24
24
(vi) For purposes hereof, the Integra Business shall mean only
Apogee, Inc.'s managed behavioral health care business conducted through its
employee assistance program and managed mental health and substance abuse
management programs and shall expressly exclude the direct provision of
behavioral treatment services and/or the ownership or operation of clinics.
c. The prohibitions contained herein shall be binding upon
Seller' successors in interest and assigns. In the event that an Event of
Default (as defined in the Note or the Security Agreement) under the Note or the
Security Agreement shall have occurred, then the covenants of Seller contained
in this Article XI shall be null and void and of no further force or effect.
11.2 Remedies. Seller acknowledges that the remedy at law for any
breach, or threatened breach, of any of the foregoing provisions of the
Restrictive Covenant will be inadequate and, accordingly, Seller covenants and
agrees that Buyer and Corphealth shall, in addition to any other rights or
remedies which Buyer and Corphealth may have, be entitled to such equitable and
injunctive relief as may be available from any court of competent jurisdiction
to restrain Seller from any violation of such obligations. Such right to obtain
injunctive relief may be exercised, at the option of Buyer and Corphealth,
concurrently with, prior to, after, or in lieu of, the exercise of any other
rights or remedies which Buyer and Corphealth may have as a result of any such
breach or threatened breach. The Restrictive Period shall be extended during any
time period during which the Seller as determined by a court of competent
jurisdiction, is in violation of the provisions of this Article XI.
11.3 Acknowledgment of Reasonableness. Seller agrees that the
restrictions set forth in this Article XI are fair and reasonably required for
the protection of Buyer and Corphealth. In the event, however, that any
provision of Paragraph 11.1 relating to the Restrictive Period, the Business
and/or the Territory shall be declared by a court of competent jurisdiction to
exceed the maximum time period, activity prohibited or geographical area such
court deems reasonable and enforceable under applicable law, the time period,
activity prohibited and/or area of restriction held reasonable by the court
shall thereafter be the Restrictive Period activity prohibited and/or the
Territory under this Agreement.
<PAGE> 25
25
ARTICLE XII
Miscellaneous
12.1 Notices. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given, if delivered in person or mailed by certified or registered mail,
postage prepaid, return receipt requested, as follows (or at such other address
for a party as shall be specified by like notice; provided that a notice of a
change of address shall be effective only upon receipt thereof):
To Buyer:
Summit Behavioral Partners-Nevada, Inc.
1300 Summit Avenue, Suite 600
Fort Worth, Texas 76102-4420
To Corphealth:
Corphealth, Inc.
1300 Summit Avenue, Suite 600
Fort Worth, Texas 76102-4420
To Seller:
Apogee, Inc.
Apogee Health Services, Inc.
1018 West Ninth Avenue, Suite 202
King of Prussia, PA 19406
Attn: President
12.2 Severability. The invalidity or unenforceability of any term or
provision of this Agreement shall not affect the other provisions hereof, and
this Agreement shall be construed in all respects as if such invalid or
unenforceable provision were omitted.
12.3 Section and Heading References. The Paragraph and Article
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement.
12.4 Successors and Assigns; Assignment. This Agreement will be
binding upon, inure to the benefit of, and be enforceable by, the respective,
permitted successors and assigns of the parties hereto. Except as otherwise
expressly provided herein, nothing expressed or implied herein is intended or
shall be construed to confer upon or give any person, other than the parties
hereto, any right or
<PAGE> 26
26
remedy hereunder or by reason hereof. No party may assign its respective rights
and obligations under this Agreement without the prior written consent of the
other party hereto.
12.5 Expenses. The parties hereto shall pay its own expenses
incurred in connection with the negotiation and consummation of this Agreement,
including the charges of its respective attorneys, accountants and other
representatives.
12.6 Entire Agreement; Amendments. This Agreement and the Exhibits
and Schedules attached hereto constitute the entire agreement and understanding
of the parties in respect of the transactions contemplated hereby and supersede
all prior agreements, arrangements and understandings. This Agreement may be
amended or modified only in a writing signed by Buyer and Seller.
12.7 Governing Law. The validity and construction of this Agreement
shall be governed by the laws of the State of Texas.
12.8 Waiver. No delay or omission on the part of any party hereto in
exercising any rights hereunder shall operate as a waiver of such right or any
other right under this Agreement.
12.9 Waiver of Consent. Seller has been unable to obtain the
necessary consents of third parties prior to the consummation of the
transactions contemplated hereby under the contracts, agreements, leases and
other instruments of Seller which are part of the Assets and are set forth in
Schedule 12.9 hereof (the "Schedule 12.9 Contracts"), which failure to obtain
such consents has been waived in writing by Buyer, Seller covenants and agrees
to cooperate with Buyer to obtain such consents within sixty (60) days of the
Closing Date. Seller covenants and agrees (i) not to assign any such Schedule
12.9 Contract to any party other than Buyer, (ii) to use reasonable efforts to
keep such Schedule 12.9 Contract in full force and effect, except as otherwise
directed by Buyer, (iii) to operate under such Schedule 12.9 Contract only under
the direction of Buyer, (iv) to the extent such Schedule 12.9 Contract requires
by its terms the performance of services by, Seller, that Buyer is hereby
subcontracted and employed to perform all such services on behalf of Seller, (v)
to remit or otherwise provide to Buyer all revenues and other benefits derived
from such Schedule 12.9 Contract immediately upon receipt thereof and (vi) in
the event that such consent cannot be obtained, to cooperate with Buyer and the
other party to such Schedule 12.9 Contract to enable Buyer to enter into a
contract directly with such other party. Buyer agrees that the failure to
<PAGE> 27
27
obtain a consent under any Schedule 12.9 Contract shall not constitute a default
under this Agreement.
IN WITNESS WHEREOF, Apogee, AHS, NPA, Corphealth and Buyer have duly
executed this Agreement by their duly authorized corporate officers as of the
day and year first above written.
CORPHEALTH, INC.
By
--------------------------------
Title:
SUMMIT BEHAVIORAL PARTNERS-NEVADA,
INC.
By
--------------------------------
Title:
APOGEE HEALTH SERVICES, INC.
By
--------------------------------
Title:
APOGEE, INC.
By
--------------------------------
Title:
NEVADA PSYCHOLOGICAL ASSOCIATES,
INC.
By
--------------------------------
Title:
<PAGE> 1
FOURTH AMENDMENT TO LOAN AGREEMENT
This FOURTH AMENDMENT TO LOAN AGREEMENT ("Amendment") dated August
8, 1997 is made by and among APOGEE, INC., a Delaware corporation ("Apogee"),
and each Subsidiary identified on the attached Schedule 6.1 (c) (collectively,
the "Borrowing Subsidiaries" and together with Apogee, the "Borrowers" and
individually, a "Borrower") and PNC BANK, NATIONAL ASSOCIATION, a national
banking association (the "Bank").
Reference is made to the Revolving Credit Agreement dated as of
April 11, 1996 by and between the Borrowers and the Bank, as amended on June 21,
1996, November 1, 1996 and March 11, 1997 (the "Agreement") pursuant to which
the Bank made available to the Borrowers a $15,000,000 revolving credit
facility. The obligations under the Agreement and the Loan Documents were
evidenced by the Borrowers' Note payable to the Bank. (Capitalized terms used
herein not otherwise defined shall have the meanings provided for in the
Agreement.)
NOW, THEREFORE, in consideration of the foregoing and for other
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto, intending to be legally bound, hereby agree as follows:
<PAGE> 2
2
1. Amendment to Agreement.
(a) The Agreement is hereby amended by amending the definition of
"Expiration Date" by substituting for the date set forth therein the date
"November 30, 1998" and the Loan Documents, including the "Revolving Credit
Note" are likewise amended to reflect such date.
2. Miscellaneous.
(a) Recognizing and in consideration of the Bank's agreement to the
amendments herein set forth, the Borrowers hereby waive and release the Bank and
its officers, attorneys, agents, and employees from any liability, suit, damage,
claim, loss or expense of any kind or nature whatsoever and howsoever arising
out of or relating to the Bank's acts or omissions with respect to the Revolving
Credit Loans. The Borrowers further hereby agree to indemnify and hold the Bank
and its officers, attorneys, agents and employees harmless from any loss,
damage, judgment, liability or expense (including counsel fees) suffered by or
rendered against the Bank or any of them on account of anything arising out of
the Revolving Credit Note, the Credit Agreement, this Agreement, the Loan
Documents or any other document delivered pursuant thereto up to and including
the date hereof.
(b) All of the terms, conditions, provisions and covenants in the
Note, the Agreement, the Loan Documents, and all other documents delivered to
the Bank in connection
<PAGE> 3
3
with any of the foregoing documents and obligations secured thereby shall remain
unaltered and in full force and effect except as modified by this Amendment.
(c) The Borrowers agree to pay all of the Bank's expenses incurred
in connection with the preparation of this Amendment and the transactions
contemplated by this Amendment, including without limitation, the reasonable
fees and expenses of the Bank's counsel.
(d) This Amendment shall be governed by and construed in accordance
with the laws of the Commonwealth of Pennsylvania.
(e) Each and every one of the terms and provisions of this Amendment
shall be binding upon and shall inure to the benefit of the Borrowers and the
Bank and their respective successors and assigns.
(f) This Amendment may be executed in one or more counterparts, each
of which shall be deemed to be an original as against any party whose signature
appears thereon, and all of which shall constitute but one and the same
instrument.
(g) Apogee represents and warrants that all of its subsidiaries are
listed on the attached Schedule 6.1(c).
<PAGE> 4
4
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their respective officers "hereunto duly authorized as of the day
and year first above written.
APOGEE, INC., a Delaware
corporation, and each of the other
Borrowers and Guarantors listed on
Schedule 6.1(c)
By:
-------------------------------
[Name],
the [Title] of
-------------------
each Borrowers and Guarantors
listed on Schedule 6.1(c),
-and-
PNC BANK, NATIONAL ASSOCIATION
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
<PAGE> 1
FIFTH AMENDMENT TO LOAN AGREEMENT
This FIFTH AMENDMENT TO LOAN AGREEMENT ("Amendment") dated December
22, 1997 is made by and among APOGEE, INC., a Delaware corporation ("Apogee"),
and each Subsidiary identified on the attached Schedule 6.1(c) (collectively,
the "Borrowing Subsidiaries" and together with Apogee, the "Borrowers" and
individually, a "Borrower" and PNC BANK, NATIONAL ASSOCIATION, a national
banking association (the "Bank").
Reference is made to the Revolving Credit Agreement dated as of
April 11, 1996 by and between the Borrowers and the Bank, as amended on June 21,
1996, November 1, 1996, March 11, 1997 and August 8, 1997 (the "Agreement")
pursuant to which the Bank made available to the Borrowers a $15,000,000
revolving credit facility, availability under which is limited to the
Discretionary Advance Sublimit, unless otherwise agreed by the Bank. The
obligations under the Agreement and the Loan Documents were evidenced by the
Borrowers' note payable to the Bank. (Capitalized terms used herein not
otherwise defined shall have the meanings provided for in the Agreement.)
The Borrowers have requested, and the Bank has agreed upon the
following terms and conditions, that a single short-term advance be made in
excess of the limits otherwise application to the Revolving Credit Loans in
<PAGE> 2
2
anticipation of the sale of assets by certain of the Borrowers as described more
fully herein and that the Bank waive certain Events of Default which have
occurred.
Further, pursuant to an Agreement dated this date (the "Brill
Agreement"), Apogee proposes to prepay in 1997 an earnout payment otherwise
payable in 1998 to Peter L. Brill, Inc. ("Brill") pursuant to a purchase
agreement between Apogee and Brill dated July 1, 1994 (the "Purchase
Agreement"). Such prepayment in 1997 (the "1997 Prepayment") would equal 100%
percent of Apogee's good-faith estimate of amount otherwise payable in 1998
pursuant to the terms of the Agreement. Any required adjustments would be
payable on March 31, 1998. To find such prepayment Brill shall make a loan to
Apogee in the amount of $2,428,351 bearing interest at 0% per annum and payable
in full on March 31, 1998, (the "Brill Loan"). The parties hereto wish to set
forth the terms of the Bank's consent to the 1997 Prepayment and the Brill Loan.
NOW, THEREFORE, in consideration of the foregoing and for other
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto, intending to be legally bound, hereby- agree as follows:
1. Amendment to Agreement.
(a) Section 1.1 of the Agreement is hereby amended effective as of
September 30, 1997 by adding new
<PAGE> 3
3
definitions of "December Advance Note" and "Special Asset Sale" to read in their
entirety as follows:
December Advance Note shall mean the $700,000 principal amount
Revolving Credit Note executed on December 16, 1997, all amounts under which
shall be due on March 1, 1998.
Special Asset Sale shall mean the sale of assets by certain of the
Borrowers for a purchase price of not less than $25,000,000 (excluding
charge-backs, reserves or similar adjustments to purchase price) and otherwise
on terms and conditions satisfactory to the Bank in its sole discretion.
(b) Section 2.1(b) of the Agreement is amended by adding at the end
thereof the following paragraph:
The Bank agrees to make on December 16, 1997 an advance of $700,000
notwithstanding that all or some of such amount is in excess of the
Discretionary Advance Sublimit. Such advance shall be evidenced by
the December Advance Note and shall bear interest at the rate
otherwise applicable from time to time to the Indebtedness. The
December Advance Note need not be repaid under Section 5.3(b) but
all principal, interest and other amounts due under or evidenced by
the December Advance Note shall be repaid in full on March 1, 1998
unless otherwise due earlier
<PAGE> 4
4
pursuant to the terms thereof or of any Loan Document. The December
Advance Note is and shall be a "Loan Document" and a "Revolving
Credit Note" (except that its terms may differ from the other
Revolving Credit Note) and the obligations evidenced thereby shall
be "Indebtedness" of each of the Borrowers which are secured by the
Collateral and the Guaranties. Without limiting the foregoing,
failure to pay when due any amounts under the December Advance Note
shall constitute an Event of Default under Section 9.1(a) of the
Agreement.
2. Waiver.
For the period from September 30, 1997 to and including the "Action
Date" (as defined below), the Bank hereby consents to the Borrower's
non-compliance with Section 8.2(m) [Funded Debt to Cash Flow From Operations]
and Section 8.2(n) [Senior Debt to Cash Flow From Operations] and waives the
right to exercise remedies in connection therewith for the period described
above. Notwithstanding the foregoing, the Bank's consent and waiver set forth in
this Section 1 shall terminate on the earlier to occur of the following (such
earlier date being the "Action Date"):
(a) March 1, 1998;
<PAGE> 5
5
(b) the completion of the "Special Asset Sale" referred to in this
Amendment;
(c) January 3, 1998, unless a definitive asset sale agreement in respect
of the Special Asset Sale satisfactory to the bank in its sole
discretion is executed and delivered by all parties on or before
January 3, 1998; and
(d) the date on which the definitive asset sale agreement referred to in
item (c) hereof is cancelled, terminated or made ineffective.
3. Consent.
Notwithstanding anything in the Agreement to the contrary, the Bank
agrees and consents to the execution and delivery of and performance under the
Brill Agreement and the 1997 Prepayment made in connection therewith, together
with the borrowing of amounts constituting the Brill Loan. This agreement and
consent is based upon and limited to the transactions contemplated in the Brill
Agreements as reviewed by the Bank and approved in the Bank's sole discretion
prior to the date hereof.
4. Miscellaneous.
(a) Recognizing and in consideration of the Bank's agreement to the
amendments herein set forth, the Borrowers hereby waive and release the Bank and
its officers, attorneys, agents, and employees from any liability, suit, damage,
claim, loss or expense of any kind or nature whatsoever and howsoever arising,
out of or relating to the Bank's acts or omissions with respect to the Revolving
Credit Loans. The Borrowers further hereby agree
<PAGE> 6
6
to indemnify and hold the Bank and its officers, attorneys, agents and employees
harmless from any loss, damages judgment, liability or expense (including
counsel fees) suffered by or rendered against the Bank or any of them on account
of anything arising out of the Revolving Credit Note, the December Advance Note,
the Agreement, this Amendment, the Loan Documents or any other document
delivered pursuant thereto up to and including the date hereof.
(b) All of the terms, conditions, provisions and covenants in the
Note, the Agreement, the Loan Documents, and all other documents delivered to
the Bank in connection with any of the foregoing documents and obligations
secured thereby shall remain unaltered and in full force and effect except as
modified by this Amendment.
(c) The Borrowers agree to pay all of the Bank's expenses incurred
in connection with the preparation of this Amendment and the transactions
contemplated by this Amendment, including without limitation, the reasonable
fees and expenses of the Bank's counsel.
(d) This Amendment shall be governed by and construed in accordance
with the laws of the Commonwealth of Pennsylvania.
(e) Each and every one of the terms and provisions of this Amendment
shall be binding upon and shall
<PAGE> 7
7
inure to the benefit of the Borrowers and the Bank and their respective
successors and assigns.
(f) This Amendment may be executed in one or more counterparts, each
of which shall be deemed to be an original as against any party whose signature
appears thereon, and all of which shall constitute but one and the same
instrument.
(g) Apogee represents and warrants that all of its subsidiaries are
listed on the attached Schedule 6.1(c).
(h) THE EXECUTION AND DELIVERY OF THIS WAIVER SHALL NOT BE CONSTRUED
TO ESTABLISH A COURSE OF CONDUCT OR IMPLY THAT ANY OTHER, FUTURE OR FURTHER
WAIVERS, CONSENTS OR FORBEARANCE SHALL BE CONSIDERED, PROVIDED OR AGREED TO.
(i) The Borrowers covenant, represent and agree that the letter of
intent dated October 10, 1997 relating to the Special Asset Sale shall not be
amended without the consent of the Bank.
(j) This Amendment is a "Loan Document" under the Agreement and any
breach of the terms hereof shall be an Event of Default under Section 9.1(d) of
the Agreement.
<PAGE> 8
8
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their respective officers thereunto duly authorized as of the day
and year first above written.
APOGEE, INC., a Delaware
corporation, and each of the other
Borrowers and Guarantors listed on
Schedule 6.1 (c)
By:
-------------------------------
[Name],
the [Title] of
-------------------
each Borrowers and Guarantors
listed on Schedule 6.1(c),
- and -
PNC BANK, NATIONAL ASSOCIATION
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
<PAGE> 1
SIXTH AMENDMENT TO LOAN AGREEMENT
This SIXTH AMENDMENT TO LOAN AGREEMENT ("Amendment") dated January
29, 1998 is made by and among APOGEE, INC. a Delaware corporation ("Apogee") and
each Subsidiary identified on the attached Schedule 6.1(c) (collectively, the
"Borrowing Subsidiaries" and together with Apogee, the "Borrowers" and
individually, a "Borrower") and PNC BANK, NATIONAL ASSOCIATION, a national
banking association (the "Bank").
Reference is made to the Revolving Credit Agreement dated as of
April 11, 1996 by and among the Borrowers and the Bank, as amended on June 21,
1996, November 1, 1996, March 11, 1997, August 8, 1997 and December 2, 1997 (the
"Agreement") pursuant to which the Bank made available to the Borrowers a
$15,000,000 revolving credit facility, availability under which is limited to
the Discretionary Advance Sublimit, unless otherwise agreed by the Bank. The
obligations under the Agreement and the Loan Documents were evidenced by the
Borrowers' note payable to the Bank. (Capitalized term used herein not otherwise
defined shall have the meanings provided for in the Agreement.)
The Borrowers have requested, and the Bank has agreed upon the
following terms and conditions, that a single short-term advance be made in
excess of the limits otherwise applicable to the Revolving Credit Loans in
anticipation of the sale of assets by certain of the Borrowers as described more
fully herein.
NOW, THEREFORE, in consideration of the foregoing and for other
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto, intending to be legally bound, hereby agree as follows:
1. Amendment to Agreement.
(a) Section 1.1 of the Agreement is hereby amended by adding a new
definition of "January Advance Note" and by amending and restating the
definition of "Special Asset Sale" to read in their entirety as follows:
January Advance Note shall mean the $1,700,000 principal amount
Revolving Credit Note executed on the date hereof, all amounts under which shall
be due on or before March 1, 1998.
<PAGE> 2
2
Special Asset Sale shall mean the sale of assets pursuant to that
certain Agreement of Purchase and Sale among Psychpartners, L.L.C.,
Psychpartners Midlantic, Inc. and Psychpartners, Inc., and Apogee, Inc. and
certain affiliated parties thereto, effective as of December 26, 1997 (the "Sale
Agreement") and otherwise on terms and conditions satisfactory to the Bank in
its sole discretion.
(b) Section 2.1 (b) of the Agreement is amended by adding at the end
thereof the following paragraph:
The Bank agrees to make available commencing on January 29, 1998 the
sum of $1,700,000 to be advanced in any one or more advances made
before February 28, 1998, notwithstanding that all or some of such
amount is in excess of the Discretionary Advance Sublimit. Such
advance collectively shall be evidenced by the January Advance Note
and outstanding amounts shall bear interest at the rate otherwise
applicable from time to time to the Indebtedness. The January
Advance Note need not be repaid under Section 5.3(b) but all
principal, interest and other amounts due under or evidenced by the
January Advance Note shall be repaid in full on March 1, 1998 unless
otherwise due earlier pursuant to the terms hereof or of any Loan
Document. The January Advance Note is and shall be a "Loan Document"
and a "Revolving Credit Note" (except that its terms may differ from
the other Revolving Credit Note) and the obligations evidenced
thereby shall be "indebtedness" of each of the Borrowers which are
secured by the Collateral and the Guaranties. Without limiting the
foregoing, failure to pay when due any amounts under the January
Advance Note shall constitute an Event of Default under Section
9.1(a) of the Agreement.
2. Miscellaneous.
(a) Recognizing and in consideration of the Bank's agreement to the
amendments herein set forth, the Borrowers hereby waive and release the Bank and
its officers, attorneys, agents, and employees from any liability, suit, damage,
claim, loss or expense of any kind or nature whatsoever and howsoever arising
out of or relating to the Bank's acts or omissions with respect to the Revolving
Credit Loans. The Borrowers further hereby agree to indemnify and hold the Bank
and its officers, attorneys, agents and employees harmless from any loss,
damage, judgment, liability or expense (including counsel fees)
<PAGE> 3
3
suffered by or rendered against the Bank or any of them on account of anything
arising out of the Revolving Credit Note, the January Advance Note, the
Agreement, this Amendment, the Loan Documents or any other document delivered
pursuant thereto up to and including the date hereof.
(b) All of the terms, conditions, provisions and covenants in the
Note, the Agreement, the Loan Documents, and all other documents delivered to
the Bank in connection with any of the foregoing documents and obligations
secured thereby shall remain unaltered and in full force and effect except as
modified by this Amendment.
(c) The Borrowers agree to pay all of the Bank's expenses incurred
in connection with the preparation of this Amendment and the transactions
contemplated by this Amendment, including without limitation, the reasonable
fees and expenses of the Bank's counsel.
(d) This Amendment shall be governed by and construed in accordance
with the laws of the Commonwealth of Pennsylvania.
(e) Each and every one of the terms and provisions of this Amendment
shall be binding upon and shall inure to the benefit of the Borrowers and the
Bank and their respective successors and assigns.
(f) This Amendment may be executed in one or more counterparts, each
of which shall be deemed to be an original as against any party whose signature
appears thereon, and all of which shall constitute but one and the same
instrument.
(g) Apogee represents and warrants that all of its subsidiaries are
listed on the attached Schedule 6.1(c).
(h) THE EXECUTION AND DELIVERY OF THIS WAIVER SHALL NOT BE CONSTRUED
TO ESTABLISH A COURSE OF CONDUCT OR IMPLY THAT ANY OTHER, FUTURE OR FURTHER
WAIVERS, CONSENTS OR FORBEARANCE SHALL BE CONSIDERED, PROVIDED OR AGREED TO.
(i) The Borrowers covenant, represent and agree that the Sale
Agreement relating to the Special Asset Sale shall not be amended without the
consent of the Bank.
(j) This Amendment is a "Loan Document" under the Agreement and any
breach of the terms hereof shall be an Event of Default under Section 9.1(d) of
the Agreement.
<PAGE> 4
4
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their respective officers thereunto duly authorized as of the day
and year first above written.
APOGEE, INC., a Delaware
corporation, and each of the other
Borrowers and Guarantors listed on
Schedule 6.1(c)
By:
-------------------------------
[Name],
the [Title] of
-------------------
each Borrowers and Guarantors
listed on Schedule 6.1(c),
- and -
PNC BANK, NATIONAL ASSOCIATION
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
<PAGE> 1
SEVENTH AMENDMENT TO LOAN AGREEMENT
This SEVENTH AMENDMENT TO LOAN AGREEMENT ("Amendment") dated February 27,
1998 is made by and among APOGEE, INC., a Delaware corporation ("Apogee"), and
each Subsidiary identified on the attached Schedule 6.1(c) (collectively, the
"Borrowing Subsidiaries" and together with Apogee, the "Borrowers" and
individually, a "Borrower") and PNC BANK, NATIONAL ASSOCIATION, a national
banking association (the "Bank").
Reference is made to the Revolving Credit Agreement dated as of April 11,
1996 by and among the Borrowers and the Bank, as amended on June 21, 1996,
November 1, 1996, March 11, 1997, August 8, 1997, December 22, 1997 and January
29, 1998 (the "Agreement"). The obligations under the Agreement and the Loan
Documents were evidenced by the Borrowers' several Revolving Credit Notes
payable to the Bank. (Capitalized terms used herein not otherwise defined shall
have the meanings provided for in the Agreement.)
The Borrowers have requested, and the Bank has agreed upon the following
terms and conditions, that the maturity of the two short-term advances
heretofore made pursuant to the terms of the amendments to the Revolving Credit
Agreement dated December 22, 1997 and January 29, 1998 and evidenced by the
Revolving Credit Notes dated those dates each be extended to March 31, 1998.
<PAGE> 2
NOW, THEREFORE, in consideration of the foregoing and for other
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto, intending to be legally bound, hereby agree as follows:
1. Amendment to Agreement.
(a) The Agreement and the Loan Documents are hereby amended by
extending to March 31, 1998 the latest date by which the January Advance Note in
the principal amount of $1,700,000 dated January 29, 1998 and the December
Advance Note in the principal amount of $700,000 dated December 22, 1997 must
each be repaid.
(b) The reference to March 1, 1998 in the definition of "Action
Date" in the Fifth Amendment to Loan Agreement dated December 22, 1997 is hereby
amended to refer to March 31, 1998 and item "(c)" of that definition, relating
to January 3, 1998, is hereby deleted.
2. Acknowledgement of Default.
The Borrowers acknowledge that the Loan Parties are in violation, as of
December 31, 1997, of the provisions of Sections 8.2(1), 8.2(m), 8.2(n) and
8.2(o) of the Agreement (collectively, the "Existing Potential Defaults").
3. Miscellaneous.
(a) Recognizing and in consideration of the Bank's agreement to the
amendments herein set forth, the Borrowers hereby waive and release the Bank and
its officers, attorneys, agents, and employees from any liability, suit, damage,
claim, loss or expense of any kind or nature whatsoever and howsoever arising
out of or relating to the Bank's acts or omissions with respect to the Revolving
Credit Loans. The Borrowers further
2
<PAGE> 3
hereby agree to indemnify and hold the Bank and its officers, attorneys, agents
and employees harmless from any loss, damage, judgment, liability or expense
(including counsel fees) suffered by or rendered against the Bank or any of them
on account of anything arising out of the Revolving Credit Note, the January
Advance Note, the December Advance Note, the Agreement, this Amendment, the Loan
Documents or any other document delivered pursuant thereto up to and including
the date hereof.
(b) All of the terms, conditions, provisions and covenants in the
Notes, the Agreement, the Loan Documents, and all other documents delivered to
the Bank in connection with any of the foregoing documents and obligations
secured thereby shall remain unaltered and in full force and effect except as
modified by this Amendment.
(c) The Borrowers hereby represent and warrant to the Bank as of the
date of this Amendment that, other than the Existing Potential Defaults, there
exists no Event of Default or Potential Default under any of the Loan Documents.
(d) The Borrowers agree to pay all of the Bank's expenses incurred
in connection with the preparation of this Amendment and the transactions
contemplated by this Amendment, including without limitation, the reasonable
fees and expenses of the Bank's counsel.
(e) This Amendment shall be governed by and construed in accordance
with the laws of the Commonwealth of Pennsylvania.
(f) Each and every one of the terms and provisions of this Amendment
shall be binding upon and shall inure to the benefit of the Borrowers and the
Bank and their respective successors and assigns.
3
<PAGE> 4
(g) This Amendment may be executed in one or more counterparts, each
of which shall be deemed to be an original as against any party whose signature
appears thereon, and all of which shall constitute but one and the same
instrument.
(h) Apogee represents and warrants that all of its subsidiaries are
listed on the attached Schedule 6.1(c).
(i) THE EXECUTION AND DELIVERY OF THIS AMENDMENT SHALL NOT BE
CONSTRUED TO ESTABLISH A COURSE OF CONDUCT OR IMPLY THAT ANY OTHER, FUTURE OR
FURTHER WAIVERS, CONSENTS OR FORBEARANCE SHALL BE CONSIDERED, PROVIDED OR AGREED
TO. NOTHING CONTAINED HEREIN SHALL BE DEEMED TO BE A WAIVER OF ANY OF THE RIGHTS
AND REMEDIES AVAILABLE TO THE BANK UNDER APPLICABLE LAW OR ANY OF THE LOAN
DOCUMENTS, AND THE BANK RESERVES ALL RIGHTS AND REMEDIES AGAINST THE BORROWERS.
NO FAILURE TO EXERCISE, NO DELAY IN EXERCISING, NO MAKING OF ANY ADVANCE TO ANY
OF THE BORROWERS BY THE BANK, AND NO ACCEPTANCE OF ANY PAYMENT OR NEGOTIATION BY
THE BANK, NOW OR IN THE FUTURE, SHALL OPERATE AS A WAIVER OF ANY POWER, REMEDY,
OR RIGHT OF THE BANK UNDER THIS AGREEMENT, THE LOAN DOCUMENTS OR APPLICABLE LAW,
NOR SHALL ANY SINGLE OR PARTIAL EXERCISE OF ANY POWER, REMEDY, OR RIGHT PRECLUDE
ANY OTHER OR FURTHER EXERCISE OF ANY SUCH POWER, REMEDY OR RIGHT.
(j) This Amendment, and each of the two Revolving Credit Notes
(Amended and Restated) dated the date hereof, is a "Loan Document" under the
Agreement and any breach of the terms hereof or thereof shall be an Event of
Default under Section 9.1 (d) of the Agreement.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized as of the day
and year first above written.
APOGEE, INC., a Delaware corporation, and
each of the other Borrowers and Guarantors
listed on Schedule 6.1(c)
By:
------------------------------------
[Name],
the [Title] of each of the
-----------------
Borrowers and Guarantors listed on Schedule
6.1(c),
- and -
PNC BANK, NATIONAL ASSOCIATION
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
5
<PAGE> 6
REVOLVING CREDIT NOTE
(Amended and Restated)
$700,000 Philadelphia, Pennsylvania
FEBRUARY 27, 1998
FOR VALUE RECEIVED, the undersigned, APOGEE, INC., a Delaware corporation
and each Subsidiary identified on the attached Schedule 6.1 (c) (collectively,
the "Borrowers") hereby promise, jointly and severally, to pay to the order of
PNC BANK, NATIONAL ASSOCIATION (the "Bank") the principal sum of Seven Hundred
Thousand U.S. Dollars (U.S. $700,000). This Note evidences each Borrower's
obligation to repay a Revolving Credit Loan made by the Bank on this date to the
Borrowers pursuant to Section 2 of the Credit Agreement dated April 11, 1996 by
and among the Borrowers, the Guarantors and the Bank, as thereafter amended,
including on the date hereof (the "Credit Agreement"). All amounts outstanding
hereunder, including principal, interest and fees, shall be due and payable on
the Action Date. As used herein, Action Date shall mean the earliest to occur of
the following:
(a) March 31, 1998;
(b) the completion of the "Special Asset Sale" referred to in the Fifth
Amendment to Loan Agreement dated December 22, 1997; or
(c) the date on which the definitive asset sale agreement referred to in
item (b) hereof is cancelled, terminated or made ineffective.
The Borrowers shall pay interest on the unpaid principal balance
hereof from time to time outstanding from the date hereof at the rate or rates
per annum specified by the Borrowers pursuant to Section 4.1(a) of, or as
otherwise provided in, the Credit Agreement.
Upon the occurrence and during the continuation of an Event of
Default, the Borrowers shall pay interest on the entire principal amount of the
then outstanding Revolving Credit Loans evidenced by this Revolving Credit Note
at an increased rate of interest as more fully set forth in Section 4.3 of the
Credit Agreement. Such interest rate will accrue before and after any judgment
has been entered.
Interest on this Revolving Credit Note will be payable as set forth
in Section 5.2 of the Credit Agreement on the Action Date and at such other
times as are specified in the Credit Agreement.
Except as otherwise provided in the Credit Agreement, any payment or
action to be made or taken hereunder shall be stated to be or become due on a
day which is not a
<PAGE> 7
Business Day, such payment or action shall be extended to the next succeeding
Business Day unless such Business Day falls in the next calendar month, in which
case such Euro-Rate Interest Period shall end on the next preceding Business
Day.
Subject to the provisions of the Credit Agreement, payments of both
principal and interest shall be made without setoff, counterclaim or other
deduction of any nature at the office of the Bank located at One PNC Plaza,
Fifth Avenue & Wood Street, Pittsburgh, Pennsylvania 15265, in lawful money of
the United States of America in immediately available funds.
This Note is one of the Revolving Credit Notes referred to in, and
is entitled to the benefits of, the Credit Agreement and other Loan Documents,
including the representations, warranties, covenants, conditions, security
interests or Liens contained or granted therein. The Credit Agreement among
other things contains provisions for acceleration of the maturity hereof upon
the happening of certain stated events and also for prepayment, in certain
circumstances, on account of principal hereof prior to maturity upon the terms
and conditions therein specified. Failure to pay any amount due hereunder on the
Action Date shall constitute an Event of Default under Section 9.1(a) of the
Credit Agreement.
All capitalized terms used herein shall, unless otherwise defined
herein, have the same meanings given to such terms in the Credit Agreement.
Except as otherwise provided in the Credit Agreement, the Borrowers
waive presentment, demand, notice, protest and all other demands and notices in
connection with the delivery, acceptance, performance, default or enforcement of
this Note and the Credit Agreement.
This Note shall bind the Borrowers and their respective successors
and assigns, and the benefits hereof shall inure to the benefit of the Bank and
its successors and assigns. All references herein to the "Borrowers" and the
"Bank" shall be deemed to apply to the Borrower and the Bank, respectively, and
their respective successors and assigns.
This Note and any other documents delivered in connection herewith
and the rights and obligations of the parties hereto and thereto shall for all
purposes be governed by and construed and enforced in accordance with the
internal laws of the Commonwealth of Pennsylvania without giving effect to its
conflicts of law principles.
EACH BORROWER HEREBY IRREVOCABLY AUTHORIZES AND EMPOWERS ANY
ATTORNEY OR ANY CLERK OF ANY COURT OF RECORD, TO APPEAR FOR AND CONFESS JUDGMENT
AS OF ANY TERM AGAINST SUCH BORROWER FOR SUCH SUMS AS ARE DUE, IN EITHER CASE
WITH OR WITHOUT DECLARATION, WITH COSTS OF SUIT, RELEASE OF ERRORS, WITHOUT STAY
-2-
<PAGE> 8
OF EXECUTION AND WITH AN AMOUNT NOT TO EXCEED THE LESSER OF $2000 OR TWO PERCENT
(2%) OF THE AMOUNT OF SUCH JUDGMENT ADDED FOR ATTORNEY'S FEES FOR COLLECTION. IF
A COPY OF THIS AGREEMENT, VERIFIED BY AFFIDAVIT OF THE BANK OR SOMEONE ON BEHALF
OF THE BANK, SHALL HAVE BEEN FILED IN SUCH ACTION, IT SHALL NOT BE NECESSARY TO
FILE THE ORIGINAL OF THIS NOTE AS A WARRANT OF ATTORNEY. NO SINGLE EXERCISE OF
THE FOREGOING WARRANT OF ATTORNEY TO CONFESS JUDGMENT SHALL BE DEEMED TO EXHAUST
THE POWER, WHETHER OR NOT ANY SUCH EXERCISE SHALL BE HELD BY ANY COURT TO BE
INVALID, VOIDABLE OR VOID, BUT THE POWER SHALL CONTINUE UNDIMINISHED AND MAY BE
EXERCISED FROM TIME TO TIME AS OFTEN AS THE BANK SHALL ELECT, UNTIL ALL OF THE
OBLIGATION HAVE BEEN SATISFIED IN FULL AND THIS AGREEMENT SHALL BE SUFFICIENT
WARRANT THEREFOR.
EACH BORROWER HEREBY FOREVER WAIVES AND RELEASES ALL ERRORS IN SAID
PROCEEDINGS, WAIVES STAY OF EXECUTION AND EXTENSION OF TIME OF PAYMENT, AND
WAIVES ALL EXEMPTIONS FROM LEVY AND SALE OF ANY PROPERTY THAT NOW IS OR
HEREAFTER MAY BE EXEMPTED BY LAW.
Each Guarantor consents to the execution and delivery of this Note
and agrees that the obligations evidenced hereby shall be "Guaranteed
Indebtedness" under the Guaranty Agreement.
THIS AMENDED AND RESTATED REVOLVING CREDIT NOTE REPLACES AND
SUPERSEDES THE REVOLVING CREDIT NOTE DATED DECEMBER 22, 1997 IN THE PRINCIPAL
AMOUNT OF $700,000 (THE "PRIOR NOTE"). TO THE EXTENT THAT THE PRINCIPAL BALANCE
OF THIS NOTE INCLUDES THE BORROWER'S INDEBTEDNESS HITHERTO EVIDENCED BY THE
PRIOR NOTE, THIS NOTE (I) MERELY RE-EVIDENCES THE INDEBTEDNESS HITHERTO
EVIDENCED BY THE PRIOR NOTE, (II) IS GIVEN AS SUBSTITUTION FOR, AND NOT AS
PAYMENT OF, THE PRIOR NOTE AND (III) IS IN NO WAY INTENDED TO CONSTITUTE A
NOVATION OF THE PRIOR NOTE. BORROWERS HEREBY AGREE THAT THIS NOTE SHALL IN ALL
RESPECTS TAKE THE PLACE OF AND INCLUDE ANY PRINCIPAL AMOUNT OF THE PRIOR NOTE.
-3-
<PAGE> 9
IN WITNESS WHEREOF, the undersigned has executed this Note by its
duly authorized officers with the intention that it constitute a sealed
instrument.
APOGEE, INC., a Delaware corporation, and
each of the other Borrowers and Guarantors
listed on Schedule 6.1(c)
By:
------------------------------------
[Name],
the [Title] of each of the
-----------------
Borrowers and Guarantors listed on Schedule
6.1(c)
-4-
<PAGE> 10
Schedule 6.1(c)
(Dated FEBRUARY 27, 1998)
-5-
<PAGE> 11
REVOLVING CREDIT NOTE
(Amended and Restated)
$1,700,000 Philadelphia, Pennsylvania
February 27, 1998
FOR VALUE RECEIVED, the undersigned, APOGEE, INC., a Delaware
corporation and each Subsidiary identified on the attached Schedule 6.1 (c)
(collectively, the "Borrowers") hereby promise, jointly and severally, to pay to
the order of PNC BANK, NATIONAL ASSOCIATION (the "Bank") the principal sum of
One Million Seven Hundred Thousand U.S. Dollars (U.S.$1,700,000). This Revolving
Credit Note evidences each Borrower's obligation to repay a Revolving Credit
Loan made by the Bank on this date to the Borrowers pursuant to Section 2 of the
Credit Agreement dated April 11, 1996 by and among the Borrowers, the Guarantors
and the Bank, as thereafter amended, including on the date hereof (the "Credit
Agreement"). All amounts outstanding hereunder, including principal, interest
and fees, shall be due and payable on the Action Date. As used herein, Action
Date shall mean the earliest to occur of the following:
(a) March 31, 1998;
(b) the completion of the "Special Asset Sale" referred to in the
Sixth Amendment to Loan Agreement dated January 29, 1998; or
(c) the date on which the "Sale Agreement" referred to in the Sixth
Amendment to Loan Agreement is cancelled, terminated or made ineffective.
The Borrowers shall pay interest on the unpaid principal balance
hereof from time to time outstanding from the date hereof at the rate or rates
per annum specified by the Borrowers pursuant to Section 4.1(a) of, or as
otherwise provided in, the Credit Agreement.
Upon the occurrence and during the continuation of an Event of
Default, the Borrowers shall pay interest on the entire principal amount of the
then outstanding Revolving Credit Loans evidenced by this Revolving Credit Note
at an increased rate of interest as more fully set forth in Section 4.3 of the
Credit Agreement. Such interest rate will accrue before and after any judgment
has been entered.
Interest on this Revolving Credit Note will be payable as set forth
in Section 5.2 of the Credit Agreement on the Action Date and at such other
times as are specified in the Credit Agreement.
Except as otherwise provided in the Credit Agreement, any payment or
action to be made or taken hereunder shall be stated to be or become due on a
day which is not a
<PAGE> 12
Business Day, such payment or action shall be extended to the next succeeding
Business Day unless such Business Day falls in the next calendar month, in which
case such Euro-Rate Interest Period shall end on the next preceding Business
Day.
Subject to the provisions of the Credit Agreement, payments of both
principal and interest shall be made without setoff, counterclaim or other
deduction of any nature at the office of the Bank located at One PNC Plaza,
Fifth Avenue & Wood Street, Pittsburgh, Pennsylvania 15265, in lawful money of
the United States of America in immediately available funds.
This Revolving Credit Note is one of the Revolving Credit Notes
referred to in, and is entitled to the benefits of, the Credit Agreement and
other Loan Documents, including the representations, warranties, covenants,
conditions, security interests or Liens contained or granted therein. The Credit
Agreement among other things contains provisions for acceleration of the
maturity hereof upon the happening of certain stated events and also for
prepayment, in certain circumstances, on account of principal hereof prior to
maturity upon the terms and conditions therein specified. Failure to pay any
amount due hereunder on the Action Date shall constitute an Event of Default
under Section 9.1(a) of the Credit Agreement.
All capitalized terms used herein shall, unless otherwise defined
herein, have the same meanings given to such terms in the Credit Agreement.
Except as otherwise provided in the Credit Agreement, the Borrowers
waive presentment, demand, notice, protest and all other demands and notices in
connection with the delivery, acceptance, performance, default or enforcement of
this Revolving Credit Note and the Credit Agreement.
This Revolving Credit Note shall bind the Borrowers and their
respective successors and assigns, and the benefits hereof shall inure to the
benefit of the Bank and its successors and assigns. All references herein to the
"Borrowers" and the "Bank" shall be deemed to apply to the Borrower and the
Bank, respectively, and their respective successors and assigns.
This Revolving Credit Note and any other documents delivered in
connection herewith and the rights and obligations of the parties hereto and
thereto shall for all purposes be governed by and construed and enforced in
accordance with the internal laws of the Commonwealth of Pennsylvania without
giving effect to its conflicts of law principles.
EACH BORROWER HEREBY IRREVOCABLY AUTHORIZES AND EMPOWERS ANY
ATTORNEY OR ANY CLERK OF ANY COURT OF RECORD, TO APPEAR FOR AND CONFESS JUDGMENT
AS OF ANY TERM AGAINST SUCH BORROWER FOR SUCH SUMS AS ARE DUE, IN EITHER CASE
WITH OR WITHOUT
-2-
<PAGE> 13
DECLARATION, WITH COSTS OF SUIT, RELEASE OF ERRORS, WITHOUT STAY OF EXECUTION
AND WITH AN AMOUNT NOT TO EXCEED THE LESSER OF $2000 OR TWO PERCENT (2%) OF THE
AMOUNT OF SUCH JUDGMENT ADDED FOR ATTORNEY'S FEES FOR COLLECTION. IF A COPY OF
THIS AGREEMENT, VERIFIED BY AFFIDAVIT OF THE BANK OR SOMEONE ON BEHALF OF THE
BANK, SHALL HAVE BEEN FILED IN SUCH ACTION, IT SHALL NOT BE NECESSARY TO FILE
THE ORIGINAL OF THIS NOTE AS A WARRANT OF ATTORNEY. NO SINGLE EXERCISE OF THE
FOREGOING WARRANT OF ATTORNEY TO CONFESS JUDGMENT SHALL BE DEEMED TO EXHAUST THE
POWER, WHETHER OR NOT ANY SUCH EXERCISE SHALL BE HELD BY ANY COURT TO BE
INVALID, VOIDABLE OR VOID, BUT THE POWER SHALL CONTINUE UNDIMINISHED AND MAY BE
EXERCISED FROM TIME TO TIME AS OFTEN AS THE BANK SHALL ELECT, UNTIL ALL OF THE
OBLIGATION HAVE BEEN SATISFIED IN FULL AND THIS AGREEMENT SHALL BE SUFFICIENT
WARRANT THEREFOR.
EACH BORROWER HEREBY FOREVER WAIVES AND RELEASES ALL ERRORS IN SAID
PROCEEDINGS, WAIVES STAY OF EXECUTION AND EXTENSION OF TIME OF PAYMENT, AND
WAIVES ALL EXEMPTIONS FROM LEVY AND SALE OF ANY PROPERTY THAT NOW IS OR
HEREAFTER MAY BE EXEMPTED BY LAW.
Each Guarantor consents to the execution and delivery of this
Revolving Credit Note and agrees that the obligations evidenced hereby shall be
"Guaranteed Indebtedness" under the Guaranty Agreement.
THIS AMENDED AND RESTATED REVOLVING CREDIT NOTE REPLACES AND
SUPERSEDES THE REVOLVING CREDIT NOTE DATED January 29, 1998 IN THE PRINCIPAL
AMOUNT OF $1,700,000 (THE "PRIOR NOTE"). TO THE EXTENT THAT THE PRINCIPAL
BALANCE OF THIS NOTE INCLUDES THE BORROWER'S INDEBTEDNESS HITHERTO EVIDENCED BY
THE PRIOR NOTE, THIS NOTE (I) MERELY RE-EVIDENCES THE INDEBTEDNESS HITHERTO
EVIDENCED BY THE PRIOR NOTE, (II) IS GIVEN AS SUBSTITUTION FOR, AND NOT AS
PAYMENT OF, THE PRIOR NOTE AND (III) IS IN NO WAY INTENDED TO CONSTITUTE A
NOVATION OF THE PRIOR NOTE. BORROWERS HEREBY AGREE THAT THIS NOTE SHALL IN ALL
RESPECTS TAKE THE PLACE OF AND INCLUDE ANY PRINCIPAL AMOUNT OF THE PRIOR NOTE.
-3-
<PAGE> 14
IN WITNESS WHEREOF, the undersigned has executed this Revolving
Credit Note by its duly authorized officers with the intention that it
constitute a sealed instrument.
APOGEE, INC., a Delaware corporation, and
each of the other Borrowers and Guarantors
listed on Schedule 6.1(c)
By:
------------------------------------
[Name],
the [Title] of
-----------------
each of the Borrowers and Guarantors
listed on Schedule 6.1(c)
-4-
<PAGE> 15
Schedule 6.1(c)
(Dated FEBRUARY 27, 1998)
-5-
<PAGE> 1
EIGHTH AMENDMENT TO LOAN AGREEMENT
This EIGHTH AMENDMENT TO LOAN AGREEMENT ("Amendment") dated March
31, 1998 is made by and among APOGEE, INC., a Delaware corporation ("Apogee")
and each Subsidiary identified on the attached Schedule 6.1(c) (collectively,
the "Borrowing Subsidiaries" and together with Apogee, the "Borrowers" and
individually, a "Borrower") and PNC BANK, NATIONAL ASSOCIATION, a national
banking association (the "Bank").
Reference is made to the Revolving Credit Agreement dated as of
April 11, 1996 by and among the Borrowers and the Bank, as amended on June 21,
1996, November 1, 1996, March 11, 1997, August 8, 1997, December 22, 1997,
January 29, 1998 and February 27, 1998 (the "Agreement"). The obligations under
the Agreement and the Loan Documents were evidenced by the Borrowers' several
Revolving Credit Notes payable to the Bank. (Capitalized terms used herein not
otherwise defined shall have the meanings provided for in the Agreement.)
The Borrowers have requested, and the Bank has agreed upon the
following terms and conditions, that: (i) the maturity of the two short-term
advances heretofore made pursuant to the terms of the amendments to the
Revolving Credit Agreement dated February 27, 1998 and evidenced by the
Revolving Credit Notes dated those dates each be
<PAGE> 2
extended to April 30, 1998, unless otherwise due earlier pursuant to the terms
thereof or of any Loan Document, and (ii) an additional short-term advance be
made in excess of the limits otherwise applicable to Revolving Credit Loans in
anticipation of the sale of assets more particularly described in the Sixth
Amendment to Loan Agreement dated January 29, 1998.
NOW, THEREFORE, in consideration of the foregoing and for other
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto, intending to be legally bound, hereby agree as follows:
1. Amendment to Agreement.
(a) Section 1.1 of the Agreement is hereby amended effective as of
March 31, 1998 by adding the new definition "March Advance Note" to read in its
entirety as follows:
March Advance Note shall mean a $600,000 principal amount Revolving
Credit Note executed on March 31, 1998, all amounts under which shall be due on
April 30, 1998, unless otherwise due earlier pursuant to the terms thereof or of
any Loan Document.
(b) The definition of "Action Date" in the Fifth Amendment to Loan
Agreement dated December 22, 1997, as such definition was amended pursuant to
the Seventh Amendment to Loan Agreement dated February 27, 1998, is hereby
further amended to read in its entirety as follows:
2
<PAGE> 3
"Action Date" shall be the earlier to occur of the following:
(a) April 30, 1998
(b) the completion of the "Special Asset Sale" referred to
in the Sixth Amendment to Loan Agreement dated January
29, 1988 (the "Sixth Amendment"); or
(c) the date on which the "Sale Agreement" referred to in
the Sixth Amendment is canceled, terminated or made
ineffective.
(c) The Agreement, the December Advance Note, the January Advance
Note and each of the Loan Documents is hereby amended by extending to April 30,
1998, or earlier pursuant to the terms thereof or any Loan Document, the latest
date by which the December Advance Note in the principal amount of $700,000 and
the January Advance Note in the principal amount of $1,700,000 must each be
repaid.
(d) Section 2.1(b) of the Agreement is amended by adding at the end
thereof the following paragraph:
The Bank agrees to make on March 31, 1998 an advance of $600,000
notwithstanding that all or some of such amount is in excess of the
Discretionary Advance Sublimit. Such advance shall be evidenced by
the March Advance Note and shall bear interest at the rate otherwise
applicable from time to time to the Indebtedness. The March Advance
Note need not be repaid under Section 5.3(b) but all principal,
interest and other amounts due under or evidenced by the March
Advance Note shall be repaid in full on April 30, 1998, unless
otherwise due earlier pursuant to the terms thereof or of any Loan
Document. The March
3
<PAGE> 4
Advance Note is and shall be a "Loan Document" and a "Revolving
Credit Note" (except that its terms may differ from the other
Revolving Credit Note) and the obligations evidenced thereby shall
be "Indebtedness" of each of the Borrowers which are secured by the
Collateral and the Guaranties. Without limited the foregoing,
failure to pay when due any amounts under the March Advance Note
shall constitute an Event of Default under Section 9.1(a) of the
Agreement.
2. Waiver.
The Borrowers acknowledge that the Loan Parties are in violation of
Section 8.2(l) [Minimum Net Worth], Section 8.2(m) [Funded Debt to Cash Flow
From Operations], Section 8.2(n) [Senior Indebtedness to Cash Flow From
Operations] and Section 8.2(o) [Interest Coverage] (the "Existing Defaults").
For the period from December 31, 1997 to and including the "Action Date" (as
defined herein), the Bank hereby consents to the Borrowers' non-compliance with
such sections and the existence of the Existing Defaults and waives the right to
exercise remedies in connection therewith for the period described above.
Notwithstanding the foregoing, the Bank's consent and waiver set forth in this
Section 1 shall terminate on the Action Date.
3. Miscellaneous.
(a) Recognizing and in consideration of the Bank's agreement to the
amendments herein set forth, the Borrowers hereby waive and release the Bank and
its officers, attorneys, agents, and employees from any liability, suit, damage,
claim, loss or expense of any kind or nature whatsoever and howsoever arising
out of or
4
<PAGE> 5
relating to the Bank's acts or omissions with respect to the Revolving Credit
Loans. The Borrowers further hereby agree to indemnify and hold the Bank and its
officers, attorneys, agents and employees harmless from any loss, damage,
judgment, liability or expense (including counsel fees) suffered by or rendered
against the Bank or any of them on account of anything arising out of the
Revolving Credit Note, the January Advance Note, the December Advance Note, the
March Advance Note, the Agreement, this Amendment, the Loan Documents or any
other document delivered pursuant thereto up to and including the date hereof.
(b) All of the terms, conditions, provisions and covenants in the
Notes, the Agreement, the Loan Documents, and all other documents delivered to
the Bank in connection with any of the foregoing documents and obligations
secured thereby shall remain unaltered and in full force and effect except as
modified by this Amendment.
(c) The Borrowers hereby represent and warrant to the Bank as of the
date of this Amendment that, other than the Existing Defaults, there exists no
Event of Default or Potential Default under any of the Loan Documents.
(d) The Borrowers agree to pay all of the Bank's expenses incurred
in connection with the preparation of this Amendment and the transactions
contemplated by this Amendment, including without limitation, the reasonable
fees and expenses of the Bank's counsel.
5
<PAGE> 6
(e) This Amendment shall be governed by and construed in accordance
with the laws of the Commonwealth of Pennsylvania.
(f) Each and every one of the terms and provisions of this Amendment
shall be binding upon and shall inure to the benefit of the Borrowers and the
Bank and their respective successors and assigns.
(g) This Amendment may be executed in one or more counterparts, each
of which shall be deemed to be an original as against any party whose signature
appears thereon, and all of which shall constitute but one and the same
instrument.
(h) Apogee represents and warrants that all of its subsidiaries are
listed on the attached Schedule 6.1(c).
(i) THE EXECUTION AND DELIVERY OF THIS AMENDMENT SHALL NOT BE
CONSTRUED TO ESTABLISH A COURSE OF CONDUCT OR IMPLY THAT ANY OTHER, FUTURE OR
FURTHER WAIVERS, CONSENTS OR FORBEARANCE SHALL BE CONSIDERED, PROVIDED OR AGREED
TO. NOTHING CONTAINED HEREIN SHALL BE DEEMED TO BE A WAIVER OF ANY OF THE RIGHTS
AND REMEDIES AVAILABLE TO THE BANK UNDER APPLICABLE LAW OF ANY OF THE LOAN
DOCUMENTS, AND THE BANK RESERVES ALL RIGHTS AND REMEDIES AGAINST THE BORROWERS.
NO FAILURE TO EXERCISE, NO DELAY IN EXERCISING, NO MAKING OF ANY ADVANCE TO ANY
OF THE BORROWERS BY THE BANK, AND NO ACCEPTANCE OF ANY PAYMENT OR NEGOTIATION BY
THE BANK, NOW OR IN THE FUTURE, SHALL OPERATE AS A WAIVER OF ANY POWER, REMEDY,
OR RIGHT OF THE BANK UNDER THIS AGREEMENT, THE LOAN DOCUMENTS OR APPLICABLE LAW,
NOR SHALL ANY SINGLE OR PARTIAL EXERCISE OF ANY POWER, REMEDY, OR RIGHT PRECLUDE
ANY OTHER OR FURTHER EXERCISE OF ANY SUCH POWER, REMEDY OR RIGHT.
(j) This Amendment, and each of the two Revolving Credit Notes
(Amended and Restated) dated the date hereof, and the additional Revolving
Credit Note dated the date hereof, is a "Loan Document" under the Agreement and
any
6
<PAGE> 7
breach of the terms hereof or thereof shall be an Event of Default under Section
9.1(d) of the Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their respective officers thereunto duly authorized as of the day
and year first above written.
APOGEE, INC., a Delaware corporation,
and each of the other Borrowers and
Guarantors listed on Schedule 6.1(c)
By:
---------------------------------------
[Name],
the [Title] of each of
----------------
the Borrowers and Guarantors listed on
Schedule 6.1(c),
-and-
PNC BANK, NATIONAL ASSOCIATION
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
7
<PAGE> 8
REVOLVING CREDIT NOTE
(Amended and Restated)
$1,700,000 Philadelphia, Pennsylvania
March 31, 1998
FOR VALUE RECEIVED, the undersigned, APOGEE, INC., a Delaware
corporation and each Subsidiary identified on the attached Schedule 6.1(c)
(collectively, the "Borrowers") hereby promise, jointly and severally, to pay to
the order of PNC BANK, NATIONAL ASSOCIATION (the "Bank") the principal sum of
One Million Seven Hundred Thousand U.S. Dollars (U.S. $1,700,000). This
Revolving Credit Note evidences each Borrower's obligation to repay a Revolving
Credit Loan made by the Bank on this date to the Borrowers pursuant to Section 2
of the Credit Agreement dated April 11, 1996 by and among the Borrowers, the
Guarantors and the Bank, as thereafter amended, including on the date hereof
(the "Credit Agreement"). All amounts outstanding hereunder, including
principal, interest and fees, shall be due and payable on the Action Date. As
used herein, Action Date shall mean the earliest to occur of the following:
(a) April 30, 1998;
(b) the completion of the "Special Asset Sale" referred to in the
Sixth Amendment to Loan Agreement dated January 29, 1998 (the "Sixth
Amendment"); or
(c) the date on which the "Sale Agreement" referred to in the Sixth
Amendment is canceled, terminated or made ineffective.
The Borrowers shall pay interest on the unpaid principal balance
hereof from time to time outstanding from the date hereof at the rate or rates
per annum specified by the Borrowers pursuant to Section 4.1(a) of, or as
otherwise provided in, the Credit Agreement.
Upon the occurrence and during the continuation of an Event of
Default, the Borrowers shall pay interest on the entire principal amount of the
then outstanding Revolving Credit Loans evidenced by this Revolving Credit Note
at an increased rate of interest as more fully set forth in Section 4.3 of the
Credit Agreement. Such interest rate will accrue before and after any judgment
has been entered.
Interest on this Revolving Credit Note will be payable as set forth
in Section 5.2 of the Credit Agreement on the Action Date and at such other
times as are specified in the Credit Agreement.
<PAGE> 9
Except as otherwise provided in the Credit Agreement, any payment or
action to be made or taken hereunder shall be stated to be or become due on an
day which is not a Business Day, such payment or action shall be extended to the
next succeeding Business Day unless such Business Day falls in the next calendar
month, in which case such Euro-Rate Interest Period shall end on the next
preceding Business Day.
Subject to the provisions of the Credit Agreement, payments of both
principal and interest shall be made without setoff, counterclaim or other
deduction of any nature at the office of the Bank located at One PNC Plaza,
Fifth Avenue & Wood Street, Pittsburgh, Pennsylvania 15265, in lawful money of
the United States of American in immediately available funds.
This Revolving Credit Note is one of the Revolving Credit Notes
referred to in, and is entitled to the benefits of, the Credit Agreement and
other Loan Documents, including the representations, warranties, covenants,
conditions, security interests or Liens contained or granted therein. The Credit
Agreement among other things contains provisions for acceleration of the
maturity hereof upon the happening of certain stated events and also for
prepayment, in certain circumstances, on account of principal hereof prior to
maturity upon the terms and conditions therein specified. Failure to pay any
amount due hereunder on the Action Date shall constitute an Event of Default
under Section 9.1(a) of the Credit Agreement.
All capitalized terms used herein shall, unless otherwise defined
herein, have the same meanings given to such terms in the Credit Agreement.
Except as otherwise provided in the Credit Agreement, the Borrowers
waive presentment, demand, notice, protest and all other demands and notices in
connection with the delivery, acceptance, performance, default or enforcement of
this Revolving Credit Note and the Credit Agreement.
This Revolving Credit Note shall bind the Borrowers and their
respective successors and assigns, and the benefits hereof shall inure to the
benefit of the Bank and its successors and assigns. All references herein to the
"Borrowers" and the "Bank" shall be deemed to apply to the Borrower and the
Bank, respectively, and their respective successors and assigns.
This Revolving Credit Note and any other documents delivered in
connection herewith and the rights and obligations of the parties hereto and
thereto shall for all
2
<PAGE> 10
purposes be governed by and construed and enforced in accordance with the
internal laws of the Commonwealth of Pennsylvania without giving effect to its
conflicts of law principles.
EACH BORROWER HEREBY IRREVOCABLY AUTHORIZES AND EMPOWERS ANY
ATTORNEY OR ANY CLERK OF ANY COURT OF RECORD, TO APPEAR FOR AND CONFESS JUDGMENT
AS OF ANY TERM AGAINST SUCH BORROWER FOR SUCH SUMS AS ARE DUE, IN EITHER CASE
WITH OR WITHOUT DECLARATION, WITH COSTS OF SUIT, RELEASE OF ERRORS, WITHOUT STAY
OF EXECUTION AND WITH AN AMOUNT NOT TO EXCEED THE LESSER OF $2000 OR TWO PERCENT
(2%) OF THE AMOUNT OF SUCH JUDGMENT ADDED FOR ATTORNEY'S FEES FOR COLLECTION. IF
A COPY OF THIS AGREEMENT, VERIFIED BY AFFIDAVIT OF THE BANK OR SOMEONE ON BEHALF
OF THE BANK, SHALL HAVE BEEN FILED IN SUCH ACTION, IT SHALL NOT BE NECESSARY TO
FILE THE ORIGINAL OF THIS NOTE AS A WARRANT OF ATTORNEY. NO SINGLE EXERCISE OF
THE FOREGOING WARRANT OF ATTORNEY TO CONFESS JUDGMENT SHALL BE DEEMED TO EXHAUST
THE POWER, WHETHER OR NOT ANY SUCH EXERCISE SHALL BE HELD BY ANY COURT TO BE
INVALID, VOIDABLE OR VOID, BUT THE POWER SHALL CONTINUE UNDIMINISHED AND MAY BE
EXERCISED FROM TIME TO TIME AS OFTEN AS THE BANK SHALL ELECT,UNTIL ALL OF THE
OBLIGATION HAVE BEEN SATISFIED IN FULL AND THIS AGREEMENT SHALL BE SUFFICIENT
WARRANT THEREFOR.
EACH BORROWER HEREBY FOREVER WAIVES AND RELEASES ALL ERRORS IN SAID
PROCEEDINGS, WAIVES STAY OF EXECUTION AND EXTENSION OF TIME OF PAYMENT, AND
WAIVES ALL EXEMPTIONS FROM LEVY AND SALE OF ANY PROPERTY THAT NOW IS OR
HEREAFTER MAY BE EXEMPTED BY LAW.
Each Guarantor consents to the execution and delivery of this
Revolving Credit Note and agrees that the obligations evidenced hereby shall be
"Guaranteed Indebtedness" under the Guaranty Agreement.
THIS AMENDED AND RESTATED REVOLVING CREDIT NOTE REPLACES AND
SUPERSEDES THE REVOLVING CREDIT NOTE DATED FEBRUARY 27, 1998 IN THE PRINCIPAL
AMOUNT OF $1,700,00 (THE "PRIOR NOTE"). TO THE EXTENT THAT THE PRINCIPAL BALANCE
OF THIS NOTE INCLUDES THE BORROWER'S INDEBTEDNESS HITHERTO EVIDENCED BY THE
PRIOR NOTE, THIS NOTE (I) MERELY RE-EVIDENCES THE INDEBTEDNESS HITHERTO
EVIDENCED BY THE PRIOR NOTE, (II) IS GIVEN AS SUBSTITUTION FOR, AND NOT AS
PAYMENT OF, THE PRIOR NOTE AND (III) IS IN NO WAY INTENDED TO CONSTITUTE A
NOVATION OF THE PRIOR NOTE. BORROWERS HEREBY AGREE THAT THIS NOTE SHALL IN ALL
RESPECTS TAKE THE PLACE OF AND INCLUDE ANY PRINCIPAL AMOUNT OF THE PRIOR NOTE.
3
<PAGE> 11
IN WITNESS WHEREOF, the undersigned has executed this Revolving
Credit Note by its duly authorized officers with the intention that it
constitute a sealed instrument.
APOGEE, INC., a Delaware
corporation, and each of the
other Borrowers and Guarantors
listed on Schedule 6.1(c)
By:
--------------------------
[Name],
the [Title] of each
----------
of the Borrowers and
Guarantors listed on Schedule
6.1(c)
4
<PAGE> 12
REVOLVING CREDIT NOTE
(Amended and Restated)
$700,000 Philadelphia, Pennsylvania
March 31, 1998
FOR VALUE RECEIVED, the undersigned, APOGEE, INC., a Delaware
corporation and each Subsidiary identified on the attached Schedule 6.1(c)
(collectively, the "Borrowers") hereby promise, jointly and severally, to pay to
the order of PNC BANK, NATIONAL ASSOCIATION (the "Bank") the principal sum of
Seven Hundred Thousand U.S. Dollars (U.S. $700,000). This Note evidences each
Borrower's obligation to repay a Revolving Credit Loan made by the Bank on this
date to the Borrowers pursuant to Section 2 of the Credit Agreement dated April
11, 1996 by and among the Borrowers, the Guarantors and the Bank, as thereafter
amended, including on the date hereof (the "Credit Agreement"). All amounts
outstanding hereunder, including principal, interest and fees, shall be due and
payable on the Action Date. As used herein, Action Date shall mean the earliest
to occur of the following:
(a) April 30, 1998;
(b) the completion of the "Special Asset Sale" referred to in the
Sixth Amendment to Loan Agreement dated January 29, 1998 (the
"Sixth Amendment"); or
(c) the date on which the "Sale Agreement" referred to in the
Sixth Amendment is canceled, terminated or made ineffective.
The Borrowers shall pay interest on the unpaid principal balance
hereof from time to time outstanding from the date hereof at the rate or rates
per annum specified by the Borrowers pursuant to Section 4.1(a) of, or as
otherwise provided in, the Credit Agreement.
Upon the occurrence and during the continuation of an Event of
Default, the Borrowers shall pay interest on the entire principal amount of the
then outstanding Revolving Credit Loans evidenced by this Revolving Credit Note
at an increased rate of interest as more fully set forth in Section 4.3 of the
Credit Agreement. Such interest rate will accrue before and after any judgment
has been entered.
Interest on this Revolving Credit Note will be payable as set forth
in Section 5.2 of the Credit Agreement
<PAGE> 13
on the Action Date and at such other times as are specified in the Credit
Agreement.
Except as otherwise provided in the Credit Agreement, any payment or
action to be made or taken hereunder shall be stated to be or become due on an
day which is not a Business Day, such payment or action shall be extended to the
next succeeding Business Day unless such Business Day falls in the next calendar
month, in which case such Euro-Rate Interest Period shall end on the next
preceding Business Day.
Subject to the provisions of the Credit Agreement, payments of both
principal and interest shall be made without setoff, counterclaim or other
deduction of any nature at the office of the Bank located at One PNC Plaza,
Fifth Avenue & Wood Street, Pittsburgh, Pennsylvania 15265, in lawful money of
the United States of American in immediately available funds.
This Note is one of the Revolving Credit Notes referred to in, and
is entitled to the benefits of, the Credit Agreement and other Loan Documents,
including the representations, warranties, covenants, conditions, security
interests or Liens contained or granted therein. The Credit Agreement among
other things contains provisions for acceleration of the maturity hereof upon
the happening of certain stated events and also for prepayment, in certain
circumstances, on account of principal hereof prior to maturity upon the terms
and conditions therein specified. Failure to pay any amount due hereunder on the
Action Date shall constitute an Event of Default under Section 9.1(a) of the
Credit Agreement.
All capitalized terms used herein shall, unless otherwise defined
herein, have the same meanings given to such terms in the Credit Agreement.
Except as otherwise provided in the Credit Agreement, the Borrowers
waive presentment, demand, notice, protest and all other demands and notices in
connection with the delivery, acceptance, performance, default or enforcement of
this Note and the Credit Agreement.
This Note shall bind the Borrowers and their respective successors
and assigns, and the benefits hereof shall inure to the benefit of the Bank and
its successors and assigns. All references herein to the "Borrowers" and the
"Bank" shall be deemed to apply to the Borrower and the Bank, respectively, and
their respective successors and assigns.
2
<PAGE> 14
This Note and any other documents delivered in connection herewith
and the rights and obligations of the parties hereto and thereto shall for all
purposes be governed by and construed and enforced in accordance with the
internal laws of the Commonwealth of Pennsylvania without giving effect to its
conflicts of law principles.
EACH BORROWER HEREBY IRREVOCABLY AUTHORIZES AND EMPOWERS ANY
ATTORNEY OR ANY CLERK OF ANY COURT OF RECORD, TO APPEAR FOR AND CONFESS JUDGMENT
AS OF ANY TERM AGAINST SUCH BORROWER FOR SUCH SUMS AS ARE DUE, IN EITHER CASE
WITH OR WITHOUT DECLARATION, WITH COSTS OF SUIT, RELEASE OF ERRORS, WITHOUT STAY
OF EXECUTION AND WITH AN AMOUNT NOT TO EXCEED THE LESSER OF $2000 OR TWO PERCENT
(2%) OF THE AMOUNT OF SUCH JUDGMENT ADDED FOR ATTORNEY'S FEES FOR COLLECTION. IF
A COPY OF THIS AGREEMENT, VERIFIED BY AFFIDAVIT OF THE BANK OR SOMEONE ON BEHALF
OF THE BANK, SHALL HAVE BEEN FILED IN SUCH ACTION, IT SHALL NOT BE NECESSARY TO
FILE THE ORIGINAL OF THIS NOTE AS A WARRANT OF ATTORNEY. NO SINGLE EXERCISE OF
THE FOREGOING WARRANT OF ATTORNEY TO CONFESS JUDGMENT SHALL BE DEEMED TO EXHAUST
THE POWER, WHETHER OR NOT ANY SUCH EXERCISE SHALL BE HELD BY ANY COURT TO BE
INVALID, VOIDABLE OR VOID, BUT THE POWER SHALL CONTINUE UNDIMINISHED AND MAY BE
EXERCISED FROM TIME TO TIME AS OFTEN AS THE BANK SHALL ELECT,UNTIL ALL OF THE
OBLIGATION HAVE BEEN SATISFIED IN FULL AND THIS AGREEMENT SHALL BE SUFFICIENT
WARRANT THEREFOR.
EACH BORROWER HEREBY FOREVER WAIVES AND RELEASES ALL ERRORS IN SAID
PROCEEDINGS, WAIVES STAY OF EXECUTION AND EXTENSION OF TIME OF PAYMENT, AND
WAIVES ALL EXEMPTIONS FROM LEVY AND SALE OF ANY PROPERTY THAT NOW IS OR
HEREAFTER MAY BE EXEMPTED BY LAW.
Each Guarantor consents to the execution and delivery of this Note
and agrees that the obligations evidenced hereby shall be "Guaranteed
Indebtedness" under the Guaranty Agreement.
THIS AMENDED AND RESTATED REVOLVING CREDIT NOTE REPLACES AND
SUPERSEDES THE REVOLVING CREDIT NOTE DATED FEBRUARY 27, 1998 IN THE PRINCIPAL
AMOUNT OF $700,00 (THE "PRIOR NOTE"). TO THE EXTENT THAT THE PRINCIPAL BALANCE
OF THIS NOTE INCLUDES THE BORROWER'S INDEBTEDNESS HITHERTO EVIDENCED BY THE
PRIOR NOTE, THIS NOTE (I) MERELY RE-EVIDENCES THE INDEBTEDNESS HITHERTO
EVIDENCED BY THE PRIOR NOTE, (II) IS GIVEN AS SUBSTITUTION FOR, AND NOT AS
PAYMENT OF, THE PRIOR NOTE AND (III) IS IN NO WAY INTENDED TO CONSTITUTE A
NOVATION OF THE PRIOR NOTE. BORROWERS HEREBY AGREE THAT THIS NOTE SHALL IN ALL
RESPECTS TAKE THE PLACE OF AND INCLUDE ANY PRINCIPAL AMOUNT OF THE PRIOR NOTE.
3
<PAGE> 15
IN WITNESS WHEREOF, the undersigned has executed this Note by its
duly authorized officers with the intention that it constitute a sealed
instrument.
APOGEE, INC., a Delaware
corporation, and each of the
other Borrowers and Guarantors
listed on Schedule 6.1(c)
By:
--------------------------
[Name],
the [Title] of each
----------
of the Borrowers and
Guarantors listed on Schedule
6.1(c)
4
<PAGE> 16
REVOLVING CREDIT NOTE
$600,000 Philadelphia, Pennsylvania
March 31, 1998
FOR VALUE RECEIVED, the undersigned, APOGEE, INC., a Delaware
corporation and each Subsidiary identified on the attached Schedule 6.1(c)
(collectively, the "Borrowers") hereby promise, jointly and severally, to pay to
the order of PNC BANK, NATIONAL ASSOCIATION (the "Bank") the principal sum of
Six Hundred Thousand U.S. Dollars (U.S. $600,000). This Revolving Credit Note
evidences each Borrower's obligation to repay a Revolving Credit Loan made by
the Bank on this date to the Borrowers pursuant to Section 2 of the Credit
Agreement dated April 11, 1996 by and among the Borrowers, the Guarantors and
the Bank (as thereafter amended, including on the date hereof the "Credit
Agreement"). All amounts outstanding hereunder, including principal, interest
and fees, shall be due and payable on the Action Date. As used herein, Action
Date shall mean the earliest to occur of the following:
(a) April 30, 1998;
(b) the completion of the "Special Asset Sale" referred to in the
Sixth Amendment to Loan Agreement dated January 29, 1998 (the "Sixth
Amendment"); or
(c) the date on which the "Sale Agreement" referred to in the Sixth
Amendment is canceled, terminated or made ineffective.
The Borrowers shall pay interest on the unpaid principal balance
hereof from time to time outstanding from the date hereof at the rate or rates
per annum specified by the Borrowers pursuant to Section 4.1(a) of, or as
otherwise provided in, the Credit Agreement.
Upon the occurrence and during the continuation of an Event of
Default, the Borrowers shall pay interest on the entire principal amount of the
then outstanding Revolving Credit Loans evidenced by this Revolving Credit Note
at an increased rate of interest as more fully set forth in Section 4.3 of the
Credit Agreement. Such interest rate will accrue before and after any judgment
has been entered.
Interest on this Revolving Credit Note will be payable as set forth
in Section 5.2 of the Credit Agreement on the Action Date and at such other
times as are specified in the Credit Agreement.
<PAGE> 17
Except as otherwise provided in the Credit Agreement, any payment or
action to be made or taken hereunder shall be stated to be or become due on an
day which is not a Business Day, such payment or action shall be extended to the
next succeeding Business Day unless such Business Day falls in the next calendar
month, in which case such Euro-Rate Interest Period shall end on the next
preceding Business Day.
Subject to the provisions of the Credit Agreement, payments of both
principal and interest shall be made without setoff, counterclaim or other
deduction of any nature at the office of the Bank located at One PNC Plaza,
Fifth Avenue & Wood Street, Pittsburgh, Pennsylvania 15265, in lawful money of
the United States of American in immediately available funds.
This Revolving Credit Note is one of the Revolving Credit Notes
referred to in, and is entitled to the benefits of, the Credit Agreement and
other Loan Documents, including the representations, warranties, covenants,
conditions, security interests or Liens contained or granted therein. The Credit
Agreement among other things contains provisions for acceleration of the
maturity hereof upon the happening of certain stated events and also for
prepayment, in certain circumstances, on account of principal hereof prior to
maturity upon the terms and conditions therein specified. Failure to pay any
amount due hereunder on the Action Date shall constitute an Event of Default
under Section 9.1(a) of the Credit Agreement.
All capitalized terms used herein shall, unless otherwise defined
herein, have the same meanings given to such terms in the Credit Agreement.
Except as otherwise provided in the Credit Agreement, the Borrowers
waive presentment, demand, notice, protest and all other demands and notices in
connection with the delivery, acceptance, performance, default or enforcement of
this Revolving Credit Note and the Credit Agreement.
This Revolving Credit Note shall bind the Borrowers and their
respective successors and assigns, and the benefits hereof shall inure to the
benefit of the Bank and its successors and assigns. All references herein to the
"Borrowers" and the "Bank" shall be deemed to apply to the Borrower and the
Bank, respectively, and their respective successors and assigns.
This Revolving Credit Note and any other documents delivered in
connection herewith and the rights and obligations of the parties hereto and
thereto shall for all
2
<PAGE> 18
purposes be governed by and construed and enforced in accordance with the
internal laws of the Commonwealth of Pennsylvania without giving effect to its
conflicts of law principles.
EACH BORROWER HEREBY IRREVOCABLY AUTHORIZES AND EMPOWERS ANY
ATTORNEY OR ANY CLERK OF ANY COURT OF RECORD, TO APPEAR FOR AND CONFESS JUDGMENT
AS OF ANY TERM AGAINST SUCH BORROWER FOR SUCH SUMS AS ARE DUE, IN EITHER CASE
WITH OR WITHOUT DECLARATION, WITH COSTS OF SUIT, RELEASE OF ERRORS, WITHOUT STAY
OF EXECUTION AND WITH AN AMOUNT NOT TO EXCEED THE LESSER OF $2000 OR TWO PERCENT
(2%) OF THE AMOUNT OF SUCH JUDGMENT ADDED FOR ATTORNEY'S FEES FOR COLLECTION. IF
A COPY OF THIS AGREEMENT, VERIFIED BY AFFIDAVIT OF THE BANK OR SOMEONE ON BEHALF
OF THE BANK, SHALL HAVE BEEN FILED IN SUCH ACTION, IT SHALL NOT BE NECESSARY TO
FILE THE ORIGINAL OF THIS NOTE AS A WARRANT OF ATTORNEY. NO SINGLE EXERCISE OF
THE FOREGOING WARRANT OF ATTORNEY TO CONFESS JUDGMENT SHALL BE DEEMED TO EXHAUST
THE POWER, WHETHER OR NOT ANY SUCH EXERCISE SHALL BE HELD BY ANY COURT TO BE
INVALID, VOIDABLE OR VOID, BUT THE POWER SHALL CONTINUE UNDIMINISHED AND MAY BE
EXERCISED FROM TIME TO TIME AS OFTEN AS THE BANK SHALL ELECT,UNTIL ALL OF THE
OBLIGATION HAVE BEEN SATISFIED IN FULL AND THIS AGREEMENT SHALL BE SUFFICIENT
WARRANT THEREFOR.
EACH BORROWER HEREBY FOREVER WAIVES AND RELEASES ALL ERRORS IN SAID
PROCEEDINGS, WAIVES STAY OF EXECUTION AND EXTENSION OF TIME OF PAYMENT, AND
WAIVES ALL EXEMPTIONS FROM LEVY AND SALE OF ANY PROPERTY THAT NOW IS OR
HEREAFTER MAY BE EXEMPTED BY LAW.
Each Guarantor consents to the execution and delivery of this
Revolving Credit Note and agrees that the obligations evidenced hereby shall be
"Guaranteed Indebtedness" under the Guaranty Agreement.
3
<PAGE> 19
IN WITNESS WHEREOF, the undersigned has executed this Revolving
Credit Note by its duly authorized officers with the intention that it
constitute a sealed instrument.
APOGEE, INC., a Delaware
corporation, and each of the
other Borrowers and Guarantors
listed on Schedule 6.1(c)
By:
--------------------------
[Name],
the [Title] of each
----------
of the Borrowers and
Guarantors listed on Schedule
6.1(c)
4
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF APOGEE, INC.
Advanced Behavioral Management
AGP Acquisition Corp.
Apogee of Tennessee, Inc.
Apogee of Pennsylvania, Inc.
Apogee of Maryland, Inc.
Apogee of Northern Florida, Inc.
Apogee Health Services, Inc.
Apogee Services, Inc.
Associated Mental Health Services, Ltd.
Associates in Psychiatry, Inc.
DOC Systems, Inc.
Family Social and Psychotherapy Services, Inc.
Integra IPA, Inc.
Martin E. Keller, Ed.D., Ltd.
Nevada Psychological Associates, Inc.
Naperville Psychiatric, Inc.
Psychiatric Associates, Inc.
Psychogeriatrics Consultants, Inc.
South Florida Substance Abuse, Inc.
Thunderbird Behavioral Health Institute, Inc.
Twin Ponds I, Inc.
Twin Ponds II, Inc.
Twin Ponds Management, Inc.
Winston Clinics, Inc.
Woodmont Psychiatric Associates, Inc.
E-6
<PAGE> 1
PRICE WATERHOUSE LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-91660) of Apogee, Inc. of our report dated March
23, 1998 appearing on page 59 of this Form 10-K.
PRICE WATERHOUSE LLP
Philadelphia, PA
April 14, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1997 AND THE CONSOLIDATED STATEMENTS
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,154
<SECURITIES> 0
<RECEIVABLES> 13,287
<ALLOWANCES> 7,348
<INVENTORY> 0
<CURRENT-ASSETS> 9,958
<PP&E> 3,679
<DEPRECIATION> 1,253
<TOTAL-ASSETS> 43,600
<CURRENT-LIABILITIES> 37,604
<BONDS> 0
0
0
<COMMON> 100
<OTHER-SE> 4,613
<TOTAL-LIABILITY-AND-EQUITY> 43,600
<SALES> 0
<TOTAL-REVENUES> 70,144
<CGS> 0
<TOTAL-COSTS> 54,202
<OTHER-EXPENSES> 10,447
<LOSS-PROVISION> 4,226
<INTEREST-EXPENSE> 1,474
<INCOME-PRETAX> (61,116)
<INCOME-TAX> 102
<INCOME-CONTINUING> (61,218)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (61,218)
<EPS-PRIMARY> (6.17)
<EPS-DILUTED> (6.17)
</TABLE>
