<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
APOGEE, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
FOR THE SALE:
Aggregate Consideration: $27,000,000 and a warrant to purchase common
units exercisable at $.05 per common unit.
Amount of Filing Fee: $5,401.33 (fee previously paid).
(4) Proposed maximum aggregate value of transaction:
Aggregate Consideration: $27,000,000 and a warrant to purchase common
units exercisable at $.05 per common unit.
(5) Total fee paid: $5,401.33
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
[APOGEE(TM) LOGO]
1060 FIRST AVENUE
SUITE 410
KING OF PRUSSIA, PENNSYLVANIA 19406
(610) 992-2600
Dear Shareholder:
You are cordially invited to attend a Special Meeting of the Shareholders
of Apogee, Inc. (the "Company") to be held at the Fourth Floor Boardroom, 1060
First Avenue, King of Prussia, Pennsylvania, on May 14, 1998, at 9:00 a.m.,
local time (the "Special Meeting"). A notice of the Special Meeting, a proxy
statement and a proxy card are enclosed. All holders of the Company's
outstanding shares of common stock, $.01 par value ("Company Common Stock"), as
of April 22, 1998 will be entitled to notice of and to vote at the Special
Meeting.
At the Special Meeting, you will be asked to consider and to vote upon a
proposal to approve and adopt an Agreement of Purchase and Sale (the "Purchase
Agreement"), dated as of December 26, 1997, by and among PsychPartners, Inc. and
PsychPartners MidAtlantic, Inc. (collectively, the "Purchasers"), PsychPartners,
L.L.C. ("PsychPartners"), the Company, and certain wholly owned subsidiaries of
the Company. Pursuant to the Purchase Agreement, the Company will sell to the
Purchasers substantially all of the assets and business relating to the
Company's outpatient behavioral healthcare business (the "Sale"). If the
Purchase Agreement is approved and the Sale is consummated, the Purchasers will
(a) pay $27,000,000 in cash to the Company, (b) issue a warrant to purchase
400,000 Common Units of PsychPartners at a purchase price of $.05 per Common
Unit if certain performance criteria are met and (c) assume certain liabilities
of the Company (collectively, the "Purchase Price"). The Purchase Price is
subject to certain adjustments.
Following the Sale, the Company will continue to operate its Integra
Division and will be primarily focused on the managed behavioral healthcare
business through its Integra Division.
The Company plans to discontinue the operations of the remaining portion of
its outpatient behavioral healthcare business operating in the Western Region of
the United States which is not being sold to the Purchasers.
Approval of the Purchase Agreement requires the affirmative vote of the
holders of a majority of all outstanding shares of the Company Common Stock,
voting as a group at the Special Meeting.
Details of the proposed Sale and other important information are set forth
in the accompanying Proxy Statement which you are urged to read carefully. The
consummation of the Sale is subject to the satisfaction of certain closing
conditions as described in greater detail in the accompanying Proxy Statement.
Your Board of Directors has carefully reviewed and considered the terms and
conditions of the proposed Sale. In addition, the Board of Directors has
received the opinion of its financial advisor, Banc One Capital Corporation,
that the cash consideration to be received by the Company upon the consummation
of the Sale pursuant to the Purchase Agreement is, from a financial point of
view, fair to the Company.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE SALE AND RECOMMENDS
THAT YOU VOTE FOR APPROVAL AND ADOPTION OF THE PURCHASE AGREEMENT.
Pursuant to the General Corporation Law of the State of Delaware, holders
of the Company Common Stock do not have dissenters' rights of appraisal in
connection with the proposed Sale.
Whether or not you plan to attend the Special Meeting, please complete,
sign and date the accompanying proxy card and return it in the enclosed prepaid
envelope. If you attend the Special Meeting, you may revoke such proxy and vote
in person if you wish, even if you have previously returned your proxy card.
Your prompt cooperation will be greatly appreciated.
Very truly yours,
Lawrence M. Davies Signature
LAWRENCE M. DAVIES
President and Chief Operating Officer
April 23, 1998
<PAGE> 3
[APOGEE(TM) LOGO]
1060 FIRST AVENUE
SUITE 410
KING OF PRUSSIA, PENNSYLVANIA 19406
(610) 992-2600
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 14, 1998
------------------------
April 23, 1998
To the Shareholders of
Apogee, Inc.:
A Special Meeting of the Shareholders of Apogee, Inc. (the "Company") will
be held at the Fourth Floor Boardroom, 1060 First Avenue, King of Prussia,
Pennsylvania, on May 14, 1998, at 9:00 a.m., local time (the "Special Meeting"),
for the following purposes, as more fully described in the accompanying Proxy
Statement:
1. To consider and vote upon a proposal to approve and adopt an Agreement
of Purchase and Sale (the "Purchase Agreement"), dated as of December
26, 1997, by and among PsychPartners, Inc. and PsychPartners
MidAtlantic, Inc. (collectively, the "Purchasers"), PsychPartners,
L.L.C. ("PsychPartners"), the Company, and certain wholly owned
subsidiaries of the Company. Pursuant to the Purchase Agreement, the
Company will sell to the Purchasers substantially all of the assets and
business relating to the Company's outpatient behavioral healthcare
business for 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 if certain performance criteria
are met and (c) the assumption of certain liabilities of the Company
(collectively, the "Purchase Price"). The Purchase Price is subject to
certain adjustments. A copy of the Purchase Agreement (exclusive of all
exhibits and schedules) is attached as Exhibit A to the accompanying
Proxy Statement;
2. To consider and vote upon a proposal to approve an adjournment or
postponement of the Special Meeting to another date or place for a
period of not more than 30 days for the purpose of soliciting additional
proxies if the number of shares of common stock, $.01 par value, of the
Company, represented at the Special Meeting or by proxy is insufficient
to constitute a quorum or, if a quorum is present, there are not
sufficient votes at the time of the Special Meeting to approve the
foregoing proposal; and
3. To transact such other business as may properly come before the Special
Meeting or any adjournment or adjournments thereof.
The close of business on April 22, 1998 is the record date for the Special
Meeting and only shareholders of record at that time will be entitled to notice
of and to vote at the Special Meeting or any adjournment or adjournments
thereof. A list of the shareholders of the Company entitled to vote at the
Special Meeting may be examined at the Company's executive office located in
King of Prussia, Pennsylvania, during the ten-day period preceding the Special
Meeting.
<PAGE> 4
Your attention is called to the Proxy Statement accompanying this Notice
for a more complete statement regarding the matters to be acted upon at the
Special Meeting. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR"
APPROVAL OF THE PURCHASE AGREEMENT AND FOR APPROVAL OF THE ADJOURNMENT OR
POSTPONEMENT OF THE SPECIAL MEETING IN THE EVENT THAT MORE TIME IS NEEDED TO
SOLICIT ADDITIONAL PROXIES.
By Order of the Board of Directors,
STANLEY F. SZCZYGIEL
Secretary
YOUR VOTE IS IMPORTANT. ALL SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE
SPECIAL MEETING IN PERSON. WHETHER OR NOT YOU PLAN TO ATTEND, PLEASE MARK, SIGN
AND DATE THE ENCLOSED FORM OF PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED
ENVELOPE. THE ENVELOPE DOES NOT REQUIRE ANY POSTAGE IF MAILED IN THE UNITED
STATES. YOU MAY NEVERTHELESS VOTE IN PERSON IF YOU ATTEND THE SPECIAL MEETING.
<PAGE> 5
[APOGEE(TM) LOGO]
APOGEE, INC.
1060 FIRST AVENUE
SUITE 410
KING OF PRUSSIA, PENNSYLVANIA 19406
610-992-2600
-------------------------
PROXY STATEMENT
-------------------------------
This Proxy Statement is being furnished to the shareholders of Apogee, Inc.
(the "Company") in connection with the solicitation of proxies by the Company's
Board of Directors to be voted at the Special Meeting of Shareholders to be held
on May 14, 1998, at 9:00 a.m., local time, at the Fourth Floor Boardroom, 1060
First Avenue, King of Prussia, Pennsylvania (the "Special Meeting") and at any
adjournment or postponements thereof. The enclosed proxy card, the accompanying
Notice of Special Meeting of Shareholders and this Proxy Statement are being
first mailed to shareholders of the Company on or about April 23, 1998.
At the Special Meeting, the shareholders of the Company will be asked to
consider and to vote upon a proposal to approve and adopt an Agreement of
Purchase and Sale (the "Purchase Agreement"), dated as of December 26, 1997, by
and among PsychPartners, Inc. and PsychPartners MidAtlantic, Inc. (collectively,
the "Purchasers"), PsychPartners, L.L.C. ("PsychPartners"), the Company, and
certain wholly owned subsidiaries of the Company, pursuant to which the Company
will sell to the Purchasers substantially all of the assets and business
relating to the Company's outpatient behavioral healthcare business (the
"Sale"). If the Purchase Agreement is approved and the Sale is consummated, the
Purchasers will pay a purchase price to the Company 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 if certain performance
criteria are met (the "Warrant") and (c) the assumption of certain liabilities
of the Company (collectively, the "Purchase Price"). The Purchase Price is
subject to certain adjustments.
Following the Sale, the Company will continue to operate its Integra
Division and will be primarily focused on the managed behavioral healthcare
business through its Integra Division.
The Company plans to discontinue the operations of the remaining portion of
its outpatient behavioral healthcare business operating in the Western Region of
the United States which is not being sold to the Purchasers.
The shareholders also will be asked to consider and vote upon a proposal to
approve an adjournment or postponement of the Special Meeting for a period of
not more than 30 days for the purpose of soliciting additional proxies in the
event the number of shares of common stock, $.01 par value, of the Company
("Company Common Stock"), represented at the meeting in person or by proxy is
insufficient to constitute a quorum or, if a quorum is present, the Company
fails to receive a sufficient number of votes to approve the Purchase Agreement.
The Board of Directors knows of no business that will be presented for
consideration at the Special Meeting other than the matters described in this
Proxy Statement. If any other matters properly come before the Special Meeting,
the persons named in the enclosed form of proxy or their substitutes will vote
in accordance with their best judgment on such matters.
<PAGE> 6
The information contained herein with respect to the Company and
PsychPartners has been supplied by the respective corporations. The information
contained herein with respect to the Sale is qualified by reference to the
Purchase Agreement attached hereto as Exhibit A and incorporated herein by
reference.
This Proxy Statement and accompanying form of proxy are first being mailed
to the shareholders of the Company on or about April 23, 1998.
2
<PAGE> 7
AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended, and in accordance therewith, files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information are available for inspection and copying at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington D.C. 20549 and at the Commission's regional office
located at 7 World Trade Center, 13th Floor, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material can also be obtained from the Public
Reference Section of the Commission at its Washington address at prescribed
rates. Such reports and other information filed with the Commission may also be
available at the Commission's site on the World Wide Web at http://www.sec.gov.
3
<PAGE> 8
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
AVAILABLE INFORMATION....................................... 3
SUMMARY
The Special Meeting....................................... 6
Proposal 1 -- The Purchase Agreement and the Sale......... 8
Selected Historical Financial Data........................ 16
Summary Pro Forma Financial Data.......................... 18
Market Price Data......................................... 20
Forward Looking Statements................................ 20
Proposal 2 -- Adjournment or Postponement of the Special
Meeting................................................ 21
THE SPECIAL MEETING
Introduction.............................................. 22
Purpose of the Special Meeting............................ 22
The Sale.................................................. 22
Adjournment or Postponement of the Special Meeting........ 22
Voting Rights; Vote Required for Approval................. 23
Proxies................................................... 23
USE OF PROCEEDS............................................. 24
BACKGROUND OF THE SALE
Overview.................................................. 25
The Reasons for the Sale and Recommendation of the
Company's Board of Directors........................... 27
Effects of the Sale....................................... 28
Alternatives to the Sale.................................. 29
OPINION OF FINANCIAL ADVISOR TO THE COMPANY................. 30
THE SALE.................................................... 33
CLOSING..................................................... 33
REGULATORY APPROVALS........................................ 33
THE PURCHASE AGREEMENT
General................................................... 34
The Subsidiary Stock and the Assets....................... 34
The Assumed Liabilities................................... 35
Retained Liabilities...................................... 35
The Purchase Price........................................ 36
Post-Closing Adjustments.................................. 36
Representations and Warranties............................ 37
Covenants................................................. 38
Termination and Expenses.................................. 39
Conditions to Closing of the Sale......................... 40
Amendments and Waivers.................................... 41
Indemnification........................................... 41
Noncompetition............................................ 42
Interim Services Agreement................................ 42
NO CONSIDERATION TO BE RECEIVED BY SHAREHOLDERS OF THE
COMPANY................................................... 43
ACCOUNTING TREATMENT........................................ 43
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE SALE TO THE
COMPANY AND THE COMPANY'S SHAREHOLDERS.................... 43
</TABLE>
4
<PAGE> 9
<TABLE>
<CAPTION>
PAGE
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<S> <C>
DISSENTERS' RIGHTS OF APPRAISAL............................. 43
EFFECT OF THE APPROVAL OF THE SALE ON THE COMPANY'S
SHAREHOLDERS.............................................. 43
INTERESTS OF CERTAIN PERSONS IN THE SALE.................... 43
THE WARRANT................................................. 45
DIVIDEND POLICY
The Company............................................... 45
PsychPartners............................................. 45
PRO FORMA CONDENSED FINANCIAL INFORMATION
Apogee, Inc. ............................................. 46
PsychPartners, L.L.C. .................................... 52
MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS................................................ 57
CAUTIONARY STATEMENT........................................ 67
INTEGRA OPERATIONS AFTER THE CLOSING OF THE SALE
Business.................................................. 68
Management................................................ 68
Marketing................................................. 68
Acquisitions.............................................. 69
INFORMATION CONCERNING PSYCHPARTNERS, L.L.C.
Business.................................................. 70
Growth Plan............................................... 70
Twelve Month Plan of Operations........................... 70
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF APOGEE, INC. ............................... 72
DIRECTORS AND EXECUTIVE OFFICERS OF APOGEE, INC. ........... 74
PROPOSAL 2 -- ADJOURNMENT OR POSTPONEMENT OF
THE SPECIAL MEETING....................................... 77
OTHER MATTERS............................................... 77
EXPENSES OF SOLICITATION.................................... 77
INDEPENDENT ACCOUNTANTS..................................... 77
INDEX TO FINANCIAL STATEMENTS............................... F-1
</TABLE>
EXHIBITS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
Exhibit A Agreement of Purchase and Sale.............................. A-1
Exhibit B Opinion of Banc One Capital Corporation..................... B-1
</TABLE>
5
<PAGE> 10
SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Proxy Statement. The summary is not intended to be complete and is
qualified in its entirety by reference to the more detailed information
contained in this Proxy Statement and the exhibits hereto. Shareholders are
urged to review the entire Proxy Statement carefully.
THE SPECIAL MEETING
Purpose of the
Special Meeting.......... (1) To consider and vote upon the adoption and
approval of the sale (the "Sale") of substantially
all of the business and assets of the Company's
outpatient behavioral healthcare business pursuant
to the Purchase Agreement and the other
transactions contemplated thereby. In the event
that the Purchase Agreement is adopted and
approved, the Company will continue to operate its
Integra Division and will be primarily focused on
the managed behavioral healthcare business through
Integra. After the closing of the Sale, the Company
plans to discontinue the operations of its
remaining outpatient behavioral healthcare business
operating in the Western Region of the United
States which are not being sold to the Purchasers.
(2) To approve a proposal to adjourn or postpone
the Special Meeting for the purpose of soliciting
additional proxies in the event the number of
shares of Company Common Stock represented at the
Special Meeting in person or by proxy is
insufficient to constitute a quorum or, if a quorum
is present, the Company fails to receive a
sufficient number of votes to approve the Purchase
Agreement and the transactions contemplated
therein.
Date, Time and Location.... May 14, 1998, at 9:00 a.m., local time, at the
Fourth Floor Boardroom, 1060 First Avenue, King of
Prussia, Pennsylvania 19406.
Record Date;
Shares Outstanding....... Only holders of record of shares of Company Common
Stock at the close of business on April 22, 1998
(the "Record Date") are entitled to notice of and
to vote at the Special Meeting. On that date, there
were 10,089,329 shares of Company Common Stock
outstanding, with each share entitled to cast one
vote at the Special Meeting.
Quorum; Vote Required...... The presence, in person or by proxy, of the holders
of a majority of the outstanding shares of the
Company Common Stock is necessary to constitute a
quorum at the Special Meeting. Approval of the
Purchase Agreement requires the affirmative vote of
the holders of a majority of the issued and
outstanding shares of Company Common Stock. All of
the Company's executive officers and directors and
their affiliates, who, as of the Record Date,
collectively own 4,149,301 shares of Company Common
Stock, representing approximately 41.0% of the
outstanding shares of Company Common Stock, have
indicated their intent to vote for approval and
adoption of the Purchase Agreement.
6
<PAGE> 11
Recommendations............ The terms of the Sale are the result of
arms'-length negotiations between the Company and
PsychPartners. The Company's financial advisor,
Banc One Capital Corporation, has advised the
Company that, in its opinion, the cash
consideration to be received by the Company in
connection with the Sale is fair to the Company
from a financial point of view. The Board of
Directors has approved the Purchase Agreement and
recommends that the Company's shareholders vote FOR
the proposal to approve the Purchase Agreement. See
"BACKGROUND OF THE SALE -- REASONS FOR THE SALE AND
RECOMMENDATION OF THE COMPANY'S BOARD OF
DIRECTORS."
Interests of Management
and Board of Directors in
the Sale................. In considering the recommendation of the Board of
Directors of the Company with respect to the
Purchase Agreement, shareholders should be aware
that certain members of the Company's management
and the Board of Directors have certain interests
in the transactions contemplated thereby that are
in addition to the interests of shareholders of the
Company generally. Such interests include (a) cash
payments to officers and directors of the Company,
and (b) severance and bonus payments due to certain
officers of the Company as a result of the
consummation of the Sale. It is anticipated that
the aggregate amount of cash payments to officers
and directors of the Company will be approximately
$120,000. The Company has not yet determined the
payments for the severance arrangements, however,
it anticipates that such payments would not be
material in the aggregate. See "INTERESTS OF
CERTAIN PERSONS IN THE SALE."
7
<PAGE> 12
PROPOSAL 1
THE PURCHASE AGREEMENT AND THE SALE
Terms of the Sale.......... 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. ("AGP"), 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) $27,000,000 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 the Closing Date any
required adjustment would not exceed $500,000. See
"INTRODUCTION -- THE SALE" and "THE SALE -- THE
PURCHASE AGREEMENT -- POST-CLOSING ADJUSTMENTS."
The Warrant................ The Warrant entitles the Company to purchase, if
certain performance criteria are met, 400,000
Common Units of PsychPartners for a purchase price
of $.05 per Common Unit during the five (5) year
period following the Closing Date. The Warrant will
be delivered on the Closing Date to an escrow
agent. The subsequent issuance of the Warrant to
the Company is contingent upon the achievement of
certain future operating profit thresholds by two
of the Practices sold to the Purchaser during the
one-year period after the Closing Date of the Sale.
The Company has not assigned, and will not assign,
a value to the Warrant until the contingency is
resolved and the Warrant is issued to the Company.
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
Warrant, if exercised, must be exercised in whole,
and not in part, by the Company or any permissible
transferee of the Company. Upon the presentation of
an exercise notice to PsychPartners and the
payment, by check or wire transfer, the Company or
any permissible transferee shall be admitted as a
member of PsychPartners. PsychPartners is not a
publicly traded company and, therefore, a public
market value for the Common Units is not available
to compare with the exercise price of the Warrant.
8
<PAGE> 13
The Closing Date........... 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"). See "THE SALE -- CLOSING."
Use of Proceeds............ 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 to settle 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 at the Closing Date. The
Company expects to have approximately $4.0 million
available from the proceeds of the Sale for working
capital and general corporate purposes. See "USE OF
PROCEEDS."
Conditions to Consummation
of the Sale................ 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 which, as required by the provisions
of the General Corporation Law of the State of
Delaware, must be approved by a majority of the
holders of the outstanding shares of Company Common
Stock) may be waived by PsychPartners and the
Purchasers. In the event the number of shares of
Company Common Stock represented at the Special
Meeting in person or by proxy is insufficient to
constitute a quorum or, if a quorum is present,
there are not sufficient votes at the time of the
Special Meeting to approve the Purchase Agreement,
the Company may, subject to shareholder approval,
adjourn or postpone the Special Meeting for a
period of not more than 30 days. However, the
Company and PsychPartners each has the right to
terminate the Purchase Agreement if the Closing has
not occurred by May 31, 1998. See "THE SALE -- THE
PURCHASE AGREEMENT -- CONDITIONS TO CLOSING OF THE
SALE" and "BACKGROUND OF THE SALE -- THE PURCHASE
AGREEMENT -- TERMINATION AND EXPENSES" and
"BACKGROUND OF THE SALE -- ALTERNATIVES TO THE
SALE."
9
<PAGE> 14
Termination of the Purchase
Agreement................ 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, (ii) in
the event a condition to the Company's or the
Purchasers' obligation to the Closing of the Sale
has not been met or waived on or prior to May 31,
1998 or (iii) 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 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"). If
the Purchase Agreement is terminated because of a
Competing Transaction, the Company must reimburse
the Purchasers for up to $300,000 of the
Purchasers' expenses incurred in connection with
the negotiation of the Purchase Agreement. See "THE
SALE -- THE PURCHASE AGREEMENT -- TERMINATION AND
EXPENSES."
Indemnification............ The Company and its subsidiaries have agreed,
jointly and severally, to indemnify and hold
harmless PsychPartners and the Purchasers and their
respective, employees, shareholders, members,
officers, agents, directors, successors and assigns
against any and all damages, losses, deficiencies,
liabilities, costs and expenses, including, without
limitation, reasonable legal fees and expenses
incurred or suffered by the Purchasers or their
successors or assigns arising from certain events.
See "THE SALE -- THE PURCHASE
AGREEMENT -- INDEMNIFICATION."
Noncompetition............. The Purchase Agreement provides that operation by
the Company of the Integra Division is not a
violation of the noncompetition provisions set
forth in the Purchase Agreement. The Company has
agreed that it will not for a period of five years
after the Closing engage in the business of
performing any of the services currently performed
by the Company's outpatient behavioral healthcare
businesses anywhere within a thirty-five mile
radius of any of the locations of the Practices.
See "THE SALE -- THE PURCHASE
AGREEMENT -- NONCOMPETITION."
Interim Services
Agreement.................. 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 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. See "THE
SALE -- THE PURCHASE AGREEMENT -- INTERIM SERVICES
AGREEMENT."
Dissenters' Rights of
Appraisal.................. The General Corporation Law of the State of
Delaware ("DGCL") does not provide for dissenters'
rights of appraisal in connection with the Sale.
10
<PAGE> 15
Rights of the Company's
Shareholders............... The consummation of the Sale will not result in any
changes in the rights of the Company's
shareholders. Holders of shares of Company Common
Stock should keep in mind that, in the event of a
lawsuit alleging that the Company's Board of
Directors breached its fiduciary duties in
connection with the Sale or otherwise challenging
the fairness of the Sale, the Company may be able
to argue that any shareholder approval of the Sale
constitutes a ratification of such transactions and
use such ratification as a defense in the lawsuit.
Accounting Treatment....... As of December 31, 1997, the Company recognized a
charge of $38.4 million to write down the carrying
value of the assets of the businesses held for sale
to PsychPartners. In addition, the Company recorded
$20.1 million in restructuring and other charges
pertaining to the Company's exit from the
outpatient behavioral healthcare business, to the
Company's restructuring of its corporate office to
reflect the discontinuation of the outpatient
operations and to record additional reserves
pertaining to the Company's long-term operations
which the Company exited in 1996. See "ACCOUNTING
TREATMENT."
Certain Federal Income Tax
Consequences............. The Company expects to recognize a taxable loss
upon the consummation of the Sale and
discontinuation of the outpatient behavioral
healthcare business. For federal income tax
purposes, the Company currently has net operating
loss carryforwards. In general, the future use of
these losses will be limited to future taxable
earnings of the Company. The consummation of the
Sale will not be a taxable event for federal income
tax purposes for the shareholders of the Company.
See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE
SALE TO THE COMPANY'S SHAREHOLDERS."
Risks to the Company's
Shareholders Associated
with
the Sale................. 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
locations in the Western Region. The Company also
intends to divest or close these remaining
outpatient practices in the Western Region. As of
December 31, 1997, the outpatient behavioral health
practice business accounted for approximately 84%
of the assets of the Company (before the impact of
the write down referred to above under the caption
"Accounting Treatment" to adjust to fair market
value of such assets). For the year ended December
31, 1997, this business accounted for approximately
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 the Integra Division.
The Company will incur a loss of approximately
$58.5 million with respect to the Sale and
discontinuation of the outpatient business. As a
result of the Sale, the Company will be a
significantly smaller company in terms of revenues
and assets. The Company's ability to continue to
operate in this downsized mode is contingent, upon
among other things, the Company's ability to reduce
its corporate cost structure to reflect its new
downsized operations, the successful renegotiation
of the Company's Credit Facility and the success of
the Company in the managed behavioral healthcare
market. See "BACKGROUND OF THE SALE -- EFFECTS OF
THE SALE."
11
<PAGE> 16
Restructuring of Credit
Facility in the Event the
Purchase Agreement is Not
Approved................. 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 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, a related
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 Company 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
$3.5 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 the event that
the Commitment Arrangement is terminated and the
Sale is consummated, the cost to the Company will
be $140,000 in cash payable to the Investment
Partnerships and a non-recurring charge of $930,000
which represents the difference between the
exercise price of the Apogee Warrants and the fair
market value of the underlying Company Common
Stock. In the event the Sale is not consummated,
the cost to the Company could be up to $280,000 in
cash payable to the Investment Partnerships for
commitment and draw down fees and $3,5000,000 in
cash payable to the Investment Partnerships 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. As of the date of
this Proxy Statement, the Company has not accepted
proposals from any 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
12
<PAGE> 17
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. See "BACKGROUND OF
THE SALE -- ALTERNATIVES TO THE SALE."
13
<PAGE> 18
THE COMPANIES
Business of
PsychPartners.............. PsychPartners, L.L.C., PsychPartners, Inc. and
PsychPartners MidAtlantic Inc. Based on its
knowledge of the behavioral health services
industry, the Company's management believes that
PsychPartners is one of the largest privately held
multi-disciplinary providers of outpatient and
partial behavioral health services in the country.
Established in late 1995, PsychPartners' strategy
is to develop integrated behavioral healthcare
networks in regions where it has operations and new
regions. Currently, PsychPartners provides
behavioral health services at twenty behavioral
health clinics and specialized outpatient programs
located in Alabama, Tennessee, New Jersey and
Pennsylvania. In addition, PsychPartners operates
an independent provider network in New Jersey.
PsychPartners' multi-disciplinary practices
typically employ some or all of the following
professionals: board certified or board eligible
adult and adolescent psychiatrists, licensed
clinical psychologists, neuropsychologists,
licensed clinical social workers; licensed
marriage, family and child counselors, registered
psychiatric nurse practitioners, clinical nurse
specialists and other allied mental health
professionals. These practices provide a full range
of behavioral health services, including but not
limited to, diagnosis, psychiatric consultation,
psychological assessment and evaluation, medication
monitoring, group and individual psychotherapy;
behavioral management, marriage, family and child
therapy, intellectual and psychological testing,
including neuropsychological testing, and substance
abuse and rehabilitation. See "INFORMATION
CONCERNING PSYCHPARTNERS, L.L.C. -- BUSINESS."
The principal executive offices of the Purchasers
and PsychPartners are located at 1900 International
Park Drive, Suite 220, Birmingham, Alabama 35243
and its telephone number is 205-967-6650.
Business of Apogee,
Inc. ...................... Outpatient Behavioral Health Business. The Company
is one of the largest multi-disciplinary providers
of outpatient behavioral healthcare services in the
United States (the "Outpatient Business"). The
Company provides behavioral health and related
services, principally at free-standing clinics and,
at December 31, 1997, operated behavioral health
clinics located in 13 states and the District of
Columbia. Prior to 1997, the Company also performed
services in long-term care facilities.
Substantially all of the assets relating to the
Outpatient Business are subject to the Sale. The
remaining outpatient operations not included in the
Sale are located in the Western portion of the
United States, including California and Nevada. The
Company plans to close, sell or otherwise dispose
of the assets in this region. For the year ended
December 31, 1997, approximately $58.1 million or
83% of the Company's net revenues were generated by
the Outpatient Business. During this period, these
operations incurred a pre-tax loss of $3.8 million
before the impact of the restructuring and other
charges. The Company plans to close, sell or
otherwise dispose of the assets in the Western
Region which have only a nominal value. See
"INFORMATION CONCERNING APOGEE, INC. -- BUSINESS"
and "RECENT DEVELOPMENTS."
14
<PAGE> 19
Integra. The Company's Integra Division is
primarily focused on managed behavioral healthcare.
Integra 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, the
Company provides other behavioral health services
including: employee assistance programs,
third-party clinical case management and claims
adjudication. For the year ended December 31, 1997,
approximately $10.4 million, or 15% of the
Company's net revenues, were generated by the
Integra business. During this period, Integra
generated pre-tax income of approximately $1.2
million. Following the Sale, the Company will
continue to operate the Integra Division.
The principal executive offices of the Company are
located at 1060 First Avenue, Suite 410, King of
Prussia, Pennsylvania 19406 and its telephone
number is 610-992-2600.
15
<PAGE> 20
SELECTED HISTORICAL FINANCIAL DATA
APOGEE, INC.
The following table presents the summary historical financial information
of the Company. The summary historical financial information as of the end of or
for each of the last five fiscal years have been derived from audited financial
statements of the Company. This selected financial data should be read in
conjunction with the Company's Consolidated Financial Statements and the
accompanying notes presented elsewhere in this Proxy Statement.
(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
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
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.
16
<PAGE> 21
SELECTED HISTORICAL FINANCIAL DATA
PSYCHPARTNERS, L.L.C.
(UNAUDITED)
The following tables presents the historical financial information for
PsychPartners, L.L.C. The selected financial information as of the end of or for
each of the last three fiscal years have been derived from unaudited financial
statements and, in the opinion of management, include all adjustments consisting
only of normal recurring adjustments necessary for a fair statement of results.
PsychPartners, L.L.C. commenced operations in 1995, accordingly, earlier periods
are not presented.
<TABLE>
<CAPTION>
FOR THE PERIOD
NOVEMBER 1, 1995
YEARS ENDED DECEMBER 31, (INCEPTION) TO
-------------------------- DECEMBER 31,
1997 1996 1995
----------- ----------- -----------------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues..................................... $15,089,189 $ 4,052,560 $ 1,247
Gross profit..................................... 4,340,711 363,306 1,247
Loss from operations............................. (1,812,857) (1,327,179) (192,450)
Loss before income taxes......................... (1,868,812) (1,280,885) (192,450)
Net loss......................................... $(1,868,812) $(1,280,885) $(192,450)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------
1997 1996 1995
----------- ----------- -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Current assets................................... $7,407,217 $ 990,203 $ 18,227
Total assets..................................... 9,843,620 1,477,843 18,227
Current liabilities.............................. 5,531,235 584,518 97,222
Total debt....................................... 2,994,137 17,000 78,836
Total liabilities................................ 5,697,901 584,518 97,222
Total stockholders' equity....................... 3,957,924 893,325 (78,995)
</TABLE>
17
<PAGE> 22
APOGEE, INC. SUMMARY PRO FORMA FINANCIAL DATA
(UNAUDITED)
The following table presents the summary pro forma financial data of the
Company after giving effect to the disposition of the Company's operations other
than the Integra Division, the Company's managed behavioral healthcare division.
The summary pro forma financial information has been derived from, or prepared
consistently with, the unaudited pro forma consolidated financial statements
included herein. The pro forma financial information is presented for
illustrative purposes only and is not necessarily indicative of the financial
position or operating results that would have occurred or that will occur upon
consummation of the Sale and disposition of all of the Company's operations
other than the Integra Division. The following summary financial information
should be read in conjunction with such historical and pro forma consolidated
financial statements and notes thereto included herein. See "Apogee, Inc. Pro
Forma Condensed Financial Information."
SUMMARY PRO FORMA FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
-----------------
<S> <C>
INCOME STATEMENT DATA:
Net revenues................................................ $10,425
Gross profit................................................ 4,606
Income from operations...................................... 1,224
Net income.................................................. 1,099
Basic net income per common share........................... 0.11
Weighted average shares outstanding......................... 10,321,374
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1997
-----------------
<S> <C>
BALANCE SHEET DATA:
Current assets.............................................. $ 9,227
Total assets................................................ 20,296
Current liabilities......................................... 14,577
Total debt.................................................. 2,615
Stockholders' equity........................................ 4,573
Book value per share........................................ 0.44
</TABLE>
18
<PAGE> 23
PSYCHPARTNERS, L.L.C. SUMMARY PRO FORMA FINANCIAL DATA
(UNAUDITED)
The following table presents the summary pro forma financial data for
PsychPartners, L.L.C. after giving effect to the acquisition of the Company's 22
outpatient behavioral health practices. The summary pro forma financial
information has been derived from or prepared consistently with the unaudited
pro forma consolidated financial statements included herein. The pro forma
financial information is presented for illustrative purposes only and is not
necessarily indicative of the financial position or operating results that would
have occurred or that will occur upon consummation of the acquisition of these
practices. The following summary financial information should be read in
conjunction with such historical and pro forma consolidated financial statements
and notes thereto. See "PsychPartners, L.L.C. Pro Forma Financial Information."
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
-----------------
<S> <C>
Selected Income Statement Data:
Net revenues................................................ $64,454,189
Gross profit................................................ 15,671,711
Income from operations...................................... 2,230,930
Net income.................................................. 869,976
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1997
-----------------
<S> <C>
Selected Balance Sheet Data:
Current assets.............................................. $17,207,217
Total assets................................................ 46,852,520
Current liabilities......................................... 7,907,235
Total debt.................................................. 15,651,137
Total unitholders' equity................................... 23,459,824
</TABLE>
19
<PAGE> 24
MARKET PRICE DATA
The Company Common Stock is quoted on the American Stock Exchange under the
symbol APG. As of April 22, 1998, there were approximately 100 shareholders of
record and approximately 1,500 beneficial holders of the Company 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 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
Fiscal Year Ended December 31, 1998
First Quarter............................................. 2 7/8 2 1/4
Second Quarter (through April 15, 1998)................... 2 7/16 2
</TABLE>
On December 29, 1997, the last full day of trading prior to the
announcement by the Company of execution of the Purchase Agreement, the reported
high and low sale prices per share of the Company Common Stock were $2 3/16 and
$2 1/8, respectively. On April 15, 1998, such reported high and low sale prices
per share were $2 1/4 and $2 1/4, respectively.
PsychPartners is a privately held limited liability company. As of April
15, 1998, there were 4,976,680 Common Units and 666,667 Preferred Units
outstanding. As of April 15, 1998, there were approximately 100 holders of
PsychPartners' Common Units and one holder of PsychPartners' Preferred Units.
FORWARD LOOKING STATEMENTS
Matters discussed in this Proxy Statement contain forward-looking
statements that are based on the Company's estimates, assumptions and
projections. Major factors that could cause results to differ materially from
those expected by management include: the successful consummation of the Sale,
the timing and nature of reimbursement changes, 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 re-negotiation of the Company's
Credit Facility, changes in procedures by third-party payors, pricing of managed
care and other third-party contracts, competitors, management retention and
unanticipated market changes. The above should be read in conjunction with the
Company's Consolidated Financial Statements and notes thereto for the year ended
December 31, 1997 contained elsewhere in this Proxy Statement. The Company does
not undertake any obligation to update the information contained herein, which
speaks only as of this date with respect to this Proxy Statement.
20
<PAGE> 25
PROPOSAL 2
ADJOURNMENT OR POSTPONEMENT OF
THE SPECIAL MEETING
The Proposal............... In the event that the number of shares of Company
Common Stock represented at the Special Meeting is
insufficient to constitute a quorum or, if a quorum
is present, the Company fails to receive a
sufficient number of votes to approve the Purchase
Agreement and the transactions contemplated
therein, the Company proposes to adjourn or
postpone the Special Meeting for a period of not
more than 30 days for the purpose of soliciting
additional proxies. Proxies initially cast in favor
of the Purchase Agreement and the transactions
contemplated therein (unless revoked) will be voted
in favor of the approval of such proposal at the
subsequently reconvened Special Meeting. See "THE
SPECIAL MEETING -- PROXIES" and "PROPOSAL
2 -- ADJOURNMENT OR POSTPONEMENT OF THE SPECIAL
MEETING."
Recommendations............ The Board of Directors has unanimously approved the
adjournment or postponement of the Special Meeting
under such circumstances and unanimously recommends
that shareholders vote FOR approval and adoption of
this proposal.
21
<PAGE> 26
------------------------
PROXY STATEMENT
------------------------
INTRODUCTION
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Apogee, Inc. (the "Company") to be voted at
a special meeting of shareholders to be held on May 14, 1998 (the "Special
Meeting") and any adjournment or adjournments thereof. Shares represented by
properly executed proxies received by the Company will be voted at the Special
Meeting or any adjournment thereof in accordance with the terms of such proxies,
unless revoked. Proxies may be revoked at any time prior to the voting thereof
either by written notice filed with the Secretary or Acting Secretary of the
Special Meeting.
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, the shareholders of the Company will consider and
vote upon the proposal to approve the sale of substantially all of the assets
and business of the Company's outpatient behavioral health practice business
(the "Sale") pursuant to the Purchase Agreement, dated as of December 26, 1997,
among PsychPartners, Inc. and PsychPartners MidAtlantic, Inc. (collectively, the
"Purchasers"), PsychPartners, L.L.C. ("PsychPartners"), the Company, and certain
wholly owned subsidiaries of the Company.
THE SALE
The Purchase Agreement provides for the Company to sell to the Purchasers
(i) all of the capital stock of AGP Acquisition Corp. ("AGP"), one of the
subsidiaries of the Company (the "Subsidiary Stock") relating to two of the
Company's behavioral healthcare practices (the "Practices") and (ii)
substantially all of the assets (the "Assets") relating to 20 of the Company's
Practices and for the Purchasers to assume certain specified liabilities (the
"Assumed Liabilities") relating to the Company and the Practices. In
consideration for the sale of the Subsidiary Stock and the Assets, the
Purchasers will pay a purchase price (the "Purchase Price") consisting of (a)
$27,000,000 in cash (subject to certain adjustments), and (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. A copy of
the Purchase Agreement (exclusive of all exhibits and schedules) is attached as
Exhibit A to this Proxy Statement. After the Sale, the Company will continue to
operate its Integra Division and will be primarily focused on the managed
behavioral healthcare business through the Integra Division.
ADJOURNMENT OR POSTPONEMENT OF THE SPECIAL MEETING
The shareholders also will be asked to consider and vote upon a proposal to
approve an adjournment or postponement of the Special Meeting for a period of
not more than 30 days for the purpose of soliciting additional proxies in the
event the number of shares of Company Common Stock represented at the Special
Meeting in person or by proxy is insufficient to constitute a quorum or, if a
quorum is present, the Company fails to receive a sufficient number of votes to
approve the Purchase Agreement and the transactions contemplated therein.
The Board of Directors knows of no business that will be presented for
consideration at the Special Meeting other than the matters described in this
Proxy Statement. If any other matters properly come before the Special Meeting,
the persons named in the enclosed form of proxy or their substitutes will vote
in accordance with their best judgment on such matters.
22
<PAGE> 27
VOTING RIGHTS; VOTE REQUIRED FOR APPROVAL
The record date for the Special Meeting is the close of business on April
22, 1998. At that date, there were 10,089,329 outstanding shares of Company
Common Stock. Each share of Company Common Stock entitles its holder to one vote
concerning all matters properly coming before the Special Meeting. Any
shareholder entitled to vote may vote either in person or by duly authorized
proxy. A majority of the shares entitled to vote, represented in person or by
proxy, will constitute a quorum. Abstentions and broker non-votes (i.e., shares
held by brokers in street name), voting on certain matters due to discretionary
authority or instructions from the beneficial owner but not voting on other
matters due to lack of authority to vote on such matters without instructions
from the beneficial owner are counted for the purpose of establishing a quorum.
Under the General Corporation Law of the State of Delaware ("DGCL"), for the
Sale to be approved by the shareholders, the Purchase Agreement must be approved
and adopted by the holders of at least a majority of the outstanding shares of
Company Common Stock. Approval of the proposal to adjourn or postpone the
Special Meeting requires the affirmative vote of the holders of at least a
majority of the outstanding shares of Company Common Stock. Accordingly,
abstentions and broker non-votes have the same effect as a vote "AGAINST"
approval of the Sale and the adjournment proposal. All of the Company's
executive officers and directors and their affiliates, who collectively own
4,149,301 shares of Company Common Stock, representing approximately 41.0% of
the outstanding Company Common Stock have indicated their intent to vote for
approval and adoption of the Purchase Agreement and the proposal to approve the
adjournment or postponement of the Special Meeting.
PROXIES
All outstanding shares of Company Common Stock represented by properly
executed proxies received prior to or at the Special Meeting and not revoked
will be voted in accordance with the instructions indicated in such proxies. IF
NO INSTRUCTIONS ARE INDICATED, SUCH PROXIES WILL BE VOTED FOR APPROVAL OF THE
SALE AND, IN THE DISCRETION OF THE PERSONS NAMED IN THE PROXY, ON SUCH OTHER
MATTERS AS MAY PROPERLY BE PRESENTED AT THE SPECIAL MEETING.
Proxies initially cast in favor of approval of the Purchase Agreement and
the transactions contemplated therein will (unless revoked) be voted in favor of
such proposal at the subsequently reconvened Special Meeting in the event that
there is a vote to adjourn or postpone the Special Meeting in order to continue
to solicit proxies if the number of shares of Company Common Stock represented
at the Special Meeting or by proxy is insufficient to constitute a quorum or, if
a quorum is present, there are not sufficient votes at the time of the Special
Meeting for approval of the Purchase Agreement.
A shareholder may revoke his, her or its proxy at any time prior to its use
by delivering to the Secretary of the Company a signed notice of revocation or a
later dated and signed proxy or by attending the Special Meeting and voting in
person. Attendance at the Special Meeting will not in itself constitute the
revocation of a proxy.
A shareholder who voted either in person or by proxy at the Special Meeting
may revoke his, her or its proxy at any time during the adjournment, if any, of
the Special Meeting, at any time prior to the reconvened Special Meeting by
delivering to the Secretary of the Company a signed notice of revocation or a
later dated and signed proxy or by attending the reconvened Special Meeting and
voting in person. Attendance at the reconvened Special Meeting will not in
itself constitute the revocation of a proxy.
Expenses in connection with the solicitation of proxies will be paid by the
Company. Upon request, the Company will reimburse brokers, dealers and banks or
their nominees, for reasonable expenses incurred in forwarding copies of the
proxy material to the beneficial owners of shares which such persons hold of
record. Solicitation of proxies will be made principally by mail. Proxies may
also be solicited in person, or by telephone or facsimile, by officers and
regular employees of the Company who will receive no additional compensation in
connection with the solicitation.
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USE OF PROCEEDS
The Company anticipates that the proceeds from the Sale will be used as
follows: to repay the Company's Credit Facility with 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 in connection with the Sale ($0.5 million), and to settle 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 at the Closing Date. The Company expects to have approximately
$4.0 million available from the proceeds of the Sale for working capital and
general corporate purposes.
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BACKGROUND OF THE SALE
The following is a brief summary of certain aspects of the Sale. The
summary does not purport to be complete and is qualified in its entirety by
reference to the Purchase Agreement (exclusive of all exhibits and schedules), a
copy of which is attached to this Proxy Statement as Exhibit A.
OVERVIEW
The Company has been one of the leading owners and operators of outpatient
behavioral healthcare practices in the United States for several years.
PsychPartners has for the past two years been an owner-operator of behavioral
group practices in the United States. Both companies have been engaged in a
business strategy emphasizing growth by acquisition and consolidation primarily
within the outpatient behavioral healthcare market. The possibility of a
strategic combination was first raised in general terms by PsychPartners during
several conversations in May and June of 1997 between representatives of
PsychPartners and the Company. In these conversations, senior management teams
of both companies began exploring the feasibility of a strategic business
combination which would most likely consist of a purchase by PsychPartners of
the Company's outpatient behavioral healthcare business. The senior management
of the Company viewed PsychPartners favorably as a possible combination
candidate due to PsychPartners' knowledge and experience in the outpatient
behavioral healthcare field and their willingness to explore a possible
transaction.
On May 29, 1997, representatives of PsychPartners, Alan N. Vinick, the
former Chief Financial Officer of the Company, and Lawrence M. Davies, President
and Chief Operating Officer of the Company, had a telephone conversation during
which each expressed interest in pursuing exploratory discussions regarding a
potential transaction. On June 6, 1997, PsychPartners and the Company executed a
non-disclosure agreement providing for the exchange of non-public information.
Over the course of a period of approximately four months between June 1997
and early October 1997, the Company initiated discussions with three other
potential candidates that the Company believed might be interested in pursuing a
strategic combination. These candidates either were not interested in pursuing a
strategic combination with the Company or did not have the financial resources
to pursue a combination with the Company on terms that would be satisfactory to
the Company. It became apparent to senior management that a strategic
combination with PsychPartners was the most attractive option to pursue.
On September 5, 1997, several senior executives of PsychPartners, including
Kerry Teel, President and Chief Executive Officer, and Emmett McLean, Senior
Vice President of Development, met with senior executives of the Company in King
of Prussia, Pennsylvania. Discussions at this meeting focused on business and
market strategies as well as possible synergies that could be realized through a
business combination. Discussions at this meeting focused on the business
strategy of PsychPartners, its focus on outpatient behavioral healthcare,
geographic strategy and its integration with partial hospitalization programs.
In addition, possible business combination synergies, such as being able to
eliminate corporate overhead redundancies were discussed. At this meeting,
PsychPartners expressed an interest in acquiring all group practice operations
of the Company, except for practices located in the Western Region of the United
States. PsychPartners' strategy is to focus on practices in the Eastern Region
of the United States. PsychPartners was not interested in acquiring practices in
the Western Region of the United States where due to the long distances between
practice locations they believed it would be more difficult to manage the
operations of the practices. In addition, PsychPartners determined that the
operating margins of the Company's practices in the Western Region did not meet
PsychPartners' acquisition criteria. Later that day, the Company received an
unsigned preliminary offer letter from PsychPartners offering to acquire the
Company's outpatient behavioral healthcare business for a proposed purchase
price of $25 million in cash.
On September 9, 1997, as part of a regularly scheduled meeting of the
Company's Board of Directors, Mr. Davies made a presentation to, and answered
questions from, the Board of Directors with respect to a possible transaction
with PsychPartners. Mr. Davies discussed with the Board of Directors,
management's discussions with PsychPartners' management regarding a potential
transaction. Specifically, Mr. Davies communicated PsychPartners' desire to
evaluate the feasibility of a sale of select group practice assets in the
Eastern Region. In addition, Mr. Davies communicated PsychPartners' lack of
interest in the Company's
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Western Region group practice operation and the Integra managed care operation.
Mr. Davies reviewed the composition of the PsychPartners management team and the
financial investors in PsychPartners. The Company's Board of Directors
authorized Mr. Davies and other members of the Company's senior management to
pursue discussions with PsychPartners with respect to a possible sale.
Between September 10, 1997 and September 24, 1997, the Company's management
evaluated the feasibility of a transaction involving the sale of selected group
practice assets to PsychPartners. During this period, there were numerous
telephonic discussions between Mr. Davies and members of the PsychPartners
management team.
During several telephone conversations between September 10, 1997 and
September 24, 1997, Mr. Davies and Andrew Hallowell of Foster Management
Company, who was assisting John H. Foster, the Chairman of the Company,
primarily discussed the adequacy of the September 5, 1997 offer of
PsychPartners. On September 24, 1997, the Company received a second signed offer
letter for a purchase price of $26.5 million in cash.
On September 25, 1997, Mr. Davies and several senior executives of the
Company met with representatives of PsychPartners in King of Prussia,
Pennsylvania regarding a proposed transaction and the basis upon which a
possible transaction might occur. The Company and PsychPartners reached a
tentative agreement with respect to the terms of the Sale which would consist of
a purchase price of $27.0 million in cash plus the assumption of selected
liabilities, including earnout liabilities. At this meeting the Company's desire
to have an equity stake in PsychPartners, in the form of the Warrant in
PsychPartners, was discussed but not agreed upon.
Further negotiations regarding the general terms of a proposed transaction
were held in separate sessions between September 26 and October 9, 1997. During
this time, Mr. Davies and Mr. Hallowell discussed with PsychPartners aspects of
the transaction other than price, namely costs and expenses, due diligence,
closing dates, exclusive negotiations and the non-binding nature of the
transaction (i.e., subject to due diligence). On October 10, 1997, the Company
and PsychPartners reached a preliminary agreement on the general terms of the
Sale. This agreement was evidenced by a non-binding letter of intent subject to
due diligence, negotiation of a definitive purchase and sale agreement, and the
approval of the respective Boards of Directors of the Company and PsychPartners.
The nature and amount of consideration to be received by the Company
evolved based on the position of the Company that it was most interested in a
cash sale. The final consideration was based on a multiple of the Company's
adjusted cash flow. The increase in the amount of cash consideration to be paid
to the Company was the result of negotiations between PsychPartners and the
Company with respect to the Company's desire to receive a higher multiple of
adjusted cash flow than PsychPartners initially offered to the Company on
September 5, 1997. The actual value of the assets to be acquired and the
liabilities to be assumed was based upon recorded historical book values. The
Company and PsychPartners ultimately settled on a cash price of 10.38 times the
Company's earnings before income taxes, depreciation and amortization (including
the Company's allocated corporate overhead expenses) plus the Warrant. The
Warrant was intended to offer the Company a potential return, in addition to the
cash portion of the Purchase Price, from the future value of PsychPartners'
equity.
Between October 11, 1997 and November 13, 1997, the senior management of
the Company and PsychPartners and their respective legal and financial advisors
conducted business, legal and financial due diligence. During this same period
of time, there were numerous discussions between Mr. Davies and the members of
the Company's Board of Directors concerning the status of the ongoing individual
negotiations with PsychPartners. Throughout this period, the Company's Board of
Directors instructed Mr. Davies that it was reasonable and appropriate for the
Company's management to proceed with the negotiations.
On November 5, 1997, senior executives of PsychPartners met with senior
executives of the Company in King of Prussia, Pennsylvania. At this meeting, the
findings of the financial due diligence review were discussed. At the November 5
meeting, PsychPartners reviewed their generally positive findings with respect
to the financial due diligence. Due to the significant contribution of two
practices, Metropolitan Psychiatric
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Group ("MPG") and Rainbow Healthcare Associates Group ("RPG") to the overall
operating profit of the Company, and the risks associated with such a
disproportionately high contribution to the overall profitability of the
Practices, PsychPartners proposed an adjustment mechanism to the Warrant tied to
the financial performance of MPG and RPG. Given its belief in the strength of
the operating performance of MPG and RPG, the Company agreed to the adjustment
formula.
During the period from November 13, 1997 to December 26, 1997, negotiations
regarding the terms of the Purchase Agreement were held in separate sessions in
which issues such as the scope of the representations and warranties in the
Purchase Agreement and the indemnification provisions were discussed. The
negotiation process was consistent with the Company's experiences with
transactions in the behavioral healthcare industry and did not entail any
significant or unusual disagreements over terms.
On December 11, 1997, as a part of a regularly scheduled meeting of the
Company's Board of Directors, which convened in King of Prussia, Pennsylvania,
Mr. Davies made a detailed presentation regarding the status of the Sale. At
that meeting, the Sale was unanimously approved subject to the completion of a
definitive Purchase Agreement with terms materially consistent with those
outlined during the presentation.
By written consent dated December 26, 1997, the Board of Directors
unanimously approved the final version of the Purchase Agreement and authorized
the execution by the Company of the Purchase Agreement.
The Reasons for the Sale and Recommendation of the Company's Board of
Directors
The Company's Board of Directors believes that the terms of the Sale are
fair to, and in the best interests of, the Company and its shareholders.
Accordingly, the Board of Directors has unanimously approved the Sale and
recommends approval of the Sale by the shareholders. In making its
recommendations, the Company considered the following factors:
(i) The condition, prospects and strategic direction of the Company's
outpatient behavioral healthcare business. In this regard, the Board of
Directors has reviewed its analyses of earnings potential of the outpatient
behavioral healthcare business based upon various operating and market
assumptions and its conclusion that there was a significant probability
that the shareholder value of the Company may not significantly improve in
the near term. This review included a discussion of (a) the Company's cost
structure, (b) the competitive market in each of the Company's businesses,
and (c) the Company's losses in recent periods.
(ii) The constraints on the Company's ability to finance growth,
including the dilutive impact of additional equity financing and the costs
of additional financing.
(iii) Recent and historical market prices for the Company Common Stock
indicated that the Company had not created in the eyes of the public market
a clear enough distinction between its group practice strategy and its
managed care strategy and the Sale would allow the Company to focus on
pursuing a pure managed care strategy which might be perceived more
positively in the market.
(iv) The successful negotiations regarding the Purchase Agreement
which the Company believed reflected a fair and equitable understanding
between the parties.
(v) The substantial likelihood that the Sale would be consummated and
the fact that no other viable alternative to the Sale was available.
(vi) The $27,000,000 cash consideration to be received upon the
consummation of the Sale will allow the Company to repay its existing
Credit Facility and satisfy its obligations in connection with past
acquisitions and the Florida Medicare review and will provide the Company
with funds to pursue its growth strategy in the managed behavioral
healthcare field through its Integra Division.
(vii) The terms of the Purchase Agreement that permit the Company's
Board of Directors, in the exercise of their fiduciary duties and subject
to the certain conditions, to respond to inquiries regarding potential
business combination transactions, to provide information to, and negotiate
with, third parties
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making an unsolicited proposal to acquire the business to be sold in such a
transaction and to terminate the Purchase Agreement if the Company's Board
of Directors determines in the exercise of its judgment as to its fiduciary
duties to the Company's shareholders, after consultation with counsel, that
such termination is required by reason of a subsequent acquisition
proposal.
The Board of Directors concluded that each of these factors favored
entering into the Purchase Agreement and supported the Company's determination
that the Sale is fair to, and in the best interests of, the holders of shares of
the Company Common Stock. No factor considered by the Board of Directors
materially weighed against its approval and recommendation of the Sale. The
Board did not see any material adverse risk to the Company's shareholders. The
relatively small revenue size of the Integra division was not considered a
negative consideration since the operating profit produced by the Integra
division would, once the Sale was completed, generate positive earnings per
share for the Company, thereby creating, in the judgment of the Board, greater
potential shareholder value in the long run. The Board believed, considered and
concluded that, ultimately, the anticipated improvement in overall earnings per
share would generate greater value on behalf of the shareholders of the Company.
No other viable alternative transaction was available. The Sale was deemed
superior due to its predominance of cash as the key term of the transaction.
With the $27.0 million in cash, which the Board viewed as a compelling aspect of
the transaction, the Company would be able to repay its Credit Facility and
satisfy its other debt obligations and provide additional future capital to fund
the Company's anticipated growth in managed behavioral healthcare. The Board
believed that the Company had not created in the eyes of the public market place
a clear enough distinction between its group practice strategy and its managed
care strategy. The Company believed that a clear focus on a pure managed care
strategy would be helpful for the Company in the public market. The successful
negotiations with respect to the Purchase Agreement and the belief that the
Purchase Agreement reflected a fair and equitable understanding of the agreement
among the parties was viewed as another positive factor. The Board, in assessing
its willingness to commit resources and time to the Sale, considered the
likelihood that PsychPartners would receive its financing and have the
wherewithal to conclude the transaction. The Board was ultimately satisfied with
PsychPartners' management history and the quality of investment capital. The
Board of Directors concluded that the consummation of the Sale provided the best
alternative to enhance shareholder value in view of the Company's financial
condition and operating prospects. In view of the wide variety of factors
considered in connection with its evaluation of the terms of the Sale, the
Company's Board of Directors did not find it practicable to, and did not,
quantify or otherwise attempt to assign relative weights to the specific factors
considered in reaching its conclusions.
Effects of the Sale
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%
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 Integra. Although
management believes that the Company's future operating profits will be improved
as a result of the Sale, the Company will incur a loss of approximately $58.5
million with respect to the Sale and discontinuation of the outpatient business.
At the time that the Board of Directors approved the Sale and exit of the
outpatient behavioral health business, it was aware that such a transaction
would result in a material loss.
As a result of the Sale, the Company will have only one line of business
which will be significantly smaller in terms of revenues and assets. Although
the Company believes it will be able to continue to operate in this downsized
mode, continuation is contingent upon among other things, the Company's ability
to reduce its corporate cost structure to reflect its new downsized operations,
the successful renegotiation of the Company's Credit Facility and the success of
the Company in the managed behavioral healthcare market.
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Alternatives to the Sale
If the Sale is not consummated, the Company will be required to either
continue operating the outpatient behavioral healthcare business or attempt to
locate another buyer for the outpatient behavioral healthcare business. There
can be no assurance that the outpatient behavioral healthcare business will not
continue to incur operating losses. There is no assurance that the Company would
be able to find another buyer for the outpatient behavioral healthcare business
or, if a buyer is located, that the terms of any sale of the outpatient
behavioral healthcare business would be equal to or better than the terms
available in the Sale.
If the Sale is not consummated, the Company will be required 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. 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. Borrowings under the Credit Facility were $14.3 million at March 25, 1998.
The Company estimates additional cash needs of approximately $7.0 million
will be required during 1998 to meet cash requirements for contingent payments,
seller notes and for restructure-related activities. These additional cash
requirements along with estimated existing debt would require the Company to
have a credit facility in excess of $22.0 million. Based on 1998 EBITDA and
current lending limits, the Company could most likely support a credit facility
of only $15.0 million. This would require the Company to either raise additional
equity of approximately $7.0 million or sell certain of its assets to meet its
financial obligations. However, such sales of assets if it took place would
reduce the Company's EBITDA and, consequently, its borrowing ability.
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 intention 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, a related party, to obtain their commitment to guarantee the
additional $7.0 million of financing. In return, the funds 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 the Company 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 $3.5 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 the event that the Commitment Arrangement is
terminated and the Sale is consummated, the cost to the Company will be $140,000
in cash payable to the Investment Partnerships and a non-recurring charge of
$930,000 which represents the difference between the exercise price of the
Apogee Warrants and the fair market value of the underlying Company Common
Stock. In the event the Sale is not consummated, the cost to the Company could
be up to $280,000 in cash payable to the Investment Partnerships for commitment
and draw down fees and $3,5000,000 in cash payable to the Investment
Partnerships on or before 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.
As of the date of this Proxy Statement, the Company has not accepted proposals
from any 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,
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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 exercise of the Apogee Warrants by the
Investment Partnerships will increase the ownership of Company Common Stock held
by the Investment Partnerships which will have a dilutive effect on the
Company's other shareholders. At the current market price on April 20, 1998 of
$2.19, and an exercise price of $.05 for the Apogee Warrants, the Investment
Partnerships would realize a profit in connection with the exercise of the
Apogee Warrants and the sale of the underlying shares of Company Common Stock.
See "Interests of Certain Persons in the Sale."
OPINION OF FINANCIAL ADVISOR TO THE COMPANY
Banc One Capital Corporation ("BOCC") has provided to the Company's Board
of Directors a written opinion dated March 16, 1998 (the "Opinion") in
connection with the Sale, pursuant to the Purchase Agreement, of a substantial
portion (the "Divested Outpatient Business Assets") of the assets and business
constituting the Company's outpatient behavioral health services business (the
"Outpatient Business"). The Opinion states that, as of its date, the cash in the
amount of $27,000,000, subject to adjustment (the "Cash Consideration"), to be
received by the Company upon the Sale is, from a financial point of view, fair
to the Company. BOCC has agreed to confirm the Opinion in writing at the request
of the Company at or prior to the Closing. BOCC was retained by the Company to
render the Opinion pursuant to an engagement letter dated January 8, 1998 (the
"BOCC Engagement Letter").
THE FULL TEXT OF THE OPINION, WHICH SETS FORTH, AMONG OTHER THINGS,
ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON THE
SCOPE OF THE REVIEW UNDERTAKEN BY BOCC IN RENDERING ITS OPINION, IS ATTACHED AS
EXHIBIT B TO THIS PROXY STATEMENT. SHAREHOLDERS OF THE COMPANY ARE URGED TO, AND
SHOULD, READ THE OPINION CAREFULLY AND IN ITS ENTIRETY IN CONJUNCTION WITH THIS
PROXY STATEMENT. THE OPINION IS ADDRESSED TO THE COMPANY'S BOARD OF DIRECTORS
AND ADDRESSES, AS OF ITS DATE, ONLY THE FAIRNESS, FROM A FINANCIAL POINT OF
VIEW, OF THE CASH CONSIDERATION TO BE RECEIVED BY THE COMPANY FOR THE DIVESTED
OUTPATIENT BUSINESS ASSETS PURSUANT TO THE PURCHASE AGREEMENT AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY HOLDER OF COMPANY COMMON STOCK AS TO HOW TO
VOTE AT THE SPECIAL MEETING. THE SUMMARY OF THE OPINION SET FORTH IN THIS PROXY
STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH
OPINION. BOCC HAS CONSENTED TO THE INCLUSION OF THE OPINION AS AN EXHIBIT TO
THIS PROXY STATEMENT AND TO THE SUMMARY OF THE OPINION CONTAINED HEREIN.
In connection with rendering its Opinion, BOCC, among other things: (i)
reviewed certain publicly available financial statements and reports and other
information of the Company and of certain publicly traded companies BOCC
considered to be reasonably comparable to the Outpatient Business; (ii) reviewed
certain internal (including estimated) financial statements, forecasts and other
financial and operating data concerning the Outpatient Business or the Divested
Outpatient Business Assets, or both, prepared by the management of the Company;
(iii) discussed with management the past, current and forecasted operations and
financial condition of the Outpatient Business or the Divested Outpatient
Business Assets, or both; (iv) reviewed recent prices and trading activity for
the Company Common Stock and the stock of such comparable companies; (v)
reviewed the financial terms, to the extent publicly available, of certain
comparable acquisition transactions, (vi) reviewed the Purchase Agreement and
certain related agreements; and (vii) considered such other factors as BOCC
deemed appropriate. BOCC did not review forecasts of the Divested Outpatient
Business Assets, as such, as no such forecasts were made available to BOCC and
management stated that it did not expect the financial performance of the
Divested Outpatient Business Assets (or the Outpatient Business) to improve
materially in the near term.
BOCC assumed, and relied upon without independent verification, the
accuracy and completeness of all of the financial and other information reviewed
by it for the purposes of its Opinion. With respect to the internal (including
estimated) financial statements, forecasts and other financial and operating
data, BOCC assumed that they have been reasonably prepared by the Company on
bases reflecting the best currently available facts and estimates and judgments
of the Company's management. BOCC has not made any independent appraisal of the
assets or liabilities of the Divested Outpatient Business Assets, nor has BOCC
been furnished with such appraisals. BOCC's opinion is necessarily based on
economic, market, and other
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conditions as in effect on, and the information made available to BOCC as of,
the date of the Opinion or as otherwise stated herein. The Opinion is limited to
the fairness to the Company, from a financial point of view, of the Cash
Consideration to be paid for the Divested Outpatient Business Assets, and does
not consider either the Company's underlying business decision to effect the
Sale or the value of the Warrant and the assets and related liabilities of the
Outpatient Business not being sold to or assumed by the Purchasers in the Sale.
BOCC further assumed, with the consent of the Company, that any adjustments to
the Cash Consideration will not be material, that the Sale will be consummated
in accordance with the Purchase Agreement, and that the Purchase Agreement has
not been amended or otherwise modified since its date.
The following is a brief summary of certain analyses performed by BOCC in
connection with the rendering of the Opinion:
- PEER GROUP COMPARISON. BOCC compared certain financial information of
the Company, as estimated and adjusted by the Company to reflect only the
financial performance and financial condition of the Divested Outpatient
Business Assets, and the Cash Consideration to certain financial and
market information of six publicly traded behavioral health management
and delivery companies (the "Comparable Companies"). The six Comparable
Companies are: Horizon Health Corporation; Ramsay Health Care, Inc.;
Comprehensive Care Corporation; PMR Corporation; PHC, Inc.; and
OptimumCare Corporation. To select the Comparable Companies, BOCC focused
on companies that (i) are publicly held, (ii) deliver behavioral
healthcare services through company-owned or company-managed clinics, or
manage the delivery of behavioral healthcare through clinics or
institutions and (iii) have size characteristics comparable to the
Company and the Divested Outpatient Business Assets. Information with
respect to the Comparable Companies included, among other things, market
valuation, enterprise value (market valuation plus funded debt less cash)
as a multiple of net revenue, enterprise value as a multiple of earnings
before interest, taxes and certain nonrecurring or special items
("EBIT"), enterprise value as a multiple of EBIT before depreciation and
amortization ("EBITDA"), and enterprise value as a multiple of tangible
book value. The information with respect to the financial results and
financial condition of the Comparable Companies was for the most recently
reported four consecutive fiscal quarters and the date of the fiscal
period then ended, and stock prices and market capitalization were as of
the close of business on March 13, 1998. The estimated financial results
and the financial condition of the Company, as so estimated and adjusted,
were for the year ended and as of December 31, 1997. No Comparable
Company is identical to the Divested Outpatient Business Assets.
Such analyses indicated that: (a) the ratios of enterprise value to net
revenue for the Comparable Companies had a median and mean of 0.60 and
0.77x, respectively, and ranged from 0.47x to 1.58x, compared to 0.54x
for the Divested Outpatient Business Assets implied by the Cash
Consideration; (b) the ratios of enterprise value to EBIT for the
Comparable Companies had a median and mean of 7.62x and 7.65x,
respectively, and ranged from 3.78x to 11.57x, compared to a 34.78x for
the Divested Outpatient Business Assets implied by the Cash
Consideration; (c) the ratios of enterprise value to EBITDA for the
Comparable Companies had a median and mean of 5.19x and 6.01x,
respectively, and ranged from 3.55x to 10.10x, compared to 10.38x for the
Divested Outpatient Business Assets implied by the Cash Consideration;
and (d) the ratios of enterprise value to tangible book value for the
Comparable Companies had a median and mean of 2.78 and 10.80x,
respectively, and ranged from 0.74x to 45.65x, compared to 11.97x for the
Divested Outpatient Business Assets implied by the Cash Consideration.
Based on the foregoing comparisons, BOCC determined that the multiples
implied by the Cash Consideration compared, on balance, favorably to the
market multiples represented by the Comparable Companies, particularly
with respect to the ratios of enterprise value to EBIT and EBITDA where
the ratios implied by the Cash Consideration exceed the high end of the
range for the Comparable Companies.
- SELECTED TRANSACTION COMPARISON. BOCC reviewed 14 publicly reported
mergers and acquisitions effected between December 31, 1995 and March 13,
1998 which involved the acquisition of assets, business units, or
enterprises engaged in the delivery of behavioral healthcare services
(the "Comparable Transactions") for which pricing information and one or
more of net revenue, EBIT and EBITDA
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of the acquired businesses were reported. The 14 Comparable Transactions
consist of (Acquirer/Target): Universal Health Services, Inc./First
Hospital Properties Corp.; Foray 911, Inc./Transitional Hospitals
Corporation; Horizon Health Corporation/Professional Psychological
Services, Inc.; Ramsay Healthcare, Inc./Ramsay Managed Care, Inc.;
Behavioral Health Center, Inc./ Transitional Hospitals Corp. U.S.;
Horizon Health Corporation/Geriatric Medical Care, Inc.; Horizon
Healthcare Corporation/Clay Care, Inc.; Vencor, Inc./Transitional
Hospitals Corporation; Merit Behavioral Care Corporation/CMG Health,
Inc.; Res-Care Corporation/Communications Network, Inc.; Magellan Health
Services, Inc./Human Affairs International, Inc.; Horizon Health
Corporation/Specialty Healthcare Management, Inc.; Horizon Health
Corporation/Acorn Behavioral Healthcare Management, Inc.; and Magellan
Health Services Corporation/Merit Behavioral Care Corporation. No
business acquired in a Comparable Transaction is identical to the
Divested Outpatient Business Assets. BOCC compared the reported
transaction prices to the reported net revenue, and, if reported, to the
EBIT and EBITDA of the acquired businesses. Such analysis indicated: (a)
the ratios of transaction prices to net revenue of Comparable
Transactions had a median and mean of 1.05x and 1.29x, respectively, and
ranged from 0.64x to 2.61x, compared to 0.54x for the Divested Outpatient
Business Assets implied by the Cash Consideration; (b) the ratios of
transaction prices to EBIT of Comparable Transactions had a median and
mean of 13.07x and 14.84x, respectively, and ranged from 8.17x to 24.0x,
compared to 34.78x for the Divested Outpatient Business Assets implied by
the Cash Consideration; and (c) the ratios of transaction prices to
EBITDA of Comparable Transactions had a median and mean of 10.20x and
11.63x, respectively, and ranged from 6.42x to 24.43x, compared to 10.38x
for the Divested Outpatient Business Assets implied by the Cash
Consideration. BOCC determined that the multiples implied by the Cash
Consideration compared, on balance, favorably to the transaction
multiples of the Comparable Transactions, particularly with respect to
the ratios of transaction prices to EBIT and EBITDA where the ratios
implied by the Cash Consideration exceeded the high end of the range, or
the median, respectively, for the Comparable Transactions.
In connection with the written confirmation of the Opinion that may be
rendered by BOCC at the request of the Company at or prior to the closing of the
Sale, BOCC will confirm the appropriateness of its reliance on the analyses used
to render the Opinion by performing procedures to update certain of such
analyses and by reviewing the assumptions upon which such analyses were based
and the factors considered in connection therewith.
BOCC performed a variety of analyses for purposes of its Opinion. The
foregoing summary describes the analyses and factors principally relied upon by
BOCC in rendering the Opinion; however, it does not purport to be a complete
description of all of the analyses performed by BOCC in arriving at its
determinations. The preparation of a fairness opinion is a complex process and
is not necessarily susceptible to partial analysis or summary description. In
arriving at its opinion, BOCC considered the results of all of its analyses as a
whole. BOCC attributed predominate consideration to the peer group comparisons
and the selected transaction comparisons summarized above, and it did not
attribute any particular weight to any one or more of these analytical
processes. The selection of any portion of BOCC's analyses, without considering
all analyses, could create an incomplete view of the process underlying its
opinion. In addition, BOCC may have deemed various assumptions more or less
probable than other assumptions, so that the ranges of valuation resulting from
any particular analysis described above should not be taken to be BOCC's view of
the actual value of the Divested Outpatient Business Assets. Any estimates
contained herein are not necessarily indicative of future results or actual
values, which may be significantly more or less favorable than those suggested
by such estimates. The analyses performed were prepared solely as part of BOCC's
analysis of the fairness, from a financial point of view, of the Cash
Consideration to be paid to the Company for the Divested Outpatient Business
Assets and were conducted in connection with the delivery of BOCC's Opinion. The
analyses do not purport to be appraisals of or to reflect the prices at which
the Divested Outpatient Business Assets or the Outpatient Business might
actually be sold. BOCC was retained after the Purchase Agreement was executed,
and BOCC did not advise the Company in any manner prior thereto. BOCC did not
recommend any specific level of consideration to the Company or that any
specific level of consideration constituted the only appropriate level of
consideration for the Divested Outpatient Business Assets.
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The Company retained BOCC based upon BOCC's qualifications, experience and
expertise. BOCC is a nationally recognized investment banking and advisory firm.
BOCC, as part of its investment banking business, is continuously engaged in the
valuation of businesses and securities in connection with mergers, acquisitions,
private placements, its own investments, and valuations for corporate and other
purposes.
Pursuant to the BOCC Engagement Letter, BOCC provided the Opinion to the
Company in connection with the Sale and the Company has agreed to pay a fee to
BOCC equal to $150,000, of which $75,000 was paid upon delivery of the Opinion
and the balance is payable at and conditioned upon the closing of the Sale. In
addition, the Company has agreed to indemnify BOCC and its affiliates, their
respective directors, officers, agents, and employees, and each person, if any,
controlling BOCC or any of its affiliates, against certain liabilities and
expenses, including certain liabilities under the federal securities laws,
related to BOCC's engagement. In the ordinary course of its business, BOCC and
its affiliates may actively trade securities of the Company and the Comparable
Companies for their own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
THE SALE
The following information describes the material aspects of the Sale. This
description does not purport to be complete and is qualified in its entirety by
reference to the exhibits hereto, including the Purchase Agreement, which is
attached as Exhibit A to this Proxy Statement (exclusive of all exhibits and
schedules) and is incorporated herein by reference. All shareholders are urged
to read Exhibit A in its entirety.
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS A VOTE FOR
APPROVAL AND ADOPTION OF THE PURCHASE AGREEMENT. THE BOARD OF DIRECTORS HAS
DETERMINED THAT THE TRANSACTIONS CONTEMPLATED BY THE PURCHASE AGREEMENT ARE FAIR
TO, AND IN THE BEST INTERESTS OF, THE COMPANY'S SHAREHOLDERS. SEE "BACKGROUND OF
THE SALE -- THE COMPANY'S REASONS FOR THE SALE AND RECOMMENDATION OF THE
COMPANY'S BOARD OF DIRECTORS."
If the Sale is consummated, the shareholders of the Company will retain
their equity interest in the Company. The consummation of the Sale will not
result in any changes in the rights of the Company's shareholders.
CLOSING
If the Purchase Agreement is adopted by the requisite vote of the Company's
shareholders and the other conditions to the Sale are satisfied (or waived to
the extent permitted), the closing (the "Closing") of the Sale will occur as
soon as practicable following the Special Meeting. The date of the Closing is
referred to herein as the "Closing Date."
The Purchase Agreement provides that the parties will cause the Closing to
occur as promptly as practicable after the approval of the Purchase Agreement by
the shareholders of the Company and the satisfaction (or waiver, if permissible)
of the other conditions set forth in the Purchase Agreement; provided, however,
that, unless otherwise agreed by the parties, the Closing may not occur later
than May 31, 1998. In certain circumstances, the Purchasers or the Company may
terminate the Purchase Agreement prior to the Closing, whether before or after
approval and adoption of the Purchase Agreement by the Company's shareholders.
See "The Sale -- The Purchase Agreement -- Termination and Expenses."
REGULATORY APPROVALS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR
Act") and the rules promulgated thereunder by the Federal Trade Commission (the
"FTC"), certain acquisition transactions may not be consummated unless notice
has been given and certain information has been furnished to the Antitrust
Division of the United States Department of Justice and the FTC and certain
waiting period requirements have been satisfied. The Sale is not subject to
these requirements.
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THE PURCHASE AGREEMENT
The following discussion of the material provisions of the Purchase
Agreement is qualified in its entirety by reference to the complete text of the
Purchase Agreement, which is included as Exhibit A in this Proxy Statement
(exclusive of all exhibits and schedules) and is incorporated herein by
reference.
General
The Purchase Agreement provides for the purchase by the Purchasers of the
Subsidiary Stock of AGP, which operates two Practices, and the Assets used in
the operations of 20 Practices, and the assumption by the Purchasers of certain
assumed liabilities. A Practice "unit" may consist of one or more clinics in
close geographic proximity which is managed by a Practice director who oversees
the clinic's management.
The Subsidiary Stock and the Assets
The Purchase Agreement provides that the Purchasers will purchase, as of
the Closing Date, the Subsidiary Stock of AGP and all of the Company's right and
title to and interest in all of the following Assets:
(i) the Company's and its subsidiaries rights under management
agreements with professional corporations or similar organizations related
to the Practices;
(ii) the Company's and its subsidiaries' rights under contracts with
managed care organizations and corporations related to the Practices;
(iii) all of the Company's and its subsidiaries' inventories of
materials and supplies related to the Practices and located at the
Practices;
(iv) the trademarks, trade names, service marks, logos, inventions,
patents, patent rights, applications for patents and similar rights, trade
secrets, know-how and designs of the Company and its subsidiaries related
to or used in the Practices;
(v) all marketing studies, customer lists, files, supplier files,
credit files, credit data, appraisals, valuations, and consulting studies
and all other records and reports relating to the Practices or the Assets,
all clinical and administrative policy and procedure manuals and all
catalogues relating to the Practices and located at the Practices;
(vi) the computer programs, computer software, computer manuals,
flowcharts, printouts, data files, program documentation and related
materials and copies thereof relating to the Practices or the Assets;
(vii) subject to applicable laws and regulations, all transferable
licenses and other regulatory approvals necessary for or incident to the
operation of the Practices;
(viii) all deposits and the expenses and deferred charges relating to
the Practices that have been prepaid or paid in advance by the Company and
its subsidiaries prior to the Closing;
(ix) the automobiles and vehicles owned by the Company and its
subsidiaries, relating to the Practices;
(x) the furniture, computers, accessories and other personal property
owned by the Company and its subsidiaries and used in the Practices and
located at the Practices;
(xi) all equipment owned by the Company and its subsidiaries and used
in the Practices and located at the Practices;
(xii) all accounts receivable of the Company and its subsidiaries
relating to the Practices and all cash and cash equivalents of the Company
and its subsidiaries relating to the Practices, whether on hand or in cash
accounts of the Practices;
(xiii) all of Company's and its subsidiaries' rights under all other
contracts and agreements of the Company and its subsidiaries relating to
the Practices;
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(xiv) all indebtedness and other amounts relating to the Practices and
owed to the Company and its subsidiaries in the ordinary course of
business;
(xv) all patient and billing files, records and documentation
necessary to effectuate the transfer of the Assets and to operate the
Practices (including ledger books and any books of account of the Company
and its subsidiaries relating to the Practices and located at the
Practices);
(xvi) all of Company's and its subsidiaries' rights under express and
implied warranties of third parties that continue in effect with respect to
any of the assets described in paragraphs (i) through (vi) above; and
(xvii) all other assets and rights of every kind and nature (whether
or not of a kind or nature referred to in items (i) through (xvi) above)
owned or held by the Company and its subsidiaries on the Closing Date and
relating to or used in the Practices and located at the Practices, whether
or not specifically referred to in clauses (i) through (xvi) above, except
for the Excluded Assets (as hereinafter defined) and any non-transferable
contracts.
All other assets of the Company and its subsidiaries (collectively, the
"Excluded Assets") will be excluded from the Sale and retained by the Company
and its subsidiaries, including, without limitation, assets of the Company and
its subsidiaries not located at the Practices and assets specifically identified
in the schedules to the Purchase Agreement as being Excluded Assets.
The Assumed Liabilities
As of the Closing Date, the Purchasers will assume the following Assumed
Liabilities relating to the Practices:
(i) all liabilities and obligations arising after the Closing Date
with respect to clinic lease obligations of the Company and its
subsidiaries related to the Practices:
(ii) all liabilities and obligations as of the Closing Date with
respect to accounts payable, accrued payroll taxes and other accrued
expenses of the Company and its subsidiaries related to the Practices;
(iii) all liabilities and obligations arising after the Closing Date
with respect to earnout contingent liabilities ("Earnout Liabilities") of
the Company and its subsidiaries associated with the Company's and its
subsidiaries' prior acquisitions of certain of the Assets related to the
Practices, except for the Earnout Liabilities for which the Company and its
subsidiaries are responsible pursuant to the Retained Liabilities (as
hereinafter defined);
(iv) all liabilities and obligations with respect to the contracts and
obligations, including employment agreements of the Company and its
subsidiaries related to the Practices;
(v) any obligations under the leases (other than clinic leases)
related to the Practices to which the Company and its subsidiaries is a
party; and
(vi) all liabilities and obligations arising from the conduct of the
Practices after the Closing Date.
Retained Liabilities
Except for the Assumed Liabilities, the Purchasers will not assume or
otherwise pay, discharge or perform any other liabilities or obligations of the
Company and its subsidiaries or the Practices, whether or not in respect of the
Practices, (whether accrued, absolute, contingent or otherwise, whether or not
disputed, or whether or not disclosed to the Purchasers) (all such liabilities
and obligations, the "Retained Liabilities"). The Retained Liabilities shall
include any severance payments that may be due either prior to or following the
Closing pursuant to a certain management agreement among a subsidiary of the
Company and a corporation owned by a former seller of a Practice to the Company,
but only to the extent that such payments are due as a result of the
transactions contemplated by the Purchase Agreement. The Company anticipates
that upon the consummation of the Sale it will make a severance payment of
between $1.0 million and $1.3 million in connection with such management
agreement.
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The Company is responsible for (i) acquisition contingent payments with
measurement dates on or before the Closing Date, but payment dates after the
Closing Date and (ii) a prorated portion of acquisition contingent payments with
measurement dates which start prior to the Closing Date. The Company's prorated
payments of these future contingent payments will be paid when such payments are
due unless otherwise agreed by the Company and the former owners.
The Purchase Price
The Purchase Price consists of (a) $27,000,000 in cash and (b) the
contingently issuable Warrant and (c) assumption of the Assumed Liabilities.
Pursuant to the Purchase Agreement there are certain post-closing adjustments
which are more fully described below.
Post-Closing Adjustments
At the Closing, the Company and its subsidiaries shall deliver to the
Purchasers financial statements of the Practices for the month ending on
November 30, 1997 (the "November Statements") which shall include a computation
of (i) the liabilities of the Practices as of November 30, 1997 assumed by the
Purchasers pursuant to the Purchase Agreement (the "November Payables and
Expenses"), (ii) an estimate as of November 30, 1997 of the Earnout Liabilities
(collectively, the "November Liabilities"), (iii) (x) the cash and cash
equivalents and (y) certain deposits and the expenses and deferred charges
relating to the Company and its subsidiaries prior to November 30, 1997 included
in the Assets and (iv) the accounts receivable of the Practices which had been
prepaid or paid in advance by the Company and its subsidiaries as of November
30, 1997 (collectively, the "November Assets"). At the Closing, the Purchasers
shall deliver the amount by which the November Liabilities exceed the November
Assets (the "Balance Sheet Adjustment Escrow Amount") in escrow (the "Escrow").
As soon as reasonably practicable following the Closing Date, the Company and
its subsidiaries are required to deliver to the Purchasers financial statements
of the Company and its subsidiaries, as of and for the period ending on the
Closing Date (the "Closing Financial Statements") which shall include a
computation of (i) the liabilities assumed by the Purchasers pursuant to the
Purchase Agreement (the "Closing Payables and Expenses"), (ii) an estimate of
the Earnout Liabilities (collectively, the "Closing Liabilities"), (iii) (x) the
cash and cash equivalents and (y) certain deposits and the expenses and deferred
charges relating to the Practices which had been prepaid or paid in advance by
the Company and its subsidiaries prior to the Closing included in the Assets and
(iv) the accounts receivable of the Practices as of the Closing Date
(collectively, the "Closing Assets"). If, as indicated in the Closing Financial
Statements, the Closing Liabilities exceed the Closing Assets, the Company and
its subsidiaries shall pay from the Escrow an amount equal to such difference.
As of December 31, 1997, the aggregate amount of such assets to be acquired less
the aggregate amount of such liabilities (not including future contingent cash
payment obligations) to be assumed is $1,713,810. The contingent cash payment
obligations are based upon the Practices achieving certain net revenue and
pre-tax earnings targets. The estimated future contingent cash 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
Balance Sheet Adjustment Escrow Amount would not exceed $500,000.
As soon as reasonably practicable following the first anniversary of the
Closing Date (the "Adjustment Date"), the Purchasers shall deliver to the
Company and its subsidiaries financial statements of each of the Practices (the
"Operating Profit Statements"), which statements shall calculate the Operating
Profit (as defined below), for each such Practice for the period from the
Closing Date through the Adjustment Date (the "Adjustment Period"). The
"Operating Profit" is defined as the earnings before income taxes of each such
Practice (or, in the event that all or substantially all the assets and business
of such Practice shall have been transferred to another entity or entities, the
allocable portion of the pre-tax earnings of such other entity or entities) for
the Adjustment Period as determined in accordance with the Company's and its
subsidiaries' historic internal accounting practices on a basis consistent with
prior periods. For purposes of calculating Operating Profit, all revenues
associated with the operation of such Practice will be recognized during the
period in which they are earned. Such operating revenues will include all
charges directly related to the daily
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operations of the Practices as determined in accordance with the Company's and
its subsidiaries' historic internal accounting practices on a basis consistent
with prior periods, including, but not limited to, gross revenues less
contractual allowances, contract revenue and other income. For purposes of
calculating Operating Profit, all expenses associated with the operation of the
Practices will be recognized during the Period in which they are incurred.
The Purchase Price is to be adjusted based on such Operating Profit, as
follows:
(i) If one of the Practices, MPG, has an Operating Profit for the
Adjustment Period of less than $630,000, then the Company is required to
forfeit a portion of the Warrant with a value equal to 4.5 times the dollar
amount by which such Operating Profit is less than $630,000; provided,
however, that the maximum value of Warrant forfeited shall not exceed
$1,350,000.
(ii) If one of the Practices, RPG, has an Operating Profit for the
Adjustment Period of less than $1,150,000, then the Company is required to
forfeit a portion of the Warrant with a value equal to 4.5 times the dollar
amount by which such Operating Profit is less than $1,150,000; provided,
however, that the maximum value of Warrant forfeited shall not exceed
$650,000.
(iii) Notwithstanding (i) or (ii) above, the Company will not forfeit
any portion of the Warrant if the Operating Profit of all of the Practices
exceeds $6,265,000 in the aggregate for the Adjustment Period.
No portion of the Warrant is to be forfeited by the Company in the event that
(x) during the first six (6) months of the Adjustment Period, the Purchasers
terminate any of the divisional vice presidents or practice directors of either
MPG or RPG employed by the Company and its subsidiaries as of the Closing Date
for any reason other than for cause or (y) during the first six (6) months of
the Adjustment Period the Purchasers initiate a material strategic decision
(including, but not limited to, consolidation of offices (except for the current
ongoing consolidation efforts involving two of the Practices); combination with
current practices or future practices acquired by the Purchasers or their
affiliates; or the elimination or addition of major clinical programs) which
materially adversely affects the Operating Profit of MPG or RPG. Any forfeiture
of a portion of the Warrant will reduce the Company's potential for realizing
future value in PsychPartners Common Units.
The MPG Operating Profit target is $630,000. In 1997, MPG achieved an
Operating Profit of $1,321,584. The RPG Operating Profit target is $1,150,000.
In 1997, RPG's operating profit was $776,154. The RPG Operating Profit in the
transaction is set at a higher level due to anticipated annual Operating Profit
improvements for new contracts effective throughout 1997 as well as anticipated
new contracts effective in 1998.
Representations and Warranties
The Purchase Agreement contains various representations and warranties
relating to, among other things, (a) corporate organization, existence, good
standing and power and authority to own and operate properties and carry on
business; (b) corporate power and authority to enter into, and the due, valid
and binding execution and delivery of, the Purchase Agreement; (c) consents and
approvals of public bodies; (d) the Sale not resulting in conflicts with respect
to the articles of incorporation or By-laws, breaches of any agreements or
instruments or violations of orders relating to the Company and its subsidiaries
or the Purchasers; (e) the material accuracy of the financial statements of the
Company and its subsidiaries and the Practices; (f) the absence of undisclosed
liabilities; (g) the absence of certain material adverse changes concerning the
Practices; (h) certain matters relating to litigation claims relating to the
Practices which the Company is indemnified for by the former sellers of the
Practices and matters relating to the Medicare review in Florida (see
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Medicare Review); (i) the absence of defaults under or
terminations of the Company's and its subsidiaries' material contracts relating
to the Practices; (j) certain matters pertaining to the Company's and its
subsidiaries' intellectual property rights relating to the Practices such as
trademarks, tradenames, patents and service marks which the Practices have; (k)
the Company's and its subsidiaries' good title to the Assets and the Subsidiary
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Stock; (l) the quality and quantity of the inventory and accounts receivable
being sold to the Purchasers and accounts payable being assumed by the
Purchasers; (m) the condition of the Assets and the adequacy of the Assets to
operate the business of the Practices; (n) certain matters pertaining to
federal, state and local taxes and employee benefit plans of the Company and its
subsidiaries such as the Company's 401(k) and 1994 Stock Option Plans; (o) the
absence of violations of applicable law by the Company and its subsidiaries; (p)
the absence of defaults under or terminations of the contracts being assigned to
the Purchasers; (q) compliance by the Company and its subsidiaries and the
Practices with federal fraud and abuse statutes.
The representations and warranties described above survive the greater of
eighteen months or the expiration of the applicable statute of limitations after
the Closing of the Sale.
Covenants
Each of the parties to the Purchase Agreement has agreed to use its
reasonable best efforts to take all such action as may be necessary or
appropriate to complete the Sale and the other transactions contemplated by the
Purchase Agreement, including cooperation in the preparation and filing of this
Proxy Statement, expiration or termination of governmental filings and waiting
period requirements, and execution of any additional instruments reasonably
necessary to effect the transactions contemplated by the Purchase Agreement.
Pursuant to the Purchase Agreement, the Company and its subsidiaries have
agreed that, except as expressly contemplated by the Purchase Agreement or
consented to in writing by the Purchasers, from the date of the Purchase
Agreement until the Closing Date, the Company and its subsidiaries will carry on
the business of the Practices in the ordinary course of business consistent with
its past practice and, to the extent consistent with such business, will use its
reasonable efforts to preserve intact the Practices and the assets thereof,
maintain its rights and franchises, keep available the services of its present
officers and key employees, preserve its relationships with its key customers
and suppliers with respect to the Practices, confer with the Purchasers
regarding material operational matters and the general status of the business of
the Practices, maintain compliance with all permits, laws, rules, regulations
and orders applicable to the Practices, and maintain the Assets in good working
order and condition, except for ordinary wear and tear. In addition, the Company
and its subsidiaries has agreed that, except as contemplated by the Purchase
Agreement or consented to in writing by the Purchasers, from the date of the
Purchase Agreement until the Closing Date, the Company and its subsidiaries will
not do any of the following:
(a) Increase the compensation payable to any employee of the Practices
(except for increases in salary or wages payable to or to become payable in
the ordinary course of business and consistent with policies currently in
effect);
(b) amend its Articles of Incorporation (except to change its name) or
By-laws;
(c) issue, sell or purchase, or enter into any contract or other
agreement to issue, sell or purchase, any share of its capital stock, any
options or rights to subscribe for any share of its capital stock or any
bonds, notes, debentures or other evidences of indebtedness, in each case,
insofar as they relate to the Practices;
(d) incur any indebtedness for borrowed money, or incur or assume any
other liability outside of the ordinary course of business, in each case
insofar as it relates to the Practices (except as such increased
indebtedness may result from utilization of funds available from the
Company's and its subsidiaries' revolving line of credit);
(e) declare or pay any dividend or declare or make any other
distributions of any kind other than distributions by the Practices to the
Company and its subsidiaries consistent with past practices;
(f) make any change in its accounting methods or practices or make any
change in depreciation or amortization policies related to the Practices,
except as required by law or generally accepted accounting or statutory
accounting principles;
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(g) enter into any employment agreements with, increase the rate of
compensation of, or pay or agree to pay any bonus to any of its directors,
officers or employees related to the Practices (provided; however, that it
may grant reasonable annual merit increases and pay bonuses to some or all
employees in the ordinary course of its business);
(h) implement any new or modify any existing employee benefit plan
related to the Practices;
(i) materially amend any existing employee benefit plan or arrangement
related to the Practices, except as required by law;
(j) enter into, amend in any respect or terminate any material
contract related to the Practices;
(k) make any material change in the nature of its business or
operations related to the Practices;
(l) make or commit to make any capital expenditures related to the
Practices in excess of $20,000 in the aggregate or as may otherwise be
reasonably required for the continued efficient operation of the Practices;
or
(m) Agree in writing or otherwise to do any of the foregoing.
Termination and Expenses
The Purchase Agreement may 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:
(a) by mutual written consent of the Purchasers and the Company;
(b) by either the Purchasers or the Company in the event the
conditions to such party's obligations under the Purchase Agreement have
not been met or waived on or prior to May 31, 1998, but only if the party
terminating has not caused the condition giving rise to termination to be
not satisfied through its own action or inaction; or
(c) by either the Purchasers or the Company if any decree, permanent
injunction, judgment, order or other action by any court of competent
jurisdiction or any governmental entity preventing or prohibiting
consummation of the Sale has become final and nonappealable.
The Purchase Agreement also provides that the Company and its subsidiaries
will not, and their respective directors, officers and agents will not, directly
or indirectly, solicit or take any other action to facilitate any inquiries or
proposals with respect to, engage or participate in negotiations concerning,
provide any nonpublic information or data to or have any discussions with any
person other than the Purchasers or its affiliates relating to any purchase of
all or any significant portion of the Assets, or any similar transaction, other
than the Purchase Agreement (such proposals, announcements, or transactions
being referred to as "Acquisition Proposals"). Notwithstanding the preceding
sentence, to the extent the Board of Directors of the Company and its
subsidiaries determines it is required to do so in the exercise of its fiduciary
duties under applicable law as so advised in writing by counsel, the Company and
its subsidiaries and its affiliates may engage and participate in negotiations
concerning, provide nonpublic information or data to and have discussions with
any persons or their affiliates relating to a written Acquisition Proposal. The
Company and its subsidiaries will promptly notify the Purchasers orally or in
writing if any such Acquisition Proposal is received. Unless the Purchase
Agreement has been terminated pursuant to its terms, in the event the Company
and its subsidiaries, prior to April 10, 1998, reaches an agreement in principle
to sell the Assets, or any substantial portion thereof, to a prospective buyer
other than the Purchasers, the Company and its subsidiaries have agreed to pay
to the Purchasers, in cash or immediately available funds, all of the expenses
of the Purchasers incurred in connection with their due diligence investigation
of the Company and its subsidiaries, their negotiation of the Purchase Agreement
and all other expenses related to the transactions contemplated thereby;
provided, however, that the expenses reimbursed shall not exceed $300,000.
In the event of the termination of the Purchase Agreement and the Sale for
any reason, the Purchase Agreement will become void, all rights of each party
thereto shall cease and none of the Company and its subsidiaries, the Purchasers
or their respective officers, directors, shareholders, agents or advisors will
have any
39
<PAGE> 44
liability except for the provisions in the Purchase Agreement with respect to
payment of up to $300,000 in expenses incurred by the Purchasers in the event
the Purchase Agreement is terminated due to the receipt and acceptance of an
Acquisition Proposal by the Board of Directors of the Company and its
subsidiaries.
Conditions to Closing of the Sale
The Purchase Agreement provides that the obligations of the parties to the
transactions contemplated by the Purchase Agreement are subject to the
satisfaction or waiver (other than with respect to the approval and adoption of
the Purchase Agreement by the Company's shareholders which, as required by the
provisions of the DGCL, must be approved by the holders of a majority of Company
Common Stock), on or prior to the Closing Date of the following conditions: (a)
the Company's and its subsidiaries' shareholders shall have approved the
Purchase Agreement and the Sale and; (b) no action or proceeding has been
instituted or is pending by any governmental entity before any court or
administrative agency; and no order or decree has been entered in any action or
proceeding before any such court or agency; (i) imposing or seeking to impose
limitations on the ability of the Purchasers to acquire or hold or to exercise
full rights of ownership of any of the Assets; (ii) imposing or seeking to
impose limitations on the ability of the Purchasers to combine and operate the
business and assets of the Practices with the Purchasers or any of the
Purchasers' subsidiaries or other operations; (iii) imposing or seeking to
impose other sanctions, damages or liabilities arising out of the Sale on the
Purchasers, the Company and its subsidiaries or any of their respective officers
or directors; (iv) restraining, enjoining or prohibiting or seeking to restrain,
enjoin or prohibit the consummation of the Sale.
The Company's and its subsidiaries' obligations to effect the transactions
contemplated by the Purchase Agreement are also subject to the satisfaction, on
or prior to the Closing Date, of the following additional conditions, any or all
of which may be waived in whole or in part by the Company and its subsidiaries:
(a) the representations and warranties of the Purchasers contained in the
Purchase Agreement being true and correct in all material respects on and as of
the Closing Date; (b) the Purchasers performing in all material respects the
obligations required to be performed by them under the Purchase Agreement prior
to the Closing Date; (c) the Company and its subsidiaries receiving an opinion
of counsel to the Purchasers in form and substance satisfactory to the Company
and its subsidiaries and its counsel to the effect that (i) the Purchasers and
PsychPartners are in good standing in their respective jurisdictions of
incorporation and are authorized to conduct business, (ii) the Purchasers and
PsychPartners are duly authorized to consummate the Sale and execute all
documents in connection with the Sale, (iii) no governmental authorizations are
required to consummate the Sale and (iv) the consummation of the Sale does not
violate the Purchaser's or PsychPartners organizational documents, cause a
breach or default under any material contract to which any of them is a party or
violate any laws; (d) the Company and its subsidiaries receiving a wire transfer
of immediately available funds in the amount of $27,000,000; (e) the Company and
its subsidiaries receiving the Warrant; and (f) the Company and its subsidiaries
receiving such documents as the Company and its subsidiaries reasonably deems
necessary and appropriate to document the transfer of the Assets and the
assumption of the Assumed Liabilities.
The obligation of the Purchasers to effect the transactions contemplated by
the Purchase Agreement is also subject to the satisfaction, on or prior to the
Closing Date, of the following additional conditions: (a) the representations
and warranties of the Company and its subsidiaries contained in the Purchase
Agreement being true and correct in all material respects when made and such
representations and warranties, as updated by any update schedule delivered by
the Company and its subsidiaries to the Purchasers, being true and correct in
all material respects on and as of the Closing Date; (b) the Company and its
subsidiaries performing in all material respects the obligations required to be
performed by them under the Purchase Agreement on or prior to the Closing Date;
(c) the Company and its subsidiaries obtaining certain listed third-party
consents including from PNC Bank; (d) the Company and its subsidiaries using
their best efforts in obtaining all other required third-party consents except
where the failure to obtain such consents would not have a material adverse
effect on the Practices or the Sale; (e) the Purchasers receiving an opinion of
counsel to the Company and its subsidiaries in form and substance satisfactory
to the Purchasers and its counsel to the effect that (i) the Company and its
subsidiaries are in good standing in their jurisdictions of organization and are
40
<PAGE> 45
authorized to conduct business, (ii) the Company and its Subsidiaries are duly
authorized to consummate the Sale and execute all documents in connection with
the Sale, (iii) except as disclosed otherwise, no governmental authorizations
are required to consummate the Sale and (iv) the consummation of the Sale does
not violate the Company's or any subsidiary's certificate of incorporation or
by-laws, cause a breach or default under any material contract to which any of
them is a party or violate any law; and (f) the Purchasers receiving such
documents as the Purchasers reasonably deem necessary and appropriate to
document the transfer of the Assets or the Subsidiary Stock, the assumption of
the Assumed Liabilities and the release of any security interests relating to
the Assets or the Subsidiary Stock.
The third-party consents referred to in clause (d) of the immediately
preceding paragraph relate to real property leases, provider agreements,
equipment leases which require third party consent to the transfer of the
contractual relationship from the Company or one of its subsidiaries to the
Purchasers. The Company is using its best efforts to obtain third party consents
and the Company does not believe that there are any material third party
consents which cannot be obtained. If any material third party consents are not
obtained, then the related leases and agreements will continue in effect under
the Interim Services Agreement until consents are obtained. See Interim Services
Agreement, below.
Amendments and Waivers
At any time prior to the Closing Date (notwithstanding any shareholder
approval) if authorized by the Purchasers and the Company and its subsidiaries
and to the extent permitted by law, the parties to the Purchase Agreement may,
by written agreement, modify, amend or supplement any term or provision of the
Purchase Agreement.
Indemnification
From and after the Closing, the Company and its subsidiaries shall, jointly
and severally, reimburse, indemnify and hold harmless the Purchasers and their
respective, employees, shareholders, members, officers, agents, directors,
successors and assigns against and in respect of:
(i) any and all damages, losses, deficiencies, liabilities, costs and
expenses, including, without limitation, reasonable legal fees and expenses
(collectively, "Damages") incurred or suffered by the Purchasers or their
successors or assigns that result from, relate to or arise out of:
(A) the failure of the Company and its subsidiaries fully to pay or
satisfy, or the failure of the Company and its subsidiaries to cause to
be paid or satisfied, the Retained Liabilities;
(B) any and all actions, suits, claims, or legal, administrative,
arbitration, governmental or other proceedings or investigations against
the Purchasers or any affiliate of the Purchasers that relate to any of
the Company and its subsidiaries or the Practices in which the event
giving rise thereto occurred prior to the Closing Date or which result
from or arise out of any action or inaction prior to the Closing Date of
the Company and its subsidiaries or any director, officer, employee,
agent, representative or subcontractor of the Company and its
subsidiaries, but not including any Assumed Liabilities: or
(C) any misrepresentations, breach of warranty or nonfulfillment of
any agreement or covenant on the part of the Company and its
subsidiaries under the Purchase Agreement, or from any misrepresentation
in or omission from any certificate or schedule furnished to the
Purchasers pursuant hereto; and
(ii) any and all actions, suits, claims, proceedings, investigations,
demands, assessments, audits, fines, judgments, costs and other expenses
(including, without limitation, reasonable legal fees and expenses)
incident to any of the foregoing or to the enforcement of the Company's and
its subsidiary's indemnification obligation.
The Purchasers are not entitled to indemnification under the Purchase Agreement
unless and until the aggregate amount of Damages, with respect to which the
Purchasers are entitled to indemnification under the
41
<PAGE> 46
Purchase Agreement exceeds an amount equal to $50,000, and then only for such
excess amount, if any. The aggregate liability of the Company and its
subsidiaries for indemnification resulting from a claim in the nature of
paragraph (i)(C) above is limited to $14,500,000.
Noncompetition
The Company has agreed that for a period of five (5) years after the date
of Closing, it will not, and it will cause each of its subsidiaries not to,
directly or indirectly, (i) own, manage, operate, join, control or participate
in the ownership, management, operation or control of, or render service to, any
business, whether in corporate, proprietorship or partnership form or otherwise,
which is competitive with the Practices as currently conducted by the Company,
within a thirty-five (35) mile radius of any Practice locations as of the
Closing; (ii) either for its own benefit or for the benefit of any other person
or entity, solicit, call on, interfere with, attempt to divert, entice away or
accept any business from any person or entity which is a customer of the Company
or any of its subsidiaries or which was a customer within the one (1) year
preceding the date of Closing; or (iii) take any action that would reasonably be
expected to cause the Purchasers to lose any of their officers, employees,
agents, customers or suppliers or any of its existing business relationships or
those business relationships obtained as a result of the transactions
contemplated by the Purchase Agreement.
From and after the date of Closing, the Company and its subsidiaries will
not, directly or indirectly, disclose to any other party or in any way utilize
for itself or any other party any information, data, proprietary information,
intellectual property, trade secrets, customer lists, subscriber lists, pricing
information or any other proprietary information purchased pursuant to the
Purchase Agreement except (a) to the extent necessary to carry out the terms of
or to exercise the Company's rights under the Purchase Agreement; (b) to
governmental agencies, including taxing authorities, having a legal right to the
information; (c) as required by law; (d) pursuant to a valid subpoena or court
order; provided, however, that prior to any disclosure pursuant to court order
or subpoena, the Company shall provide prompt notice to the Purchasers of the
receipt of any subpoena or court order requiring the disclosure of the
information; or (e) to the extent necessary to exercise the Company's rights in
connection with the Excluded Assets.
The Purchase Agreement provides that the operation by the Company of the
Integra Business is not a violation of the noncompetition provisions set forth
in the Purchase Agreement.
Interim Services Agreement
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, after the Closing, the Company and certain of its
subsidiaries will assist the Purchasers in obtaining certain consents in
connection with the Sale and provide certain management and other services,
including billing services, necessary to operate and manage the Practices for a
period of up to nine months.
The Interim Services Agreement provides that the Company and/or its
subsidiaries shall continue to operate the Practices, exclusively on behalf of
the Purchasers, in states where professional corporations are not necessary in
order to provide behavioral health services and for which either no provider
numbers have been obtained or for which consents to contract assignment have not
been obtained, only (i) as necessary to maintain the contracts requiring consent
to assignment until receipt of such consents to assignment of certain contracts
and leases to the Purchasers or waivers of the requirement to obtain such
consents, (ii) by continuing to employ or retain personnel pursuant to the
Interim Services Agreement, and (iii) by continuing to bill third party payors
and patients and clients for the services of employees of the Company or its
subsidiaries, as requested by the Purchasers, to the extent permitted by
applicable law and the terms of any agreements with such payors, patients and
clients. During the interim period, the Purchasers shall provide management
services to the Company or its subsidiaries in connection with the business
conducted by the Company. The Interim Services Agreement will continue until
clinicians are credentialed with various payors as employees of PsychPartners.
This process may take several months and during this time, the Company will
continue to need personnel in human resources and accounting to administer the
payroll and benefits for those employees. The Company be reimbursed for all
costs of the employees' payroll and benefits, costs for the
42
<PAGE> 47
Company to administer such payments and costs of maintaining necessary insurance
for those employees and their activities. Reimbursement for costs, other than
direct clinician payroll, benefits and insurance, will amount to less than
$10,000 per month for the term of the Interim Services Agreement.
The Company's obligations under the Interim Services Agreement will not
create any material financial liability for the Company. Other than systems and
personnel costs (which the Company estimates will be approximately $15,000 per
month), under the Interim Services Agreement, the Company will be fully
reimbursed in advance for all costs incurred on behalf of PsychPartners. Under
the Interim Services Agreement, the Company is also required to maintain
insurance coverages such as worker's compensation, professional liability and
any other employment-related insurance. The Company will be reimbursed for all
costs of such coverages.
NO CONSIDERATION TO BE RECEIVED BY SHAREHOLDERS OF THE COMPANY
The shareholders of the Company will not receive any distributions from the
Company in connection with the Sale.
ACCOUNTING TREATMENT
As of December 31, 1997, the Company recognized a charge of $38.4 million
to write down the carrying value of the assets of the business held for sale to
PsychPartners to their estimated fair value less the estimated cost to sell. In
addition, the Company recorded $20.1 million in restructuring and other charges
pertaining to the Company's exit from the outpatient behavioral healthcare
business, restructuring the corporate office to reflect the discontinuation of
the outpatient operations and to record additional reserves pertaining to the
Company's billing of Medicare patients in long-term care operations which the
Company exited in 1996.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE SALE TO THE COMPANY AND THE
COMPANY'S SHAREHOLDERS
The Company expects to recognize a taxable loss upon the consummation of
the Sale and discontinuation of the outpatient behavioral healthcare business.
For federal income tax purposes, the Company currently has net operating loss
carryforwards. In general, the future use of these losses will be limited to
future taxable earnings of the Company. The consummation of the Sale will not be
a taxable event for federal income tax purposes for the shareholders of the
Company.
DISSENTERS' RIGHTS OF APPRAISAL
The holders of the outstanding shares of the Company Common Stock will not
have any appraisal rights as dissenting shareholders by reason of the Sale.
Holders of shares of the Company Common Stock should keep in mind that, in
the event of a lawsuit alleging that the Company's Board of Directors breached
its fiduciary duties in connection with the Sale or otherwise challenging the
fairness of the Sale, the Company may be able to argue that any Shareholder
approval of the Sale constitutes a ratification of such transactions and use
such ratification as a defense in the lawsuit.
EFFECT OF THE APPROVAL OF THE SALE ON THE COMPANY'S SHAREHOLDERS
If the Sale is consummated, the shareholders of the Company will retain
their equity interest in the Company. The consummation of the Sale will not
result in any changes in the rights of the Company's shareholders.
INTERESTS OF CERTAIN PERSONS IN THE SALE
In considering the recommendation of the Board of Directors of the Company
with respect to the Purchase Agreement, shareholders should be aware that
certain members of the Company's management and the Board of Directors have
certain interests in the transactions contemplated thereby that are in addition
to the interests of shareholders of the Company generally.
43
<PAGE> 48
John H. Foster, Chairman of the Board, Chief Executive Officer and a
director of the Company, is a Managing General Partner of Foster Management
Company and general partner of the general partners of the Investment
Partnerships. Timothy E. Foster, a director of the Company, is a Managing
General Partner of Foster Management Company and a general partner of the
general partners of the Investment Partnerships. 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 intention would be subject, among other things, to PNC
Bank obtaining guarantees to partially collateralize the Credit Facility. The
Company has entered into the Commitment Arrangement with the Investment
Partnerships which are significant stockholders of the Company and are managed
by Foster Management Company, 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) the Apogee Warrants to
purchase 400,000 shares of the Company 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 $3.5 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 the event that the Commitment Arrangement is
terminated and the Sale is consummated, the cost to the Company will be $140,000
payable to the Investment Partnerships and a non-recurring charge of $930,000
which represents the difference between the exercise price of the Apogee
Warrants and the fair market value of the underlying Company Common Stock. In
the event the Sale is not consummated, the cost to the Company could be up to
$280,000 in cash payable to the Investment Partnerships for commitment and draw
down fees and $3,5000,000 in cash payable on or before 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 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. The
Company believes that the terms of the Commitment Arrangement are fair to the
Company and are on market terms. The Company has the opportunity to obtain a
commitment and guarantee on terms better than the Commitment Arrangement.
In December 1997, the Company entered into separate bonus agreements (the
"Bonus Agreements") with each of Lawrence M. Davies, President and Chief
Operating Officer, Stanley F. Szczygiel, Vice President of Finance, and Mark
Gibson, Corporate Controller and Chief Accounting Officer. Pursuant to the Bonus
Agreements, each of such officers will receive a bonus if the Sale is closed in
1998. Mr. Davies will be entitled to a bonus payment in the amount of $100,000
and each of Mr. Szczygiel and Mr. Gibson will be entitled to a bonus payment in
the amount of $10,000. The Company anticipates that it will make such payments
immediately following the Closing.
There will be no changes or adjustments with respect to any options
currently held by the Company's management or its employees.
44
<PAGE> 49
It is anticipated that the aggregate amount of cash payments to executive
officers and directors of the Company for severance and bonus arrangements
related to this transaction will be approximately $120,000. The Company has not
yet determined the payments for severance arrangements, however, it anticipates
that such payments would not be material in the aggregate. The following table
provides information regarding such payments to each executive officer or
director who is expected to receive $100,000 or more:
<TABLE>
<CAPTION>
PERSON BONUS
------ --------
<S> <C>
Lawrence M. Davies,............................... $100,000
President and Chief
Operating Officer
</TABLE>
THE WARRANT
The Warrant entitles the Company to purchase 400,000 Common Units of
PsychPartners at a purchase price of $.05 per Common Unit during the five (5)
year period following the Closing Date. The Warrant will be delivered at closing
to an escrow agent. The subsequent issuances of the Warrant to the Company is
contingent upon the achievement of certain future operating profits thresholds
by two of the Practices sold to the Purchaser during the one-year period after
the Closing Date of the Sale. The Company has not assigned and will not assign a
value to the Warrant until the contingency is resolved and the Warrant is issued
to the Company. 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 Warrant, if exercised, must be exercised in
whole and not in part by the Company or any permissible transferee of the
Company. Upon the presentation of an exercise notice to PsychPartners and the
payment, by check or wire transfer, the Company or any permissible transferee
shall be admitted as a member of PsychPartners. PsychPartners is not a publicly
traded company and, therefore, a public market value of the Common Units is not
available to compare with the exercise price of the Warrant.
DIVIDEND POLICY
The Company
No cash dividends have been declared on the Company Common Stock since the
Company was organized. The Company does not intend to pay dividends in the
future.
PsychPartners
PsychPartners has neither declared nor paid dividends on its Common Units
or Preferred Units. The Second Amended and Restated Operating Agreement of
PsychPartners, L.L.C., dated July 17, 1997 (the "Operating Agreement"), contains
certain provisions regarding the distribution of the profits of PsychPartners to
holders of both Preferred Units and Common Units of PsychPartners
("PsychPartners Preferred Unitholders" and "PsychPartners Common Unitholders",
respectively). PsychPartners is required to distribute its Available Cash Flow
as follows: (i) first, to PsychPartners Preferred Unitholders, an amount equal
to forty percent (40%) of the current year's Priority Return, (ii) second, to
PsychPartners Preferred Unitholders, an amount equal to forty percent (40%) of
any cumulative Priority Return, and (iii) third, to all Members, an amount equal
to forty percent (40%) of any remaining Available Cash Flow. The Board of
Managers may distribute, but may withhold distribution for any reason, the
remaining Available Cash Flow of PsychPartners. All of the terms used in this
paragraph are defined in the Operating Agreement. The Operating Agreement also
provides that no distributions shall be declared or paid unless, after such
distribution, the assets of PsychPartners would exceed its liabilities (except
liabilities to Members on account of their capital accounts).
PsychPartners expects to obtain future financing, pursuant to which its
ability to pay dividends to its Members may be further restricted.
45
<PAGE> 50
APOGEE, INC.
PRO FORMA CONDENSED FINANCIAL INFORMATION
In December 1997, the Company's Board of Directors approved a plan to
discontinue and exit the Company's outpatient group practice operations, subject
to shareholder approval of the Sale of substantially all of the Company's
outpatient business assets to PsychPartners. The Company will continue to
operate its managed care behavioral health business through its Integra
Division. The following unaudited Pro Forma Condensed Statement of Operations
for the year ended December 31, 1997 was prepared as if the discontinuation and
Sale of the Company's operations other than Integra, was effective January 1,
1997. The Pro Forma Condensed Balance Sheet as of December 31, 1997, was
prepared as if the discontinuation and Sale was effective as of this date.
The Pro Forma Condensed Financial Information should be read in conjunction
with the Company's historical Consolidated Financial Statements and notes
thereto appearing elsewhere in this Proxy Statement or incorporated by
reference. The Pro Forma Condensed Financial Information set forth below and
elsewhere in this Proxy Statement, are presented for informational purposes only
and are not necessarily indicative of the results that would have actually
occurred had the events been consummated as of the dates presented or the
results that may occur in the future.
46
<PAGE> 51
APOGEE, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
RESULTS PRIOR
TO BUSINESSES
BUSINESSES DISCONTINUED AND BUSINESSES OTHER
HISTORICAL(A) SOLD(B) OTHER ADJUSTMENTS DISCONTINUED(C) ADJUSTMENTS PRO FORMA
------------- ---------- ----------------- --------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net revenues......... $ 70,144 $ 49,286 $ 20,858 $ 10,433 $ 10,425
Cost of revenues..... 54,202 37,955 16,247 10,428 5,819
--------- -------- --------- -------- ----------
Gross profit......... 15,942 11,331 4,611 5 4,606
Selling and
administrative
expenses........... 10,447 6,194 4,253 1,250 3,003
Provision for
doubtful
accounts........... 4,226 2,464 1,762 1,762
Amortization of
intangible assets
and excess cost
over fair value of
net assets
acquired........... 2,441 1,438 1,003 748 $ 124(F) 379
Writedown of assets
held for sale(G)... 38,400 38,400
Restructuring and
other charges(G)... 20,100 20,100 20,100
--------- -------- --------- -------- ------- ----------
(Loss) income from
operations......... (59,672) (37,165) (22,507) (23,855) (124) 1,224(L)
Non-operating
expenses (income):
Interest
expense(D)....... 1,474 889 585 548 37
Interest income.... (30) (30) (30)
--------- -------- --------- -------- ------- ----------
(Loss) income before
income taxes....... (61,116) (38,054) (23,062) (24,373) (124) 1,187
Provision for income
taxes.............. 102 50 52 (36) 88(E)
--------- -------- --------- -------- ------- ----------
Net (loss) income.... $ (61,218) $(38,104) $ (23,114) $(24,337) $ (124) $ 1,099
========= ======== ========= ======== ======= ==========
Basic net (loss)
income per common
share.............. $ (6.17) $ (2.33) $ 0.11
========= ========= ==========
Weighted average
shares
outstanding........ 9,921,374 9,921,374 400,000(H) 10,321,374
========= ========= ======= ==========
</TABLE>
The accompanying notes to the Pro Forma Condensed Financial Information
are an integral part of these statements.
47
<PAGE> 52
APOGEE, INC.
PRO FORMA CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRIOR
TO BUSINESSES
BUSINESSES DISCONTINUED AND BUSINESSES OTHER
HISTORICAL(A) SOLD(B) OTHER ADJUSTMENTS DISCONTINUED(C) ADJUSTMENTS PRO FORMA
------------- ---------- ----------------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...... $ 2,154 $(23,653)(I) $ 25,807 $ 231 $17,310(J) $ 8,266
Accounts receivable, net of
allowance for doubtful
accounts..................... 5,939 4,281 1,658 956 702
Other accounts receivable...... 1,455 570 885 734 151
Other current assets........... 410 302 108 108
-------- -------- -------- ------ ------- --------
Total current assets.... 9,958 (18,500) 28,458 1,921 17,310 9,227
Property and equipment, net.... 2,426 1,232 1,194 1,194
Intangible assets and excess
cost over fair value of net
assets acquired, net......... 31,031 21,156 9,875 9,875
Other assets................... 185 150 35 35
-------- -------- -------- ------ ------- --------
$ 43,600 $ 4,038 $ 39,562 $1,956 $17,310 $ 20,296
======== ======== ======== ====== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
debt......................... $ 13,891 $ 13,891 $ 6 $12,070(J) $ 1,815
Accounts payable............... 2,283 $ 368 1,915 287 1,628
Accrued expenses and other
current liabilities.......... 21,430 3,539 17,891 1,657 5,100(J)(H) 11,134(K)
-------- -------- -------- ------ ------- --------
Total current
liabilities........... 37,604 3,907 33,697 1,950 17,170 14,577
Long-term debt................. 809 9 800 800
Other long-term liabilities.... 128 122 6 6
Deferred income tax
liability.................... 346 346 346
-------- -------- -------- ------ ------- --------
Total liabilities....... 38,887 4,038 34,849 1,956 17,170 15,723
-------- -------- -------- ------ ------- --------
Stockholders' equity:
Common stock................... 100 100 100
Capital in excess of par
value........................ 86,349 86,349 (930)(H) 87,279
Accumulated deficit............ (81,707) (81,707) 1,070(H) (82,777)
Deferred compensation.......... (29) (29) (29)
-------- -------- -------- ------ ------- --------
Total stockholders'
equity................ 4,713 4,713 140 4,573
-------- -------- -------- ------ ------- --------
$ 43,600 $ 4,038 $ 39,562 $1,956 $17,310 $ 20,296
======== ======== ======== ====== ======= ========
</TABLE>
The accompanying notes to the Pro Forma Condensed Financial Information
are an integral part of these statements.
48
<PAGE> 53
APOGEE, INC.
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
(A) The historical balances represent the financial position as of December 31,
1997 and the results of operations for the year ended December 31, 1997 as
reported in the historical Consolidated Financial Statements of the Company,
included elsewhere in the Proxy Statement.
(B) Represents balances of the Company's outpatient business which will be sold
to PsychPartners upon approval of the Sale by the Company's shareholders.
(C) Represents balances of the Company's operations other than Integra and the
outpatient business held for sale to PsychPartners, all of which have been
discontinued. During this period, these operations are principally comprised
of the Company's long-term care and Western Region outpatient operations.
(D) Represents the elimination of interest expense pertaining to subordinated
promissory notes issued in connection with acquisitions for business
operations being sold or discontinued and the elimination of interest
expense pertaining to borrowings under the Company's revolving credit
facility which were attributed to either sold or discontinued operations.
(E) The Company has significant net operating loss carryforwards which are
assumed to be utilized for Federal income tax purposes. The Company has
taxable income in certain states, and accordingly, the pro forma balance
represents the estimated provision for state income taxes.
(F) In the fourth quarter of 1997, the Company changed its estimated useful
life for excess cost over fair value of net assets acquired from 40 years
to 25 years. The Company believes this change in estimate is appropriate
given the Company's pending sale to PsychPartners which would reposition
the Company as a managed behavioral healthcare company. Additionally, the
Company would be significantly smaller in terms of both revenues and
assets. A pro forma adjustment has been made to record the effect of this
change in estimate for the retained Integra business as if the change
occurred at the beginning of 1997.
(G) The Company does not believe that there are other material nonrecurring
charges relating to the Sale that have not been accrued for at December 31,
1997.
(H) If the Sale is not consummated, the Company will be required (i) to either
continue 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. 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 the Company anticipates the outstanding borrowings at
closing will be $15,000. 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
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 company, to obtain their
commitment to guarantee the additional $7.0 million 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 bank borrowings in
excess of $15.0 million; (iii) an unused commitment fee of 1/2% per annum;
and (iv) 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 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
49
<PAGE> 54
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 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, 1998 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 impact of this financing commitment guarantee on the Pro Forma
Statements is as follows:
i) the required commitment fee of 2% on the guaranteed amount of $7,000 is
$140 (See note J).
ii) the fair value of the Warrant to purchase 400,000 shares of Company
Common Stock on the date the commitment was made, March 23, 1998, was
approximately $950 and the aggregate financing charge was $930 based on
the fair value of the warrants versus the aggregate strike price of
$20.
The above result in a pro forma adjustment to accumulated deficit in the
accompanying consolidated pro forma balance sheet of $1,070 as of January
1, 1997. These adjustments have not been reflected in the accompanying
consolidated statement of operations. Assuming the Sale is consummated, the
Company would terminate the agreement and no further costs would be
incurred by the Company. Accordingly, these charges for the guarantee would
be non recurring in nature.
(I) Cash and cash equivalents for businesses sold is calculated as follows:
<TABLE>
<S> <C>
Net increase in cash at closing (See note J)................ $24,100
Less:
Cash remaining with clinics sold.......................... 447
-------
Net increase in cash and cash equivalents for businesses
sold...................................................... $23,653
-------
</TABLE>
(J) Net proceeds to be received in connection with the Sale using balances as
of December 31, 1997 is calculated as follows:
<TABLE>
<S> <C>
Gross cash proceeds from sale............................... $27,000
Less:
Estimated escrow amounts.................................. 500
Severance and separation payments......................... 1,400
Expenses related to the sale.............................. 1,000
-------
Net increase in cash at closing............................. 24,100
-------
Less other uses of proceeds:
Repayment of credit facility.............................. 12,070
Financing guarantee and Commitment Fee.................... 140
Payment of contingent consideration and settlement of
Florida Medicare review................................ 5,100
-------
Total other use of proceeds............................ 17,310
-------
Net remaining proceeds...................................... $ 6,790
=======
</TABLE>
Subsequent to December 31, 1997, the Company anticipates it will have
additional credit facility borrowings of approximately $2,930 which will
also be repaid with the remaining proceeds from the Sale. After including
this additional repayment, the Company estimates that approximately $4,000
of the net proceeds from the Sale will be available to the Company for
general corporate purposes and to invest in future growth.
Severance and separation payments and expenses related to the Sale, which
have been accrued at December 31, 1997 and will be paid in 1998, are not
included in the pro forma statement of operations.
50
<PAGE> 55
The issuance of the Warrant by PsychPartners to the Company is contingent
upon the achievement of certain future operating profit thresholds of two
of the Practices sold during the one-year period after the closing date of
the Sale. The Company will not assign a value to the Warrant until the
contingency is resolved and the Warrant is issued to the Company.
Accordingly, no impact of this Warrant is included in the pro forma
statements.
(K) Accrued expenses and other current liabilities include:
<TABLE>
<S> <C>
Clinician fees and medical claims........................... $ 1,150
Acquisition related costs................................... 2,023
Salaries and vacation....................................... 435
Restructuring and other costs............................... 5,818
Other....................................................... 1,708
-------
$11,134
=======
</TABLE>
Acquisition related costs consist of consideration payable to former owners
of acquired businesses based upon the resolution of purchase price
contingencies. These amounts represent consideration payable to the former
owner of Integra as well as the Company's liability for contingent
consideration earned prior to the Sale to PsychPartners.
Restructuring and other costs pertain primarily to reserves for long-term
care billings. The Company elected to discontinue all of its long term care
operation in December 1996. The Company is currently undergoing post
payment reviews of its long term care billings and the Company has
established reserves associated with these reviews. (See Notes 11 and 13 in
the Company's 1997 Consolidated Financial Statement which are contained in
this Proxy Statement.) The liability pertaining to these reviews will be
retained by the Company. The charge associated with these liabilities has
been eliminated in the Businesses Discontinued column and is a component of
the Restructuring and other charges line.
(L) The pro forma income from operations is approximately 12% of net revenues
which the Company believes compares favorably to and is fairly consistent
with the industry. There can be no assurances the Company will be able to
sustain such operating margins in future periods. On a limited basis,
Integra utilizes certain Apogee outpatient operations as part of Integra's
provider network. These costs are reflected at fair market value in these
pro forma financial statements. The Company anticipates that where
practicable, it will continue to utilize these operations as network
providers at the existing or comparable rates. The Company also believes
there is a readily available supply of service providers in these markets,
and accordingly, is not dependent on these operations.
51
<PAGE> 56
PSYCHPARTNERS, L.L.C.
PRO FORMA CONDENSED FINANCIAL INFORMATION
In December 1997, PsychPartners' Board of Directors approved a plan to
acquire 22 outpatient group practice operations. The following unaudited Pro
Forma Condensed Statement of Operations for the year ended December 31, 1997 was
prepared as if the acquisition were effective January 1, 1997. The Pro Forma
Condensed Balance Sheet as of December 31, 1997, was prepared as if the
acquisition were effective as of this date.
The Pro Forma Condensed Financial Information should be read in conjunction
with the PsychPartners' historical Consolidated Financial Statements and notes
thereto appearing elsewhere in this Proxy Statement. The Pro Forma Condensed
Financial Information set forth below and elsewhere in this Proxy Statement, are
presented for informational purposes only and are not necessarily indicative of
the results that would have actually occurred had the events been consummated as
of the dates presented or the results that may occur in the future.
52
<PAGE> 57
PSYCHPARTNERS, L.L.C.
PRO FORMA FINANCIAL INFORMATION
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------------
BUSINESSES OTHER
HISTORICAL ACQUIRED ADJUSTMENTS PRO FORMA
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues.......................... $15,089,189 $49,286,000 $64,375,189
Cost of revenue....................... 10,748,478 37,955,000 48,703,478
----------- ----------- -----------
Gross profit.......................... 4,340,711 11,331,000 15,671,711
Selling and administrative expenses... 4,379,843 3,494,000(8) 7,873,843
Minority interest expense............. 133,500 133,500
Provision for doubtful accounts....... 1,503,975 2,464,000 3,967,975
Amortization of intangible assets and
excess cost over fair value of
assets acquired(3).................. 136,250 $ 1,329,213 1,465,463
----------- ----------- ----------- -----------
Income (loss) from operations......... (1,812,857) 5,373,000 (1,329,213) 2,230,930
Nonoperating expenses (income):
Interest expense...................... 89,715 1,304,999(2) 1,394,714
Interest (income)..................... (33,760) (33,760)
----------- ----------- ----------- -----------
Income (loss) before income taxes..... (1,868,812) 5,373,000 (2,634,212) 869,976
Provision for income taxes(1)......... 0 0 0 0
----------- ----------- ----------- -----------
Net income (loss)..................... $(1,868,812) $ 5,373,000 $(2,634,212) $ 869,976
=========== =========== =========== ===========
</TABLE>
53
<PAGE> 58
PSYCHPARTNERS, L.L.C.
PRO FORMA FINANCIAL INFORMATION
CONSOLIDATED CONDENSED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1997
-------------------------------------------------------
ACQUIRED OTHER
HISTORICAL PRACTICES ADJUSTMENTS PRO FORMA
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 1,276,615 $ 447,000 $ 4,200,000 $ 5,923,615
Accounts receivable, net............... 5,578,608 4,281,000 9,859,608
Other accounts receivable.............. 174,251 570,000 744,251
Other current assets................... 377,743 302,000 679,743
----------- ---------- ----------- -----------
Total current assets................... 7,407,217 5,600,000 4,200,000 17,207,217
Property and equipment, net............ 509,903 1,232,000 1,741,903
Other assets........................... 150,000 150,000
Intangible assets and excess cost over
fair value of net assets acquired,
net.................................. 1,926,500 25,826,900(4) 27,753,400
----------- ---------- ----------- -----------
$9,843,620.. $6,982,000 $30,026,900 $46,852,520
=========== ========== =========== ===========
LIABILITIES AND UNITHOLDERS' EQUITY
Current liabilities:
Current portion of note payable........ $ 475,471 $ 475,471
Convertible promissory note............ 2,352,000 $(2,352,000)(5)
Accounts payable....................... 729,416 $ 368,000 1,097,416
Accrued expense and other current
liabilities.......................... 1,974,348 5,375,000(9) (1,015,000) 6,334,348
----------- ---------- ----------- -----------
Total current liabilities.............. 5,531,235 5,743,000 (3,367,000) 7,907,235
Other long-term liabilities............ 122,000 122,000
Long-term notes payable................ 166,666 9,000 15,000,000(2) 15,175,666
----------- ---------- ----------- -----------
Total liabilities...................... 5,697,901 5,743,000 11,633,000 23,204,901
Minority Interest...................... 187,795(7) 187,795
Unitholders' equity:
Common units........................... 6,034,048 2,501,900(6) 8,535,948
Preferred units........................ 1,428,023.. 17,000,000(6) 18,428,023
Treasury units......................... (162,000) (162,000)
Accumulated deficit.................... (3,342,147) (3,342,147)
----------- ---------- ----------- -----------
Total unitholders' equity.............. 3,957,924 19,501,900 23,459,824
----------- ---------- ----------- -----------
$ 9,843,620 $5,743,000 $31,134,900 $46,852,520
=========== ========== =========== ===========
</TABLE>
54
<PAGE> 59
PSYCHPARTNERS, L.L.C.
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS
(1) PsychPartners is registered as a Limited Liability Company under the
provisions of the Internal Revenue Code. Accordingly, PsychPartners does not
pay federal or state corporate income taxes.
(2) Interest expense was adjusted to reflect the additional borrowings
PsychPartners requires to complete the asset purchase, as if completed as of
January 1, 1997. PsychPartners, L.L.C. has reached an agreement in principle
with NationsCredit Commercial Corporation for debt financing in the total
amount of $22,500,000, to be secured by substantially all of the assets of
PsychPartners, L.L.C. and its subsidiaries. The arrangement includes (a) a
five-year term loan of $10,000,000 bearing interest at the Index Rate (a
one-month commercial paper rate -4.833% at December 31, 1997) plus 3.5%, (b)
a six-year term loan of $5,000,000 bearing interest at the Index Rate plus
4%, and (c) a five-year revolving credit commitment of $7,500,000, bearing
interest at the Index Rate plus 4%. The proposed credit agreement contains
financial covenants and restrictions on certain activities of PsychPartners,
L.L.C. and its subsidiaries, all of which are customary to agreements of
this nature. PsychPartners, L.L.C. anticipates that $15,000,000 of this
Facility will be used to fund the acquisition of the Apogee practices, which
under the terms of the Facility would have a blended interest rate of 8.5%.
In addition, PsychPartners anticipates it will incur approximately $150,000
of loan origination fees which will be amortized over five years. This
amortization is included as a component of interest expense.
(3) Amortization expense was adjusted to reflect the additional amortization
from identified intangible assets and the excess cost over fair value of net
assets acquired, as if completed as of January 1, 1997 using an estimated
blended useful life of 20 years.
(4) The pro forma adjustment to excess of cost over fair value of net assets
acquired reflects the acquisition cost of the acquired company in excess of
the fair value of assets acquired and liabilities assumed.
(5) The pro forma adjustment reflects the conversion of convertible debt to
equity units. The holder of the convertible promissory note has agreed to
convert its debt into Class B Preferred Units of PsychPartners, L.L.C. on or
prior to the closing of the proposed Apogee transaction, because the
noteholder is also a participant in the new equity financing through Electra
Investment Trust, PLC. Such conversion into Class B Preferred Units of
PsychPartners, L.L.C. is a condition to closing of the new equity financing.
(6) PsychPartners, L.L.C. has signed a commitment letter with Electra Fleming,
Inc., as agent for Electra Investment Trust, PLC ("Electra"), pursuant to
which PsychPartners, L.L.C. will issue 3,717,776 Class B Preferred Units to
Electra for a total purchase price of $14,648,000 (or $3.94 per Unit). In
connection with the Electra transaction, holders of convertible promissory
notes are expected to convert their notes into 850,762 Class B Preferred
Units. The members of PsychPartners, L.L.C. have approved a form of third
amended and restated operating agreement which authorizes the issuance of
the Class B Preferred Units and establishes certain rights and preferences
of such Units. As part of the Electra transaction, PsychPartners, L.L.C.
will enter into a Class B Preferred Unit Purchase Agreement with Electra and
will enter into an Amended and Restated Members Agreement with the following
group of managers: Capitol Health Partners, L.P., Electra, EBSCO Industries,
Inc., and Harbert Equity Fund I, L.L.C. These documents will impose certain
additional obligations and restrictions on the Company, customary to equity
investments of this nature. Upon issuance of the Class B Preferred Units to
Electra, Electra will hold approximately a 40.5 percent equity interest in
PsychPartners, L.L.C.
(7) The minority interest pertains to a 49% ownership in a consolidated entity
of PsychPartners, L.L.C. The transaction to acquire the Apogee practices
will not affect this entity and, therefore, the minority interest will not
be affected.
55
<PAGE> 60
(8) The Selling General and Administrative Expense of $3,504,000 for Businesses
Acquired reflects a decrease of $2,700,000 in the Selling General and
Administrative Expense of $6,204,000 reported on the Apogee Pro Forma
Statement of Operations. This decrease is due to the fact that (i) the
calculation of the Selling General and Administrative Expense of Apogee,
Inc. includes a number of top management positions that will not be
duplicated within the PsychPartners, L.L.C. organizational structure, and
(ii) PsychPartners, L.L.C. anticipates obtaining efficiencies from economies
of scale following the acquisition of the 22 practices when combined with
the operation of its current business.
(9) For pro forma purposes, accrued expenses from acquired practices includes an
additional $1,836 in estimated future contingent liabilities which will be
assumed by PsychPartners pertaining to consideration payable to former
owners of the Apogee businesses.
56
<PAGE> 61
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
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.
Sale and Divestiture of Outpatient Business
In 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.
On an ongoing basis, the Company evaluates and considers alternatives to
improve operating results and enhance shareholder value. These alternatives
include continued acquisitions or mergers, joint ventures, strategic alliances
and sale of assets. In October 1997, the Company executed a non-binding
memorandum of understanding with PsychPartners for the sale of substantially all
of the Company's outpatient behavioral health businesses. The Company then began
a more focused assessment of alternatives available to the Company including an
evaluation of the transaction with PsychPartners to determine if such a
transaction was both viable and in the best interests of the Company and its
shareholders. In December 1997, the Company's Board of Directors reached
agreement that an exit and disposal of the Company's outpatient operations and a
refocus on behavioral managed care was the best course of action for the Company
to pursue. The Board authorized management to proceed with and attempt to close
the transaction with PsychPartners. On December 26, 1997, the Company executed
the Purchase Agreement with PsychPartners. The Company's Board of Directors
believes that the terms of the Sale are fair to, and in the best interests of,
the Company and its shareholders. Accordingly, the Board of Directors has
unanimously approved the Sale and recommends approval of the Sale by the
shareholders. While the Company's estimated future cash flows from these
operations showed full recovery of the carrying value of the related assets
prior to the decision to sell, the Company believes the sale of substantially
all of the Company's outpatient businesses will enable the Company to achieve
higher returns than would be obtained if the Company continued to operate its
outpatient operations. In reaching its decision to approve the Sale to
PsychPartners, the Company and the Board of Directors considered the following
factors:
(i) The condition, prospects and strategic direction of the Company's
outpatient behavioral healthcare business. In this regard, the Board of
Directors has reviewed its analyses of the earnings
57
<PAGE> 62
potential of the outpatient behavioral healthcare business based upon
various operating and market assumptions and its conclusion that there was
a significant probability that the shareholder value of the Company may not
significantly improve in the near term. This review included a discussion
of (a) the Company's cost structure, (b) the competitive market in each of
the Company's businesses, and (c) the Company's losses in recent periods;
(ii) The constraints on the Company's ability to finance growth,
including the dilutive impact of additional equity financing and the costs
of additional financing;
(iii) Recent and historical market prices for the Company Common Stock
indicated that the Company had not created in the eyes of the public market
a clear enough distinction between its group practice strategy and its
managed care strategy and the Sale would allow the Company to focus on
pursuing a pure managed care strategy which might be perceived more
positively in the market;
(iv) The successful negotiations regarding the Purchase Agreement
which the Company believed reflected a fair and equitable understanding
between the parties;
(v) The substantial likelihood that the Sale would be consummated and
the fact that no other viable alternative to the Sale was available; and
(vi) The $27,000 cash consideration to be received upon the
consummation of the Sale will allow the Company to repay its existing
Credit Facility and satisfy its obligations in connection with past
acquisitions and the Florida Medicare review and will provide the Company
with funds to pursue its growth strategy in the managed behavioral
healthcare field through its Integra Division.
In addition, the Board received a written fairness opinion from Banc One Capital
Corporation which states that the Sale was fair from a financial point of view.
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."
In December 1997, and in conjunction with the above, the Board also authorized a
plan to shut down or sell the remaining outpatient operations not included in
the proposed Sale to PsychPartners. When reaching this decision the Board
considered the following factors:
(i) The recent operating losses in these remaining outpatient
operations. The Company projected that over time, these operations would be
able to be returned to profitability, however, the Company would be
required to make a substantial investment in terms of both capital to fund
the short-term losses and management resources. The Company believes that
dedicating Company resources to the behavioral managed care market would
ultimately result in a higher return on investment than if the Company
continued to invest in the Western Region outpatient operations.
(ii) The proposed Sale to PsychPartners would divest the Company of
substantially all of its outpatient operations. By executing a plan to
divest the remaining outpatient operations, the Company would have the
opportunity to significantly reduce its regional and corporate
infrastructure which the Company believes will improve overall
profitability.
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 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
58
<PAGE> 63
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.
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
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<PAGE> 64
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.
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.
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<PAGE> 65
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 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
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<PAGE> 66
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 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
The Company applies 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 established 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 costs may not be recoverable. The Company also reviews the overall
recoverability of goodwill based primarily on estimated future undiscounted cash
flows.
If over the remaining useful life of such assets, the expected undiscounted
future cash flows 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, the
Company uses a combination of recent operating results, financial forecasts and
budgets, and management estimates and assumptions of factors such as growth and
potential future changes when determining whether an asset is impaired, and in
measuring assets that are impaired, the Company groups assets by geographic
region. The geographic region is the level at which the Company contracts with
managed care payors, deploys administrative and clinical resources and
consolidates back office operations. In addition, patients and Company providers
often use clinic locations interchangeably within a geographic region. Upon
signing a non-binding memorandum of understanding ("MOU") with PsychPartners in
October 1997, the Company had an impairment indicator as the fair value of the
Company's assets included in the MOU were less than their respective carrying
values. Accordingly, the Company performed undiscounted cash flow analyses. In
accordance with the Company's policy and SFAS 121, during 1997, the Company
measured the carrying value of the related intangible assets against the
estimated future undiscounted cash flows expected to result from the continued
use of these assets. The analyses indicated full recovery of the related
intangible assets prior to the expiration of their remaining estimated useful
lives which were approximately 36 years. When the Company changed its strategic
direction in December 1997 with respect to these assets and the Board approved a
plan to exit and dispose of the outpatient operations (see "Sale and Divestiture
of Outpatient Business"). Accordingly, in December 1997, the Company revised its
cash flow analyses to reflect the cash flows expected to result from the use of
these assets prior to their disposal as well as the proceeds expected to result
from their disposal based upon the terms of the Purchase Agreement with
PsychPartners and 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
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<PAGE> 67
$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 charge of $10,287 associated with the
remaining outpatient operations. The remainder of the write down of assets
consists primarily of fixed assets related to the discontinued operations. In
accordance with its policy and SFAS 121, when the Company reached the decision
to exit the outpatient business and divest these remaining outpatient operations
(see "Sale and Divestiture of Outpatient Business") the Company measured the
carrying value of the related assets against the estimated current fair market
value for these remaining operations less costs to dispose and recorded the
above write down. 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.
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The following summarizes the Company's restructuring activity:
<TABLE>
<CAPTION>
AMOUNTS RESTRUCTURE RESTRUCTURE
1995 1996 UTILIZED IN BALANCE AT 1997 AMOUNTS BALANCE AT
RESTRUCTURE RESTRUCTURE 1995 & DECEMBER 31, RESTRUCTURE 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........ 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:
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 this matter 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 Inspector General of the Department of Health and Human Services
("OIG") and the Department of Justice ("DOJ"). The Company has been informed by
the
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<PAGE> 69
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 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
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<PAGE> 70
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 the
event that the Commitment Arrangement is terminated and the Sale is consummated,
the cost to the Company will be $140 in cash payable to the Investment
Partnerships and a non-recurring charge of $930 which represents the difference
between the exercise price of the Apogee Warrants and the fair market value of
the underlying Company Common Stock. In the event the Sale is not consummated,
the cost to the Company could be up to $280 in cash payable to the Investment
Partnerships for commitment and draw down fees and $3,5000 in cash 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. As of the date of
this Proxy Statement, the Company has not accepted proposals from any 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.
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.
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<PAGE> 71
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.
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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 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
68
<PAGE> 73
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.
69
<PAGE> 74
INFORMATION CONCERNING
PSYCHPARTNERS, L.L.C.
BUSINESS
Established in October of 1995 and headquartered in Birmingham, Alabama,
PsychPartners, L.L.C. is one of the largest privately held multi-disciplinary
providers of outpatient and partial behavioral health services in the country.
With the acquisition of the outpatient behavioral healthcare business of the
Company, PsychPartners behavioral health services will be provided by more than
1,300 clinicians at 112 behavioral health clinics and specialized outpatient
programs located in eleven states and the District of Columbia generating annual
revenue of approximately $75 million. In addition, PsychPartners operates a
statewide IPA in the state of New Jersey.
PsychPartners' multi-disciplinary practices typically employ some or all of
the following professionals: board certified or board eligible adult and
adolescent psychiatrists, licensed clinical psychologists, neuropsychologists,
licensed clinical social workers; licensed marriage, family and child
counselors, registered psychiatric nurse practitioners, clinical nurse
specialists and other allied mental health professionals. These practices
provide a full range of behavioral health services, including but not limited
to, diagnosis, psychiatric consultation, psychological assessment and
evaluation; medication monitoring; group and individual psychotherapy;
behavioral management; marriage, family and child therapy; intellectual and
psychological including neuropsychological testing; substance abuse and
rehabilitation both residential and outpatient.
PsychPartners offers both full and shared risk arrangements to employers
and managed care organizations to perform behavioral health services on a
capitated (fixed rate), subcapitated and case rate basis. PsychPartners provides
an array of other necessary behavioral health services, including but not
limited to: employee assistance programs, partial hospitalization programs,
critical incidence stress programs, crisis intervention programs, third party
clinical case management and claim adjudication, contractual programming for
hospitals and other residential and outpatient programs including correctional
systems.
The PsychPartners philosophy is to provide services in the most appropriate
least restrictive settings to achieve the desired patient outcome.
PsychPartners' services are designed to provide patients with access to
treatment at all levels of care. The desired outcome of all behavioral health
services provided by PsychPartners' clinicians is to return the patient to his
or her optimal functional capacity utilizing the most cost effective services
and service settings. PsychPartners' professionals treat patients with a wide
variety of behavioral, psychological and psychiatric problems. The conditions
treated by PsychPartners' professionals can and in many cases, seriously
interfere with a patient's ability to function occupationally, socially and
interpersonally. Such loss of function can result in reduced productivity,
impaired job performance and, in some cases, total disability.
GROWTH PLAN
The company focuses on several factors to enhance the profit margins of its
acquired practices. These factors include: (1) adding new payor relationships;
(2) adding additional healthcare providers; (3) improving collections; (4)
increasing same store sales; and (5) creating administrative efficiencies.
PsychPartners is the largest privately held multi-disciplinary provider of
partial and outpatient behavioral health services in the country.
TWELVE MONTH PLAN OF OPERATIONS
PsychPartners' major focus for the next twelve months is the acquisition of
the outpatient behavioral healthcare practices of the Company and the
integration of these facilities into its current operations. PsychPartners plans
to make smaller, selective acquisitions of physician practices or practice
management companies, primarily in markets where PsychPartners and the acquired
outpatient behavioral healthcare practices of the Company are located.
PsychPartners also plans to continue to develop its regional behavioral care
networks by focusing on additional products and services and new payor
relationships in order to expand
70
<PAGE> 75
and strengthen its business within its markets. In connection with the
acquisition of the outpatient behavioral healthcare assets of the Company and to
satisfy anticipated working capital requirements for the next twelve months,
PsychPartners expects to raise additional funds through a variety of sources.
PsychPartners anticipates that there will be no significant change in the number
of employees, exclusive of the employees associated with the outpatient
behavioral healthcare practices of the Company being acquired who will become
employees of PsychPartners.
Matters discussed in this section related to PsychPartners contain
forward-looking statements that are based on management's estimates and
assumptions. Major factors that could cause results to differ materially from
those expected by management include; the successful consummation of the Sale,
the time and nature of reimbursement changes, the nature of changes in laws and
regulations that govern various aspects of PsychPartners' business, new criteria
adopted to determine medical necessity for behavioral health services,
successful consummation of PsychPartners' financing transactions, changes in
procedures by third-party payors, pricing of managed care and other third party
contract, retention and productivity of clinicians, the direction and success of
competitors, management retention and unanticipated market changes.
PsychPartners does not undertake any obligation to update the information
contained herein.
71
<PAGE> 76
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT OF APOGEE, INC.
The shareholders (including any "group" as that term is used in Section
13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) who, to the knowledge of the Board of Directors of the Company, owned
beneficially more than five percent of the Company's one class of outstanding
voting securities as of April 22, 1998, each director of the Company who
beneficially owns Company Common Stock and each executive of the Company who
beneficially owns Company Common Stock and all directors and officers of the
Company as a group, and their respective shareholdings as of such date
(according to information furnished by them to the Company), are set forth in
the following table. Except as indicated in the footnotes to the table, all of
such shares are owned with sole voting and investment power.
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK OWNED
NAME AND ADDRESS BENEFICIALLY PERCENT OF CLASS
---------------- ---------------- ----------------
<S> <C> <C>
Abbingdon Venture Partners................. 2,767,650(1) 27.4%
Limited Partnership
1018 West Ninth Avenue
King of Prussia, Pennsylvania 19406
Abbingdon Venture Partners................. 921,550(1) 9.1
Limited Partnership-II
1018 West Ninth Avenue
King of Prussia, Pennsylvania 19406
John H. Foster............................. 3,737,974(1)(2) 37.0
Foster Management Company
1018 West Ninth Avenue
King of Prussia, Pennsylvania 19406
Lawrence M. Davies......................... 120,568(3) 1.2
Apogee, Inc.
1060 First Avenue
Suite 410
King of Prussia, Pennsylvania 19406
Timothy E. Foster.......................... 3,719,421(1)(4) 36.9
NovaCare, Inc.
1016 West Ninth Avenue
King of Prussia, Pennsylvania 19406
Harvey V. Fineberg, M.D. .................. 7,000 *
Harvard University
677 Huntington Avenue
Boston, Massachusetts 02115
Irwin Lehrhoff, Ph.D. ..................... 196,500(5) 1.9
Irwin Lehrhoff & Associates
13946 Ventura Boulevard
Sherman Oaks, California 91423
R. Bruce Mosbacher......................... 5,000(6) *
Saw Island Partners
2200 Sand Hill Road
Suite 150
Menlo Park, California 94025
Shawkat Raslan............................. 10,000 *
International Resources Holdings, Inc.
16th Floor
770 Lexington Avenue
New York, New York 10021
Stanley F. Szczygiel....................... 17,738(7) *
Apogee, Inc.
1060 First Avenue
Suite 410
King of Prussia, Pennsylvania 19406
</TABLE>
72
<PAGE> 77
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK OWNED
NAME AND ADDRESS BENEFICIALLY PERCENT OF CLASS
---------------- ---------------- ----------------
<S> <C> <C>
Massoud G. Hampton, Ph.D. ................. 21,800(8) *
Apogee, Inc.
1060 First Avenue
Suite 410
King of Prussia, Pennsylvania 19406
Mark Gibson................................ 2,500(9) *
Apogee, Inc.
1060 First Avenue
Suite 410
King of Prussia, Pennsylvania 19406
Wellington Management Company, L.L.P. ..... 664,000 6.6
75 State Street
Boston , Massachusetts 02109
Wellington Trust Company, N.A. ............ 664,000 6.6
75 State Street
Boston , Massachusetts 02109
Directors and officers as a group (11 4,149,301(1)(2) 41.0
persons).................................
(4)(5)
(10)
</TABLE>
- ---------------
* Less than one percent (1%).
(1) Does not include the Apogee Warrants.
(2) Includes 3,689,200 shares of Company Common Stock owned by Abbingdon and
Abbingdon-II, limited partnerships, of each of which Mr. John H. Foster is
a general partner through intermediate general partnerships. Also includes
16,800 shares of Company Common Stock owned by the Trust u/w Virginia C.
Foster, of which Mr. John H. Foster is a trustee.
(3) Includes 8,000 shares of Company Common Stock presently issuable upon the
exercise of options.
(4) Includes 3,689,200 shares of Company Common Stock owned by Abbingdon and
Abbingdon-II, of each of which Mr. Timothy E. Foster is a general partner
through intermediate general partnerships.
(5) Includes 176,000 shares of Company Common Stock owned by Irwin Lehrhoff
Trust No. 1, of which Dr. Lehrhoff is a trustee and a beneficiary. Does not
include 500 shares of Company Common Stock owned by Dr. Lehrhoff's spouse,
of which shares of Company Common Stock Dr. Lehrhoff disclaims beneficial
ownership.
(6) Represents shares of Company Common Stock owned by the Mosbacher/Ditz
Living Trust, of which Mr. Mosbacher is the trustee and a beneficiary.
(7) Includes 6,800 shares of Company Common Stock presently issuable upon the
exercise of options.
(8) Includes 6,800 shares of Company Common Stock presently issuable upon the
exercise of options.
(9) Includes 2,500 shares of Company Common Stock presently issuable upon the
execution of options.
(10) Includes 24,100 shares of Company Common Stock presently issuable upon the
exercise of options.
73
<PAGE> 78
DIRECTORS AND EXECUTIVE OFFICERS OF APOGEE, INC.
DIRECTORS AND EXECUTIVE OFFICERS
Certain information concerning the directors and executive officers of the
Company is set forth below. Such information was furnished by them to the
Company.
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK OWNED
BENEFICIALLY AS
OF APRIL 22, PERCENT
NAME AND CERTAIN BIOGRAPHICAL INFORMATION 1998(1) OF CLASS
----------------------------------------- ---------------- --------
<S> <C> <C>
JOHN H. FOSTER, age 55, has been Chairman of the Board and
Chief Executive Officer of the Company since March 1991.
Mr. Foster has been Chairman of the Board of NovaCare,
Inc., a leading national provider of comprehensive medical
rehabilitation services ("NovaCare"), since December 1984.
Between December 1984 and May 1997, he was also Chief
Executive Officer of NovaCare. Mr. Foster is a director of
Corning Incorporated, an international corporation with
business interests in specialty materials, communications,
laboratory services and consumer products. Mr. Foster is a
director of CulturalAccessWorldwide, Inc., an outsourced
and marketing services company. Mr. Foster is the founder
and Chairman of the Board of Foster Management Company, a
venture capital firm, and general partner of various
venture capital investment funds. 3,737,974(2)(3) 37.0%
LAWRENCE M. DAVIES, age 39, 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. 120,568(4) 1.2
HARVEY V. FINEBERG, M.D., age 52, has been a director of the
Company since November 1993. Dr. Fineberg has been Provost
of Harvard University since July 1997 and Dean of the
Harvard School of Public Health since July 1984. He has
been Professor of Health Policy and Management at the
Harvard School of Public Health since 1982 and has held
other faculty positions at Harvard University since 1973.
Dr. Fineberg earned a medical degree at Harvard Medical
School and a doctorate in Public Policy at the Kennedy
School of Government at Harvard University. Dr. Fineberg
is a director of PrincipalCare Incorporated, a provider of
women's health services. 7,000 *
TIMOTHY E. FOSTER, age 46, has been a director of the
Company since February 1993. Mr. Foster has been Chief
Executive Officer of NovaCare since May 1997. Between
October 1994 and May 1997 he was President and Chief
Operating Officer of NovaCare. He has been a director of
NovaCare since December 1984. Prior to becoming President
of NovaCare, he served in a variety of finance and
administrative roles at NovaCare beginning in 1984. Mr.
Foster has been a Managing Partner of Foster Management
Company since June 1997. 3,719,421(2)(5) 36.9
</TABLE>
74
<PAGE> 79
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK OWNED
BENEFICIALLY AS
OF APRIL 22, PERCENT
NAME AND CERTAIN BIOGRAPHICAL INFORMATION 1998(1) OF CLASS
----------------------------------------- ---------------- --------
<S> <C> <C>
IRWIN LEHRHOFF, PH.D., age 68, has been a director of the
Company since March 1991, at which time his company, Irwin
Lehrhoff & Associates, Inc., was acquired by the Company.
For more than the prior five years, Dr. Lehrhoff has
engaged in the private practice of clinical psychology in
Southern California. Dr. Lehrhoff holds a Ph.D. in
Communication Disorders and a Ph.D. in Clinical
Psychology. He is a member of the American Psychological
Association and the International Society of Mental
Health. Dr. Lehrhoff presently serves as a director of the
Thalians Community Mental Health Center. He was previously
a director and President of the National Association of
Rehabilitation Agencies. Dr. Lehrhoff was Director and
President of the California Speech Pathologists and
Audiologists in Private Practice from 1973 to 1977. 196,500(6) 1.9
R. BRUCE MOSBACHER, age 45, has been a director of the
Company since July 1992. Mr. Mosbacher has been a general
partner of Saw Island Partners, a securities, real estate
and oil and gas investment firm, since 1985. From 1983 to
1985, Mr. Mosbacher was of counsel to Gaston Snow & Ely
Bartlett of Palo Alto, California; prior to that, he was
associated with Wilson, Sonsini, Goodrich & Rosati of Palo
Alto, California. Mr. Mosbacher serves on the Boards of
Advisors of investment funds managed by Foster Management
Company and is a director of a number of privately held
companies. He previously was a director of ISI
Corporation, ISI Trust Fund, ISI Growth Fund, Inc. and ISI
Income Fund, Inc. and is a member of the State Bar of
California. 5,000(7) *
SHAWKAT RASLAN, age 46, has been a director of the Company
since February 1994. Mr. Raslan serves as President and
Chief Executive Officer of International Resources
Holdings, Inc., an asset management and investment
advisory service. He has held these positions since 1982.
Mr. Raslan serves as a director of U.S. Home Care
Corporation. 10,000 *
MASSOUD G. HAMPTON, Ph.D., age 47, 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 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. 21,800(8) *
</TABLE>
75
<PAGE> 80
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK OWNED
BENEFICIALLY AS
OF APRIL 22, PERCENT
NAME AND CERTAIN BIOGRAPHICAL INFORMATION 1998(1) OF CLASS
----------------------------------------- ---------------- --------
<S> <C> <C>
STANLEY F. SZCZYGIEL, age 46, 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. 17,738(9) *
MARK D. GIBSON, age 31, 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 & Horvath. 2,500(10) *
</TABLE>
- ---------------
* Less than one percent.
(1) Except as indicated in the following footnotes, each of the persons listed
above has sole voting and investment power with respect to all shares of
Company Common Stock shown in the table as beneficially owned by him.
(2) Does not include the Apogee Warrants.
(3) Includes 3,689,200 shares of Company Common Stock owned by Abbingdon
Venture Partners Limited Partnership ("Abbingdon") and Abbingdon Venture
Partners Limited Partnership-II ("Abbingdon-II"), limited partnerships, of
each of which Mr. John H. Foster is a general partner through intermediate
general partnerships. Also includes 16,800 shares of Company Common Stock
owned by the Trust u/w Virginia C. Foster, of which Mr. John H. Foster is a
trustee.
(4) Includes 8,000 shares of Company Common Stock presently issuable upon the
exercise of stock options.
(5) Includes 3,689,200 shares of Company Common Stock owned by Abbingdon and
Abbingdon-II, of each of which Mr. Timothy E. Foster is a general partner
through intermediate general partnerships.
(6) Includes 176,000 shares of Company Common Stock owned by Irwin Lehrhoff
Trust No. 1, of which Dr. Lehrhoff is a trustee and a beneficiary. Does not
include 500 shares of Company Common Stock held by Dr. Lehrhoff's spouse,
of which shares of Company Common Stock Dr. Lehrhoff disclaims beneficial
ownership.
(7) Represents shares of Company Common Stock owned by the Mosbacher/Ditz
Living Trust, of which Mr. Mosbacher is the trustee and a beneficiary.
(8) Includes 6,800 shares of Company Common Stock presently issuable upon the
exercise of options.
(9) Includes 6,800 shares of Company Common Stock presently issuable upon the
exercise of options.
(10) Includes 2,500 shares of Company Common Stock presently issuable upon the
exercise of options.
76
<PAGE> 81
PROPOSAL 2
ADJOURNMENT OR POSTPONEMENT OF SPECIAL MEETING
In the event the number of shares of Company Common Stock represented at
the Special Meeting is insufficient to constitute a quorum or, if a quorum is
present, the Company fails to receive a sufficient number of votes to approve
the Purchase Agreement and the transactions contemplated therein, the Company
proposes to adjourn or postpone the Special Meeting for a period of not more
than 30 days for the purpose of soliciting additional proxies. Proxies initially
cast in favor of the Purchase Agreement and the transactions contemplated
therein will, unless revoked, be voted in favor of the approval of such item at
any Special Meeting subsequently convened within thirty days of the initial date
of the Special Meeting.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL OF THE
ADJOURNMENT OR POSTPONEMENT OF THE SPECIAL MEETING TO SOLICIT ADDITIONAL
PROXIES.
OTHER MATTERS
The Board of Directors of the Company is not aware of any matters to be
presented for action at the Special Meeting other than those described herein
and does not intend to bring any other matters before the Special Meeting.
However, if other matters should come before the Special Meeting, it is intended
that the holders of proxies solicited hereby will vote thereon in their
discretion, unless such authority is withheld.
EXPENSES OF SOLICITATION
The expenses in connection with the solicitation of the enclosed form of
proxy, will be borne by the Company. In addition to solicitation by mail,
officers or regular employees of the Company, who will receive no compensation
for such services other than their regular salaries, may solicit proxies
personally or by telephone or facsimile. Arrangements will be made with
brokerage houses, nominees, participants in central certificate depository
systems and other custodians and fiduciaries to supply them with solicitation
material for forwarding to their principals, and arrangements may be made with
such persons to obtain authority to sign proxies. The Company may reimburse such
persons for reasonable out-of-pocket expenses incurred by them in connection
therewith.
INDEPENDENT ACCOUNTANTS
The financial statements of the Company as of December 31, 1997 and 1996
and for each of the years in the period ended December 31, 1997, have been
audited by Price Waterhouse LLP, independent public accountants, as stated in
their report contained in this Proxy Statement.
A representative of Price Waterhouse will be at the Special Meeting to
answer questions by shareholders and will have the opportunity to make a
statement if so desired.
King of Prussia, Pennsylvania
April 23, 1998
77
<PAGE> 82
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
APOGEE, INC. AND SUBSIDIARIES
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1997 and
December 31, 1996......................................... F-3
Consolidated Statements of Operations for the Years ended
December 31, 1997, 1996 and 1995.......................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995...... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
OUTPATIENT BEHAVIORAL HEALTH BUSINESS OF APOGEE, INC.
(UNAUDITED)
Combined Balance Sheets as of December 31, 1997 and December
31, 1996.................................................. F-23
Combined Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995.......................... F-24
Combined Statements of Changes in Apogee, Inc. Net
Investment for the Years ended 1997,
1996 and 1995............................................. F-25
Combined Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995.......................... F-26
Notes to Combined Financial Statements...................... F-27
PSYCHPARTNERS, L.L.C. (UNAUDITED)
Consolidated Condensed Balance Sheets as of December 31,
1997 and 1996............................................. F-36
Consolidated Condensed Statements of Operations for the
Years ended December 31, 1997,
1996 and 1995............................................. F-37
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997,
1996 and 1995............................................. F-38
Consolidated Statement of Unitholder's Equity for the Years
Ended December 31, 1997,
1996 and 1995............................................. F-39
Notes to Consolidated Financial Statements.................. F-40
</TABLE>
F-1
<PAGE> 83
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of Apogee, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of changes in stockholders'
equity and of cash flows 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
F-2
<PAGE> 84
APOGEE, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
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
F-3
<PAGE> 85
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....................................... 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
F-4
<PAGE> 86
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
F-5
<PAGE> 87
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
F-6
<PAGE> 88
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,
F-7
<PAGE> 89
APOGEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 shortterm 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.
F-8
<PAGE> 90
APOGEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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>
<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.
F-9
<PAGE> 91
APOGEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
F-10
<PAGE> 92
APOGEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
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
F-11
<PAGE> 93
APOGEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-12
<PAGE> 94
APOGEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 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
F-13
<PAGE> 95
APOGEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-14
<PAGE> 96
APOGEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-15
<PAGE> 97
APOGEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
---- ----- ----
<S> <C> <C> <C>
Current:
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>
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
F-16
<PAGE> 98
APOGEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-17
<PAGE> 99
APOGEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes the Company's restructuring activity:
<TABLE>
<CAPTION>
RESTRUCTURE RESTRUCTURE
1995 1996 AMOUNTS BALANCE AT 1997 AMOUNTS BALANCE AT
RESTRUCTURING RESTRUCTURING UTILIZED IN DECEMBER 31, RESTRUCTURING UTILIZED DECEMBER 31,
PROVISION PROVISION 1995 & 1996 1996 PROVISION IN 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.
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
F-18
<PAGE> 100
APOGEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 revenues in 1997,
1996 and 1995, respectively.
F-19
<PAGE> 101
APOGEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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>
F-20
<PAGE> 102
APOGEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
The following summarizes the activity of the stock option plan:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------------------------------
1997 1996 1995
------------ ------------- -------------
<S> <C> <C> <C>
Options:
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-$14.75 $12.25-$14.75 $12.25
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-$14.75 $ 4.25-$14.75 $12.25-$14.75
Options exercisable at end of year... 55,520 54,304 33,010
Exercisable option price ranges...... $3.25-$14.75 $ 4.25-$14.75 $12.25-$14.75
Options available for grant at end of
year under the 1994 Stock Option
Plan.............................. 247,700 242,480 315,975
</TABLE>
F-21
<PAGE> 103
APOGEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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).
F-22
<PAGE> 104
OUTPATIENT BEHAVIORAL HEALTH BUSINESS OF APOGEE, INC.
COMBINED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,532 $ 1,580
Accounts receivable, net of allowance for doubtful
accounts............................................... 4,281 4,994
Other accounts receivable................................. 570 798
Other current assets...................................... 370 983
------- -------
Total current assets.............................. 6,753 8,355
Property and equipment, net................................. 1,232 1,241
Intangible assets and excess cost over fair value of net
assets acquired, net...................................... 21,156 53,291
Other assets................................................ 150 187
------- -------
$29,291 $63,074
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 1,789 $ 3,760
Accounts payable.......................................... 1,030 862
Accrued expenses and other current liabilities............ 7,966 5,650
Due to Apogee, Inc. ...................................... 6,151 7,569
------- -------
Total current liabilities......................... 16,936 17,841
======= =======
Long-term debt.............................................. 804 2,546
Other long-term liabilities................................. 70 192
------- -------
Total liabilities......................................... 17,810 20,579
------- -------
Commitments and contingencies
Apogee, Inc., net investment.............................. 11,481 42,495
------- -------
$29,291 $63,074
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements
F-23
<PAGE> 105
OUTPATIENT BEHAVIORAL BUSINESS OF APOGEE, INC.
COMBINED STATEMENTS OF OPERATIONS
UNAUDITED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Net revenues................................................ $ 49,286 $45,475 $33,381
Cost of revenues............................................ 37,955 34,799 25,716
-------- ------- -------
Gross profit................................................ 11,331 10,676 7,665
Selling and administrative expenses......................... 6,194 5,796 3,238
Provision for doubtful accounts............................. 2,464 2,274 1,669
Amortization of intangible assets and excess cost over fair
value of net assets acquired.............................. 1,438 1,481 939
Writedown of assets......................................... 38,400
-------- ------- -------
(Loss) income from operations............................... (37,165) 1,125 1,819
Non-operating expense:
Interest.................................................. 889 662 336
-------- ------- -------
(Loss) income before income taxes........................... (38,054) 463 1,483
Provision for income taxes.................................. 50 50 50
-------- ------- -------
Net (loss) income........................................... $(38,104) $ 413 $ 1,433
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements
F-24
<PAGE> 106
OUTPATIENT BEHAVIORAL BUSINESS OF APOGEE, INC.
COMBINED STATEMENTS OF CHANGES IN APOGEE, INC. NET INVESTMENT
UNAUDITED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
--------
<S> <C>
Apogee, Inc., net investment, December 31, 1994............. $ 21,644
1995 net income............................................. 1,433
Net transactions with Apogee, Inc........................... 14,860
--------
Apogee, Inc., net investment, December 31, 1995............. 37,937
1996 net loss............................................... 413
Net transactions with Apogee, Inc........................... 4,145
--------
Apogee, Inc., net investment, December 31, 1996............. 42,495
1997 net loss............................................... (38,104)
Net transactions with Apogee, Inc........................... 7,090
--------
Apogee, Inc., net investment, December 31, 1997............. $ 11,481
========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-25
<PAGE> 107
OUTPATIENT BEHAVIORAL BUSINESS OF APOGEE, INC.
COMBINED STATEMENTS OF CASH FLOWS
UNAUDITED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income......................................... ($38,104) $ 413 $ 1,433
Adjustments to reconcile net (loss) income to net cash
used by operations:
Depreciation and amortization.......................... 1,773 1,827 1,127
Provision for doubtful accounts........................ 2,464 2,274 1,669
Noncash portion of writedown of assets held for sale... 38,400
Changes in assets and liabilities, net of effects of effects
of businesses acquired:
(Decrease) in accounts receivable......................... (1,751) (1,424) (3,852)
Decrease (increase) in other current assets............... 687 (398) (1,128)
Increase in accounts payable.............................. 218 482 440
(Decrease) increase in accrued expenses and other current
liabilities............................................ (2,403) 1,362 2,251
(Increase) in other assets and other liabilities.......... (497) (475) (50)
-------- ------- -------
Net cash provided by operating activities......... 787 4,061 1,890
-------- ------- -------
Cash flows from investing activities:
Acquisition of businesses:
Payments for acquisition of businesses, net of cash
acquired of $524 in 1996 and $618 in 1995............ -- (4,108) (6,365)
Additional payments for business acquired in prior
years................................................ (942) (3,696) (2,265)
-------- ------- -------
Net cash outlay for acquisition of businesses..... (942) (7,804) (8,630)
Purchases of property and equipment....................... (326) (425) (741)
-------- ------- -------
Net cash used in investing activities............. (1,268) (8,229) (9,371)
-------- ------- -------
Cash flows from financing activities:
Increase in net investment from Apogee, Inc. ............. 1,830 992 10,734
Increase in due to Apogee, Inc. .......................... 2,316 5,650
Principal payments on long-term obligations............... (3,713) (1,900) (2,583)
-------- ------- -------
Net cash provided by financing activities......... 433 4,742 8,151
-------- ------- -------
Net (decrease) increase in cash and cash equivalents........ (48) 574 670
Cash and cash equivalents at beginning of period............ 1,580 1,006 336
-------- ------- -------
Cash and cash equivalents at end of period.................. $ 1,532 $ 1,580 $ 1,006
======== ======= =======
Supplemental disclosures of cash flow information:
Interest paid............................................. $ 770 $ 587 $ 289
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements
F-26
<PAGE> 108
OUTPATIENT BEHAVIORAL HEALTH BUSINESS OF APOGEE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 1 -- ORGANIZATION, OPERATION AND BASIS OF PRESENTATION
On December 26, 1997 Apogee, Inc. ("Apogee") entered into an agreement of
purchase and sale (the "Purchase Agreement") with PsychPartners MidAtlantic,
Inc., PsychPartners, Inc., and PsychPartners, L.L.C. (collectively
"PsychPartners"). Pursuant to the Purchase Agreement, Apogee will sell to
PsychPartners all the assets and business of 22 outpatient behavioral health
practices ("Outpatient Practices") to PsychPartners (the "Sale").
The Outpatient Practices primarily operate multi-disciplinary outpatient
behavioral health group practices and, collectively as a unit, is one of the
largest providers of outpatient behavioral health services in the United States.
The Outpatient Practices provide behavioral health and related services,
principally at free-standing clinics located in 9 states and the District of
Columbia. At December 31, 1997, the Outpatient Practices were principally
concentrated in Florida, Maryland, New Jersey, Pennsylvania, Virginia and
Wisconsin.
Basis of presentation
The accompanying financial statements present the financial position,
results of operations and cash flows of the behavioral health business of Apogee
to be sold. Apogee's historical cost basis of assets and liabilities has been
reflected in the Outpatient Practices' financial statements. The financial
information in these financial statements is not necessarily indicative of
results of operations, financial position and cash flows that would have
occurred if the Outpatient Practices had been a separate stand alone entity
during the periods presented or future periods. The consolidated financial
statements included herein do not reflect any changes that may occur in the
financing and operations of the Outpatient Practices as a result of the Sale.
The Outpatient Practices participate in Apogee's centralized cash
management system to finance operations. Cash deposits from the Outpatient
Practices are transferred to Apogee on a regular basis and Apogee pays the
expenses of the Outpatient Practices when due. Accounts payable on the balance
sheet consists of expenses of the Outpatient Practices remitted to Apogee but
unpaid. No interest has been charged on accounts payable transactions with
Apogee.
Apogee provides certain selling, general and administrative services to the
Outpatient Practices including insurance, finance, accounting, legal, systems,
benefits, marketing and facilities. These expenses were allocated to the
Outpatient Practices based on proportional allocations based upon net revenues,
direct attribution or other methods which management believes to be reasonable.
Expense allocations to Outpatient Practices were $2,570, $3,513 and $2,379 for
the years ended December 31, 1997, 1996 and 1995, respectively.
The expenses allocated to the Outpatient Practices for these services are
not necessarily indicative of the expenses that would have incurred if the
Outpatient Practices had been a separate, independent entity and had managed
these functions.
Apogee provides for the working capital needs of the Outpatient Practices
through Apogee's revolving credit facility ("Credit Facility"). Interest expense
has been allocated to the financial statements of the Outpatient Practices based
on the Due to Apogee, Inc. balance and the borrowing rate of the Credit
Facility.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of combination
The combined financial statements include the accounts of the Outpatient
Practices and all wholly owned and beneficially owned subsidiaries. Because of
corporate practice of medicine laws in certain states in which the Outpatient
Practices operate, the Outpatient Practices do not own the professional
corporations which
F-27
<PAGE> 109
OUTPATIENT BEHAVIORAL HEALTH BUSINESS OF APOGEE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
operate the professional and clinical aspects of the outpatient behavioral
healthcare practices in those states but instead have 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 Outpatient Practices enter into
exclusive long-term management services agreements ("Management Services
Agreements") with the professional corporations. Through the Management Services
Agreements, the Outpatient Practices have 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 behavioral healthcare services as required by
certain state laws. Under the Management Services Agreements, the Outpatient
Practices establish 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 Outpatient Practices for expenses
incurred in providing covered services plus a profit. These interests are
unilaterally saleable and transferable by the Outpatient Practices and fluctuate
based upon the actual performance of the operations of the professional
corporations.
Through the Nominee Arrangements, the Outpatient Practices have 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
Outpatient Practices must combine the results of the affiliated practices.
Because the Outpatient Practices must present combined financial statements, net
revenues are presented in the Combined Statements of Operations. All significant
intercompany accounts and transaction including management fees have been
eliminated.
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
Net revenues are 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 Apogee's historical experience and contractual rates established
with the payors.
The Outpatient Practices have also entered into agreements to provide
behavioral health services for a fixed per-member per-month capitated fee.
Capitated revenues are recorded in the month for which the member is entitled to
services (see Note 11).
F-28
<PAGE> 110
OUTPATIENT BEHAVIORAL HEALTH BUSINESS OF APOGEE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 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>
<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 of the Outpatient
Practices, Apogee 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,
Apogee, 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 $200 in the fourth quarter as a
result of this change in estimate.
Effective January 1, 1996, Apogee 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, Apogee has historically reviewed the realizability of long-lived
assets, certain intangible assets and goodwill of the Outpatient Practices
whenever events or circumstances occur which indicate recorded cost may not be
recoverable.
If the expected future cash flows (undiscounted) are less than the carrying
amount of such assets, Apogee has recognized 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
Apogee accounts for certain items of income and expense of the Outpatient
Practices 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 Apogee believes it more likely than not that
the benefit will be realized.
F-29
<PAGE> 111
OUTPATIENT BEHAVIORAL HEALTH BUSINESS OF APOGEE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Earnings per share
Historical earnings per share are not presented since there is no separate
identifiable pool of capital relating to the Outpatient Practices.
NOTE 3 -- SALE OF OUTPATIENT BUSINESS TO PSYCHPARTNERS
On December 26, 1997, Apogee entered into the Purchase Agreement with
PsychPartners. Pursuant to the Purchase Agreement, Apogee will sell to
PsychPartners all of the assets and business of (i) all of the capital stock of
one of the subsidiaries of the Outpatient Practices operating two outpatient
behavioral health practices and (ii) substantially all of the assets relating to
20 of the Outpatient Practices (the "Subsidiary Stock"). In consideration for
the Sale of the Outpatient Practices, PsychPartners will pay to Apogee 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 ("Warrant") and (c) the assumption of certain
liabilities of Apogee and the Outpatient Practices (collectively the "Purchase
Price"). The Purchase Price is subject to certain adjustments.
The Warrant entitles Apogee to purchase 400,000 Common Units of
PsychPartners during the five (5) year period following the closing date. The
issuance of the Warrant to Apogee is contingent on the achievement of certain
future operating profit thresholds of two of the businesses of the Outpatient
Practices during a one-year period after the closing of the Sale as defined in
the agreement. 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 it is practicable after the approval of the
Purchase Agreement by the holders of a majority of the outstanding shares of
Apogee, Inc. Common Stock. Apogee anticipates the closing date of the sale will
be in the second quarter of 1998.
The respective obligations of Apogee and PsychPartners 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 Apogee, Inc. Common Stock, the correctness in all material
respects of the representations and warranties of the parties to the Purchase
Agreement and Apogee 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 shareholders of Apogee)
may be waived by PsychPartners. If Apogee's shareholders do not approve the
Sale, Apogee'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
Apogee. Apogee may terminate the Purchase Agreement (i) with the mutual written
consent of PsychPartners, (ii) in the event a condition to Apogee's or
PsychPartners' obligation to the closing has not been met or waived on or prior
to April 30, 1998 or (iii) because the Board of Directors of Apogee determines,
in the exercise of its judgment as to its fiduciary duties to the shareholders
after consultation with counsel, that such termination is required 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, PsychPartners, Apogee
and certain of its subsidiaries will enter into an Interim Services Agreement
pursuant to which Apogee and the subsidiaries will assist PsychPartners in
obtaining certain consents in connection with the Sale and will provide certain
management and other services, including billing services to PsychPartners to
operate and manage the Outpatient Practices in connection with the transition of
the Outpatient Practices to PsychPartners.
F-30
<PAGE> 112
OUTPATIENT BEHAVIORAL HEALTH BUSINESS OF APOGEE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Based on the fair value of the net assets of the Outpatient Practices
established by the Purchase Agreement, Apogee recorded a charge of $38,400 on
the Financial Statements of the Outpatient Practices to write down the carrying
amounts of the net assets of the Outpatient Practices to fair value less cost to
sell.
NOTE 4 -- WORKING CAPITAL DEFICIT
At December 31, 1997, the Outpatient Practices had a working capital
deficit of $10,183. This deficit is primarily attributable to the current
classification of Outpatient Practices' Due to Apogee, Inc. balance and accrued
liabilities which pertain to Apogee's sale of the Outpatient Practices.
If the Sale is not consummated, Apogee will be required (i) to either
continue operating the Outpatient Practices or attempt to locate another buyer
for the Outpatient Practices, and (ii) to refinance its revolving Credit
Facility. Apogee 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 Apogee Credit
Facility were approximately $12,100 as of December 31, 1997, and $14,300 as of
March 15, 1998. Apogee 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. Apogee has obtained a letter of intent
from PNC Bank indicating their present intention to keep the existing Credit
Facility in place through 1998 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. Apogee has
entered into an agreement with certain investment funds which are significant
stockholders of Apogee 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, Inc. 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 Apogee's need to evaluate other potential guarantors and the
terms they may offer, Apogee was given the right to accept proposals from other
potential guarantors. In the event Apogee terminates the investment funds'
obligations because it has secured more favorable financing arrangements, Apogee
shall be obligated to pay such investment 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.
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......... $7,870 $9,182
Less: Allowance for doubtful accounts................. 3,589 4,188
------ ------
$4,281 $4,994
====== ======
</TABLE>
The Outpatient Practices' services are primarily reimbursed by third party
payors, including Medicare, Medicaid, managed care organizations and commercial
insurance companies. Apogee believes the allowance for doubtful accounts is an
adequate estimate based on its ongoing review of collectibility.
F-31
<PAGE> 113
OUTPATIENT BEHAVIORAL HEALTH BUSINESS OF APOGEE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- BUSINESS ACQUISITIONS
During 1996 and 1995, Apogee acquired 6 and 10 outpatient businesses to be
sold, 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.
Information with respect to businesses acquired are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
1996
-----------------
<S> <C>
Cash paid (net of cash acquired)............................ $4,108
Common stock of Apogee, Inc. issued......................... 191
Subordinated promissory notes issued........................ 1,205
Other deferred purchase price............................... --
------
5,504
Liabilities assumed......................................... 819
------
6,323
Fair value of assets acquired, principally accounts
receivable, property and equipment and certain identified
intangible assets......................................... 630
------
Cost in excess of fair value of net assets acquired.... $5,693
======
</TABLE>
In connection with certain acquisitions, Apogee has entered into
contractual arrangements whereby additional shares of Apogee, Inc. Common Stock
and cash may be issued to former owners of acquired companies upon attainment of
specified financial criteria 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, Apogee
will be obligated to make cash payments of approximately $3,396 and issue
approximately 181,939 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 terms of the Sale, the Outpatient
Practices obligation for contingent consideration for periods subsequent to the
closing date for the practices acquired will be assumed by PsychPartners.
Apogee paid $942, $743 and $480 in cash and issued 149,274, 28,497 and
15,045 shares of Apogee, Inc. Common Stock in 1997, 1996 and 1995, respectively,
in connection with outpatient 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.......................... $2,021 $1,695
Less: Accumulated depreciation........................... 789 454
------ ------
$1,232 $1,241
====== ======
</TABLE>
Depreciation expense was $335, $346 and $188 for 1997, 1996 and 1995,
respectively.
F-32
<PAGE> 114
OUTPATIENT BEHAVIORAL HEALTH BUSINESS OF APOGEE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- INTANGIBLE ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Excess cost over fair value of net assets acquired....... $25,628 $55,876
Patient lists............................................ 68 68
Covenants not to compete................................. 304 304
------- -------
25,256 56,248
Less: Accumulated amortization........................... 4,100 2,957
------- -------
$21,156 $53,291
======= =======
</TABLE>
As further described in Note 3, Apogee recorded a charge of $38,400 related
to the Outpatient Practices to write down the carrying amount of the assets to
be sold to PsychPartners. In accordance with SFAS 121, this charge is primarily
reflected as a reduction to goodwill at December 31, 1997.
NOTE 9 -- BORROWINGS
Long- term debt
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
------ ------
<S> <C> <C>
5.0% - 9.0% subordinated promissory notes issued by
Apogee in connection with outpatient business
acquisitions, payable through 2000..................... $2,587 $6,109
Subordinated convertible debentures, payable through
1997................................................... 183
Various installment loans payable through October 1998,
interest rates from 7.0% to 9.5%....................... 6 14
------ ------
2,593 6,306
Less: Amounts due within one year...................... 1,789 3,760
------ ------
$ 804 $2,546
====== ======
Minimum repayments of long-term debt are:
1998................................................... $1,789
1999................................................... 773
2000................................................... 31
------
$2,593
======
</TABLE>
Based on the borrowing rates currently available to Apogee for loans with
similar terms and maturity, the fair value of the Outpatient Practices' debt at
December 31, 1997, and 1996 was $2,424 and $6,269, respectively.
NOTE 10 -- INCOME TAXES
The results of operations of the Outpatient Practices are included in the
consolidated federal and certain state income tax returns of Apogee. The
provision for income taxes was calculated as if Outpatient Practices had filed
separate income tax returns. Income taxes have been provided against income
before income taxes utilizing federal net operating loss carryforwards which
were generated prior to 1995.
F-33
<PAGE> 115
OUTPATIENT BEHAVIORAL HEALTH BUSINESS OF APOGEE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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
---- ---- ----
<S> <C> <C> <C>
Current:
Federal............................................... $-- $-- $--
State................................................. 50 50 50
--- --- ---
$50 $50 $50
=== === ===
</TABLE>
The reconciliation of the federal statutory rate to the effective tax rate
is as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal statutory 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.......................... 5 4 8
Business expense disallowance........................... 2 2 2
Non-deductible portion of restructuring charge.......... 16
Loss for which no tax benefit was provided.............. 13
Net operating loss utilized............................. (33)% (43)%
--- --- ---
0% 11% 3%
=== === ===
</TABLE>
A valuation reserve has been established against the future benefit of the
net operating loss carryforwards.
NOTE 11 -- COMMITMENTS AND CONTINGENCIES
Operating leases
The Outpatient Practices lease office and patient care facilities as well
as equipment under noncancellable operating leases which require future minimum
annual rentals as follows:
<TABLE>
<S> <C>
1998................................................ $2,275
1999................................................ 1,651
2000................................................ 1,196
2001................................................ 689
2002................................................ 155
------
$5,966
======
</TABLE>
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 $2,508, $2,407 and $1,827 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Capitated contracts
The Outpatient Practices have entered into agreements with managed care
organizations and corporations to provide behavioral health services to members
of a group at a fixed rate per member, regardless of the services actually
performed ("capitated contracts"). Approximately 16%, 13%, and 10% of the
Outpatient Practices' net revenues were derived from capitated contracts in
1997, 1996 and 1995, respectively. Revenues under these contracts are recorded
in the month for which the member is entitled to services. Apogee
F-34
<PAGE> 116
OUTPATIENT BEHAVIORAL HEALTH BUSINESS OF APOGEE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
estimates the costs of providing services under these contracts, which includes
a reserve for service costs incurred, but not reported, based upon authorized
services, past claim payment experience for member groups and other factors.
Services under these contracts are performed using both Outpatient Practices'
employees and provider networks which the Outpatient Practices manage.
Apogee 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 of utilization of services under these contracts
could result in material losses to the Outpatient Practices. Historically, the
Outpatient Practices have managed these capitated contracts profitably.
Generally, either party to these capitated contracts may terminate the contract
without cause at any time with thirty to ninety days written notice.
NOTE 12 -- ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------ ------
<S> <C> <C>
Clinician fees and medical claims.......... $1,539 $1,469
Acquisition related costs.................. 2,185 1,466
Salaries and vacation...................... 879 1,275
Other...................................... 1,548 3,359
------ ------
$6,151 $7,569
====== ======
</TABLE>
Acquisition related costs pertain primarily to contingent consideration
payable in connection with outpatient businesses acquired by Apogee based upon
the resolution of purchase price contingencies.
NOTE 13 -- BENEFIT PLANS
Retirement Plan
Substantially all employees of the Outpatient Practices participate in an
Apogee sponsored defined contribution 401(k) plan. 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 Apogee's
matching contributions relating to employees of the Outpatient Practices were
$87, $74 and $31 for 1997, 1996 and 1995, respectively.
F-35
<PAGE> 117
PSYCHPARTNERS L.L.C.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 1,276,615 $ 147,666
Accounts receivable, net.................................... 5,578,608 566,096
Other accounts receivable................................... 174,251 106,130
Other current assets........................................ 377,743 170,311
----------- -----------
Total current assets........................................ 7,407,217 990,203
Property and equipment, net................................. 509,903 105,102
Intangible assets and excess cost over fair value of net
assets acquired, net...................................... 1,926,500 382,538
----------- -----------
$ 9,843,620 $ 1,477,843
=========== ===========
LIABILITIES AND UNITHOLDERS' EQUITY
Current liabilities:
Current portion of note payable............................. $ 475,471 $ 17,000
Convertible promissory note................................. 2,352,000 --
Account payable............................................. 729,416 148,269
Accrued expenses and other current liabilities.............. 1,974,348 419,249
----------- -----------
Total current liabilities................................... 5,531,235 584,518
Long-term notes payable..................................... 166,666 --
----------- -----------
Total liabilities........................................... 5,697,901 584,518
Minority interest........................................... 187,795 --
Unitholders' Equity:
Common Units................................................ 6,034,048 2,366,660
Preferred Units............................................. 1,428,023 --
Treasury Units.............................................. (162,000)
Accumulated deficit......................................... (3,342,147) (1,473,335)
----------- -----------
Total unitholders' equity................................... 3,957,924 893,325
----------- -----------
$ 9,843,620 $ 1,477,843
=========== ===========
</TABLE>
F-36
<PAGE> 118
PSYCHPARTNERS, L.L.C.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------------------------------
1997 1996 1995
----------- ----------- ---------
<S> <C> <C> <C>
Net revenues......................................... $15,089,189 $ 4,052,560 $ 1,247
Cost of revenues..................................... 10,748,478 3,689,254 --
----------- ----------- ---------
Gross profit......................................... 4,340,711 363,306 1,247
Selling and administrative expenses.................. 4,379,843 1,203,184 193,697
Minority interest expense............................ 133,500 -- --
Provision for doubtful accounts...................... 1,503,975 472,441 --
Amortization of intangible assets and excess cost
over fair value of net assets acquired............. 136,250 14,860 --
----------- ----------- ---------
Loss from operations................................. (1,812,857) (1,327,179) (192,450)
Nonoperating expenses (income):
Interest expense..................................... 89,715 318 0
Interest (income).................................... (33,760) (46,612) 0
----------- ----------- ---------
Loss before income taxes............................. (1,868,812) (1,280,885) (192,450)
Provision for income taxes........................... --
----------- ----------- ---------
Net loss............................................. $(1,868,812) $(1,280,885) $(192,450)
=========== =========== =========
</TABLE>
F-37
<PAGE> 119
PSYCHPARTNERS, L.L.C.
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.................................................. $(1,869) $(1,281) $(192)
Adjustments to reconcile net loss to net cash used by
operations:
Depreciation and amortization.......................... 181 31 --
Changes in assets and liabilities, net of effects of
businesses acquired:
Increase in accounts receivable...................... (3,650) (566) --
Increase in other current assets..................... (294) (275) (1)
Increase in accounts payable......................... 581 148 --
Increase in accrued expenses and other current
liabilities....................................... 1,460 400 18
Decrease (increase) in other assets and other
liabilities....................................... 188 (106) --
------- ------- -----
Net cash used in operating activities..................... (3,403) (1,649) (175)
Cash flows from investing activities:
Acquisition of businesses:
Payments for acquisition of businesses................. (3,063) (291) --
------- ------- -----
Net cash outlay for acquisition of businesses........ (3,063) (291) --
Purchase of property and equipment........................ (331) (120) --
------- ------- -----
Net cash used in investing activities.................. (3,394) (411) --
Cash flows from financing activities:
Proceeds from issuance of common and preferred units...... 4,932 2,253 113
Proceeds from issuance of notes payable................... 2,827 -- 79
Proceeds from issuance of long term obligations........... 167 -- --
Payments on notes payable................................. -- (62) --
------- ------- -----
Net cash provided by financing activities................. 7,926 2,191 192
Net increase in cash and cash equivalents................... 1,129 131 17
Cash and cash equivalents at beginning of period............ 148 17 --
------- ------- -----
Cash and cash equivalents at end of period.................. $ 1,277 $ 148 $ 17
======= ======= =====
</TABLE>
F-38
<PAGE> 120
PSYCHPARTNERS, L.L.C.
CONSOLIDATED STATEMENTS OF UNITHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED TREASURY
COMMON UNITS UNITS UNITS
----------------------- -------------------- ------------------- ACCUMULATED
UNITS AMOUNT UNITS AMOUNT UNITS AMOUNT DEFICIT TOTAL
--------- ----------- ------- ---------- ------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of December 31,
1994.........................
Issuance of members' units, net
of placement commissions and
offering expenses............ 1,424,310 $ 113,455 $ 113,455
Net loss for the period ended
December 31, 1995............ $ (192,450) (192,450)
--------- ----------- ------- ---------- ------- --------- ----------- -----------
Balance as of December 31,
1995......................... 1,424,310 113,455 (192,450) (78,995)
Issuance of members' units, net
of placement commissions and
offering expenses............ 1,245,649 1,738,705 1,738,705
Issuance of members' units at
acquisition.................. 326,000 514,500 514,500
Net loss for the year ended
December 31, 1996............ (1,280,885) (1,280,885)
--------- ----------- ------- ---------- ------- --------- ----------- -----------
Balance as of December 31,
1996......................... 2,995,959 2,366,660 (1,473,335) 893,325
Issuance of members' units, net
of placement commissions and
offering expenses............ 1,516,852 2,938,888 2,938,888
Issuance of members' units at
acquisition.................. 356,600 728,500 728,500
Purchase of Treasury units..... (72,000) $(162,000) (162,000)
Issuance of preferred units,
net of placement commissions
and offering expenses........ 566,887 $1,428,023 1,428,023
Net loss for the year ended
December 31, 1997............ (1,868,812) (1,868,812)
--------- ----------- ------- ---------- ------- --------- ----------- -----------
Balance at December 31, 1997... 4,869,411 $6,034,0480 566,887 $1,428,023 (72,000) $(162,000) $(3,342,147) $ 3,957,924
========= =========== ======= ========== ======= ========= =========== ===========
</TABLE>
F-39
<PAGE> 121
PSYCHPARTNERS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT UNIT AND PER UNIT DATA)
NOTE 1 -- ORGANIZATION AND OPERATION
PsychPartners, L.L.C. ("Company"), an Alabama Limited Liability Company,
was formed to provide behavioral health services and commenced operations on
October 26, 1995. The Company operates multi-disciplinary outpatient behavioral
health group practices and provides behavioral health and related services,
principally at free-standing clinics. The Company currently operates behavioral
health clinics located in four (4) states. The Company also offers full and
shared risk arrangements with employers and managed care organizations to
perform behavioral health services on a capitated, sub-capitated and/or case
rate basis. In addition, the Company provides an array of behavioral health
services including: employee assistance programs; third party clinical case
management and claims adjudication; and management and staffing of acute and
sub-acute inpatient facilities and correctional institutions through contractual
agreements. At December 31, 1997, operations were principally concentrated in
New Jersey, Pennsylvania, Alabama and Tennessee.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly and beneficially owned subsidiaries. In response to regulations
in certain states in which the Company operates, it has executed management
agreements with professional corporations. Through the terms of the management
agreements, the Company has complete control over the professional corporations
with the exception of the provision or direction of behavioral health services.
The management agreements substantially restrict the business activities and the
rights of the shareholders of the professional corporations. These professional
corporations are consolidated because the Company has unilateral and perpetual
control over the assets and business operations of the professional corporations
and because, notwithstanding the lack of majority ownership, consolidation of
the professional corporations is necessary to present fairly the financial
position and results of operations of the Company due to the existence of a
parent-subsidiary relationship by means other than majority ownership of the
professional corporations' voting stock. The Company effectively has perpetual
control over the professional corporations because the Company does not intend
to terminate any of its management agreements with the ongoing professional
corporations and, upon termination of any such agreement by the clinician, the
Company intends to exercise its option to purchase or to designate a purchaser
for the stock of the professional corporation. Fees paid to the Company under
these agreements approximate the operating income, as defined, of the
beneficially owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Preparation of financial statements
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
Net revenues are reported at the estimated amounts to be realized through
payments from patients, third party payors and others for services rendered.
F-40
<PAGE> 122
PSYCHPARTNERS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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:
Furniture and Fixtures........ 5 to 7 years
Office Equipment.............. 3 to 5 years
Intangible assets and excess cost over fair value of net assets acquired
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 at the subsidiary
level but not at the parent level because the Company is a Limited Liability
Company (see Income Taxes). The excess of the purchase price over the fair value
of the identifiable net assets acquired is amortized on a straight-line basis
over twenty (20) years and identified intangible assets are amortized over
periods ranging from one to twenty (20) years. On an annual basis the Company
reviews the recoverability of goodwill based primarily on estimated future cash
flows.
Accounting for impairment of long-lived assets
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.
Financial instruments
The carrying value of cash and cash equivalents, accounts receivable and
payable and accrued liabilities approximates faire value due to the short-term
maturities of these assets and liabilities.
Income taxes
The Company is a Limited Liability Company under the provision of the
Internal Revenue Code. Accordingly, the Company does not pay federal or state
corporate income taxes; instead, the Company's Unitholders are responsible for
these taxes. The Company however, does have an obligation for federal and state
corporate income taxes at the subsidiary level. The Company's subsidiaries
applied the asset and liability approach of Statement of Financial Accounting
Standards No. 109 for financial accounting and reporting of income taxes and
recognizes deferred tax assets and liabilities for the future tax consequences
of events that have been recognized in the subsidiaries financial statements or
tax returns.
F-41
<PAGE> 123
PSYCHPARTNERS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- 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:........ $9,933 $2,095
Less: Allowance for doubtful accounts.................... 4,354 1,529
------ ------
$5,579 $ 566
====== ======
</TABLE>
The Company's services are primarily reimbursed by third party payors,
including Medicare, managed care organizations and commercial insurance
companies. Third party reimbursement is initially billed at "usual, customary
and reasonable" market rates. Aggregate billings are at established rates
adjusted to estimated amounts realizable from third party payors. The allowance
for doubtful accounts is estimated based on management's ongoing review of
collectibility including accounts receivable aging reports and cash collection
analyses. The balances in the allowance for doubtful accounts as of December 31,
1997 and 1996 includes reserves established for receivables acquired and reflect
management's estimate of reserving certain receivables at date of acquisition.
NOTE 4 -- PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1996
---- ----
<S> <C> <C>
Furniture, fixtures and equipment........................... $583 $120
Less: Accumulated amortization............................ 73 15
---- ----
$510 $105
==== ====
</TABLE>
Depreciation expense was $45 and $15 for 1997 and 1996, respectively.
NOTE 5 -- BORROWINGS
Notes payable
On September 24, 1997, the Company borrowed $2,352 from Capital Health
Partners, L.P. pursuant to the terms of a Convertible Promissory Note that
matures on September 24, 1998. The Note bears interest at a rate of eight
percent (8%) per annum and has the option to be converted into Units. The holder
of the convertible promissory note has agreed to convert its debt into Class B
Preferred Units of PsychPartners, L.L.C. on or prior to the closing of the
proposed Apogee transaction, because the noteholder is also a participant in the
new equity financing through Electra Investment Trust, PLC. Such conversion into
Class B Preferred Units of PsychPartners, L.L.C. is a condition to closing of
the new equity financing.
On July 1, 1997, the Company entered into a Deferred Consideration
obligation in conjunction with the purchase of the assets of APS and ABHS. The
terms of which are: Purchaser shall pay to (i) Shareholder Eighty-Three Thousand
Three Hundred Thirty-Four Dollars ($83,334), plus the prime rate of interest as
published in the Wall Street Journal as of the Closing Date, on the first
anniversary of the Closing Date: (ii) ABHS Fifty-Three Thousand Three Hundred
Thirty-Four Dollars and 00/100 ($53,334), plus the prime rate of interest as
published in the Wall Street Journal as of the Closing Date, on the first
anniversary of the Closing Date; and (iii) Shareholder One Hundred Sixty-Six
Thousand Six Hundred Sixty-Six Dollars ($166.666), plus the prime rate of
interest, on the second anniversary of the Closing Date.
F-42
<PAGE> 124
PSYCHPARTNERS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On June 16, 1997, the Company assumed an obligation of the seller as part
of the acquisition of the assets of ADTC the terms of the Promissory Note are:
<TABLE>
<S> <C> <C>
Face Amount................................. -- $420.000
Balance at December 31, 1997................ -- $304.805
Maturity Date............................... -- August 31, 2026
Interest Rate............................... -- Floating between 5% and 12%
depending on certain cash flow
parameters spelled out in the
note. The average rate during
1997 was 5%.
</TABLE>
Principal and interest to be paid monthly.
NOTE 6 -- COMMITMENTS AND CONTINGENCIES
Operating leases
The Company leases office and patient care facilities as well as vehicles
and equipment under noncancellable operating leases which require future minimum
annual rentals as follows:
<TABLE>
<S> <C>
1998................................................ $1,176
1999................................................ 724
2000................................................ 582
2001................................................ 359
2002 and thereafter................................. 234
------
$3,075
======
</TABLE>
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 $1,086 and $405 for the years ended December
31, 1997 and 1996, respectively.
NOTE 7 -- ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1996
------ ----
<S> <C> <C>
Clinician fees.............................................. $ 713 $273
Payroll Related............................................. 175 95
Accrued Legal and........................................... 131 --
Accounting Accrued Termination Costs........................ 102 --
Accrued Interest............................................ 65 --
Accrued Equalization Costs.................................. 617 --
Payment Accrued Expenses, Other............................. 171 51
------ ----
$1,974 $419
====== ====
</TABLE>
Accrued equalization costs pertain to consideration payable to former
owners of acquired businesses based upon the resolution of purchase price
contingencies.
F-43
<PAGE> 125
PSYCHPARTNERS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- BENEFITS PLANS
Stock Option Plan
Effective April 2, 1996, the Company's Board of Managers ratified and
approved the establishment of an employee stock option plan ("the Plan") under
which options to purchase up to 300,000 Units of the Company's common Units may
be granted to employees, officers, managers, and others. 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 varying period of time.
Retirement Plan
The Company has a defined contribution 401(k) plan covering substantially
all of its employees. The general, eligible employees may contribute up to 6% of
their compensation to this plan. The Company did not make any matching
contribution in the years ended December 31, 1997 or 1996.
NOTE 9 -- MINORITY INTEREST
PsychPartners, L.L.C. owns a 51% interest in American Day CD Centers,
L.L.C., a Delaware limited liability company ("CD Centers"). PsychPartners,
L.L.C. purchased this 51% interest from American Day Management Services,...Inc.
in June of 1997, as part of a series of asset acquisitions from the American
Day Treatment Centers companies. The 49% owner of CD Centers is High Focus
Centers, Inc., a New Jersey corporation. The sole shareholder of High Focus
Centers, Inc. is David Nyman, Ph.D., who is also an executive officer of CD
Centers. CD Centers offers an intensive outpatient counseling program for
adolescent and adult substance abuse clients generally referred by managed care
companies, and is not considered a "practice group" by PsychPartners, L.L.C.
F-44
<PAGE> 126
EXHIBIT A
PURCHASE AGREEMENT
AGREEMENT OF PURCHASE AND SALE
AMONG
PSYCHPARTNERS, L.L.C., PSYCHPARTNERS MIDATLANTIC, INC.
AND PSYCHPARTNERS, INC.
AND
APOGEE, INC.
APOGEE OF TENNESSEE, INC.
APOGEE OF PENNSYLVANIA, INC.
APOGEE SERVICES, INC.
APOGEE OF MARYLAND, INC.
APOGEE OF TENNESSEE, INC.
AGP ACQUISITION, INC.
WINSTON CLINICS, INC.
DOC SYSTEMS, INC.
FAMILY SOCIAL AND PSYCHOTHERAPY SERVICES, INC.
ASSOCIATED MENTAL HEALTH SERVICES, LTD.
PSYCHIATRIC ASSOCIATES, INC.
PSYCHOGERIATRIC CONSULTANTS, INC.
NAPERVILLE PSYCHIATRIC, INC.
APOGEE OF NORTHERN FLORIDA, INC.
FAMILY SOCIAL AND PSYCHOLOGICAL SERVICES, L.L.C.
WOODMONT PSYCHIATRIC ASSOCIATES, INC.
AHS OF RHODE ISLAND, INC.
EFFECTIVE AS OF DECEMBER 26, 1997
A-1
<PAGE> 127
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I
PURCHASE AND SALE OF ASSETS AND STOCK...................................... A-7
Section 1.1 Conveyance and Transfer of Stock............................ A-7
Section 1.2 Conveyance and Transfer of Assets........................... A-7
Section 1.3 Excluded Assets............................................. A-9
Section 1.4 Assumed Liabilities......................................... A-9
Section 1.5 Retained Liabilities........................................ A-9
Section 1.6 Purchase Price.............................................. A-10
Section 1.7 Post-Closing Adjustments.................................... A-10
Section 1.8 Payment of Purchase Price................................... A-13
Section 1.9 Allocation of Purchase Price................................ A-13
ARTICLE II
THE CLOSING................................................................ A-13
Section 2.1 Date and Place.............................................. A-13
Section 2.2 Delivery of Documents....................................... A-14
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLERS.................................. A-14
Section 3.1 Corporate Organization...................................... A-14
Section 3.2 Corporate Authority; Authorization of Agreement............. A-14
Section 3.3 Capital Stock............................................... A-14
Section 3.4 Subsidiaries................................................ A-15
Section 3.5 Title to Stock and Power to Convey.......................... A-15
Section 3.6 No Violation................................................ A-15
Section 3.7 Financial Statements........................................ A-15
Section 3.8 No Undisclosed Liabilities.................................. A-16
Section 3.9 Absence of Changes.......................................... A-16
Section 3.10 Limitation on Sales......................................... A-17
Section 3.11 Title to Properties; Encumbrances........................... A-17
Section 3.12 Title Conveyed.............................................. A-17
Section 3.13 Real Property............................................... A-18
Section 3.14 Leases...................................................... A-18
Section 3.15 Accounts Receivable......................................... A-18
Section 3.16 Accounts Payable............................................ A-18
Section 3.17 Intellectual Property Matters............................... A-18
Section 3.18 Contracts and Commitments................................... A-18
Section 3.19 Agreements in Full Force and Effect......................... A-19
Section 3.20 Insurance................................................... A-19
Section 3.21 Compliance with Laws........................................ A-19
Section 3.22 Employment Matters.......................................... A-20
Section 3.23 Employee Benefit Plans and Arrangements..................... A-20
Section 3.24 Litigation.................................................. A-20
Section 3.25 Compliance With Fraud and Abuse Statutes.................... A-21
Section 3.26 Governmental Consents....................................... A-21
Section 3.27 Other Consents.............................................. A-21
Section 3.28 Environmental Matters....................................... A-21
Section 3.29 Inventory................................................... A-22
</TABLE>
A-2
<PAGE> 128
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 3.30 Customers, Suppliers and Sales Representatives.............. A-22
Section 3.31 Brokers or Finders.......................................... A-22
Section 3.32 Taxes....................................................... A-22
Section 3.33 Tax Returns................................................. A-22
Section 3.34 OSHA and ADA and Clean Air Act.............................. A-22
Section 3.35 Full Disclosure............................................. A-22
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASERS AND PSYCHPARTNERS............. A-23
Section 4.1 Organization................................................ A-23
Section 4.2 Authorization............................................... A-23
Section 4.3 No Violation................................................ A-23
Section 4.4 Litigation.................................................. A-23
Section 4.5 Governmental Consents....................................... A-23
Section 4.6 Other Consents.............................................. A-24
Section 4.7 No Brokers.................................................. A-24
Section 4.8 Shares to be Fully Paid; Reservation of Stock............... A-24
Section 4.9 Capital Structure of PsychPartners and Purchasers........... A-24
ARTICLE V
ADDITIONAL COVENANTS AND AGREEMENTS........................................ A-24
Section 5.1 Operations Pending Closing; Filing of Tax Returns........... A-24
Section 5.2 Shareholders Meeting........................................ A-25
Section 5.3 Proxies..................................................... A-25
Section 5.4 Payment of Taxes and Certain Expenses....................... A-26
Section 5.5 Earnout Liabilities......................................... A-26
Section 5.6 Best Efforts................................................ A-26
Section 5.7 Consents; Duties of Sellers................................. A-27
Section 5.8 Additional Insurance Coverage............................... A-27
Section 5.9 Transition Assistance....................................... A-27
Section 5.10 Access To, and Information Concerning, Properties and A-27
Records.....................................................
Section 5.11 Noncompetition; Nonsolicitation; Nondisclosure.............. A-27
Section 5.12 Exclusive Agreement......................................... A-28
Section 5.13 Employee Benefit Plans...................................... A-29
Section 5.14 Mail Received After Closing................................. A-29
Section 5.15 Cobra....................................................... A-29
Section 5.16 Company Name................................................ A-29
Section 5.17 Cooperation and Records Retention........................... A-29
Section 5.18 Offers of Employment........................................ A-30
Section 5.19 Assignment and Assumption of Contracts...................... A-30
Section 5.20 Further Assurances.......................................... A-30
Section 5.21 Publicity................................................... A-30
Section 5.22 Lease Renewals.............................................. A-30
ARTICLE VI
CONDITIONS TO THE OBLIGATIONS OF PURCHASERS................................ A-30
Section 6.1 Representations and Warranties True......................... A-30
Section 6.2 Compliance with this Agreement.............................. A-30
Section 6.3 Documents to be Delivered................................... A-31
Section 6.4 Shareholder Approval........................................ A-31
Section 6.5 No Injunctions.............................................. A-31
</TABLE>
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<TABLE>
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ARTICLE VII
CONDITIONS TO THE OBLIGATIONS OF SELLERS................................... A-31
Section 7.1 Representations and Warranties True......................... A-31
Section 7.2 Compliance with this Agreement.............................. A-31
Section 7.3 Documents to be Delivered................................... A-31
Section 7.4 No Injunction............................................... A-32
Section 7.5 Assumption of Assumed Liabilities........................... A-32
ARTICLE VIII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION................ A-32
Section 8.1 Survival of Representations and Warranties.................. A-32
Section 8.2 Indemnification by Sellers.................................. A-32
Section 8.3 Indemnification by Purchasers............................... A-33
Section 8.4 Notice of Claims............................................ A-33
Section 8.5 Limits on Indemnification................................... A-34
Section 8.6 Tax Benefit and Insurance Proceeds.......................... A-34
Section 8.7 Sole and Exclusive Remedy................................... A-34
Section 8.8 Satisfaction of Indemnification Claim....................... A-34
ARTICLE IX
TERMINATION................................................................ A-35
Section 9.1 Termination................................................. A-35
Section 9.2 Obligations Upon Termination................................ A-35
Section 10.1 Amendment................................................... A-35
Section 10.2 Waiver of Compliance........................................ A-35
Section 10.3 Notices..................................................... A-35
Section 10.4 Specific Performance........................................ A-36
Section 10.5 Expenses.................................................... A-36
Section 10.6 Severability................................................ A-36
Section 10.7 Assignment.................................................. A-37
Section 10.8 Governing Law............................................... A-37
Section 10.9 Counterparts................................................ A-37
Section 10.10 Headings.................................................... A-37
Section 10.11 Entire Agreement............................................ A-37
Section 10.12 Third Parties............................................... A-37
Section 10.13 Performance Following Closing............................... A-37
</TABLE>
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LIST OF SCHEDULES (INTENTIONALLY OMITTED)
<TABLE>
<S> <C>
Schedule 1.2 Transferred Assets
Schedule 1.2(i) Management Agreements
Schedule 1.2(ii) Managed Care Contracts
Schedule 1.2(iv) Trademarks, Tradenames, etc.
Schedule 1.2(ix) Automobiles and Vehicles
Schedule 1.2(vi) Computers and Related Materials
Schedule 1.2(xii) Other Contracts
Schedule 1.3 Excluded Assets
Schedule 1.4(a)(iii) Earnout Contingent Liabilities
Schedule 1.4(a)(v) Lease Obligations
Schedule 1.4(b) Retained Liabilities
Schedule 1.9 Allocation of Purchase Price
Schedule 3.1 Jurisdictions and Licenses
Schedule 3.4 Subsidiaries of AGP/Other Investments of AGP
Schedule 3.5 Ownership of AGP Stock
Schedule 3.7(b) Balance Sheet of the Business as of September 30, 1997
Schedule 3.8 Undisclosed Liabilities
Schedule 3.9 Change Since December 31, 1996
Schedule 3.11 Title to Properties; Encumbrances
Schedule 3.12 Title Conveyed
Schedule 3.14 Leases and Subleases
Schedule 3.15 Accounts Receivable
Schedule 3.16 Accounts Payable
Schedule 3.17 Intellectual Property Matters
Schedule 3.18 Material Contracts of Sellers
Schedule 3.20 Insurance
Schedule 3.21 Compliance with Laws
Schedule 3.22(a) Employment Law Compliance
Schedule 3.22(b) Employees
Schedule 3.23 Employee Benefit Plans
Schedule 3.24 Litigation
Schedule 3.26 Governmental Consents -- Sellers
Schedule 3.27 Other Consents -- Sellers
Schedule 3.28 Environmental Matters
Schedule 3.30 Customers, Suppliers and Sales Representatives
Schedule 4.4 Litigation
Schedule 4.5 Governmental Consents -- Purchasers
Schedule 4.6 Other Consents -- Purchasers
Schedule 4.9 Capital Structure of PsychPartners
Schedule 5.3 Individuals Executing Proxies
Schedule 5.5(a) Individuals/Entities Entitled to Estimated Earnout Payments
Schedule 5.16 Company Names
Schedule 5.18 Offers of Employment
</TABLE>
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LIST OF EXHIBITS (INTENTIONALLY OMITTED)
<TABLE>
<S> <C>
Exhibit A Designated Practice Locations
Exhibit B Form of Warrant
Exhibit C Form of Escrow Agreement
Exhibit D Form of Voting Agreement and Irrevocable Proxy
Exhibit E Form of Interim Services Agreement
Exhibit F Form of Opinion of Haythe & Curley
Exhibit G Form of Bill of Sale
Exhibit H Form of Assignment and Assumption Agreement
Exhibit I Form of Opinion of Balch & Bingham LLP
</TABLE>
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AGREEMENT OF PURCHASE AND SALE
THIS AGREEMENT OF PURCHASE AND SALE (this "Agreement") is made and entered
into as of December 26, 1997, by and among PsychPartners, Inc., a Delaware
corporation ("PsychPartners, Inc."), and PsychPartners MidAtlantic, Inc., a
Delaware corporation (collectively, "Purchasers"), and PsychPartners, L.L.C., an
Alabama limited liability company ("PsychPartners"); and Apogee of Pennsylvania,
Inc., a Delaware corporation, Apogee of Tennessee, Inc., a Tennessee
corporation, Winston Clinics, Inc., a Wisconsin corporation, DOC Systems, Inc.,
a District of Columbia corporation, Family Social and Psychotherapy Services,
Inc., a Wisconsin corporation, Apogee Services, Inc., a Delaware corporation,
Apogee of Maryland, Inc., a Maryland corporation, Associated Mental Health
Services, Ltd., an Illinois corporation, Psychiatric Associates, Inc., a Florida
corporation, Psychogeriatric Consultants, Inc., a Maryland corporation,
Naperville Psychiatric, Inc., an Illinois corporation, Apogee of Northern
Florida, Inc., a Florida corporation, Family Social and Psychological Services,
L.L.C., a Wisconsin limited liability company, AHS of Rhode Island, Inc., a
Rhode Island corporation, and Woodmont Psychiatric Associates, Inc., a Maryland
corporation (collectively, the "Subsidiaries"), AGP Acquisition, Inc., a
Delaware corporation ("AGP") (collectively with the Subsidiaries, the
"Companies") and Apogee, Inc., a Delaware corporation ("Apogee") (collectively
with the Companies, the "Sellers").
WITNESSETH:
WHEREAS, the Companies, each of which are direct or indirect wholly owned
subsidiaries of Apogee, own, manage or operate the 22 behavioral health
practices (the "Practices") set forth on Exhibit A hereto (such practices,
owned, managed or operated by the Companies, the "Business");
WHEREAS, Apogee and the Subsidiaries desire to sell to Purchasers, each of
which are direct or indirect wholly owned subsidiaries of PsychPartners, the
Transferred Assets (as defined in Section 1.2 hereof) and to assign to
Purchasers the Assumed Liabilities (as defined in Section 1.4 hereof) relating
to the operations of the Business, and Purchasers desire to purchase from Apogee
and Sellers the Transferred Assets and to assume the Assumed Liabilities, upon
the terms and subject to the conditions hereinafter set forth;
WHEREAS, Apogee owns all of the issued and outstanding shares of capital
stock, $.01 par value of AGP (the "AGP Stock") and desires to sell the AGP Stock
to Purchasers for the consideration and upon the terms and conditions set forth
in this Agreement, and Purchasers desire to purchase the AGP Stock from Apogee
in accordance with the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the premises and of the respective
representations, warranties, covenants, agreements and conditions contained
herein, the parties hereto, intending to be legally bound, hereby agree as
follows:
ARTICLE I
PURCHASE AND SALE OF ASSETS AND STOCK
SECTION 1.1 CONVEYANCE AND TRANSFER OF STOCK. Upon the terms and subject
to all of the conditions contained herein and the performance by each of the
parties hereto of their respective obligations hereunder, Purchasers hereby
agree to purchase from Apogee, and Apogee hereby agrees to sell, deliver,
transfer and convey to Purchasers at the Closing (as hereinafter defined), all
of the AGP Stock.
SECTION 1.2 CONVEYANCE AND TRANSFER OF ASSETS. Upon the terms and subject
to all of the conditions contained herein and the performance by each of the
parties hereto of their respective obligations hereunder, Purchasers hereby
agree to purchase from Apogee and the Subsidiaries, and Apogee and the
Subsidiaries hereby agree to sell, deliver, transfer and convey to Purchasers at
the Closing (as hereinafter defined), all of the assets of Apogee and the
Subsidiaries owned, held or used in the operation or management of the Business,
of every kind and description which are located at the real property leased by
Sellers pursuant to the leases set forth on Schedule 3.14 (the "Clinic
Locations"), other than the Excluded Assets (as defined in Section 1.3 hereof);
real, personal, or mixed; tangible or intangible; including all assets and
property reflected
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on the balance sheets of the Business as of the date of the Closing
(collectively, "Transferred Assets"), such assets to be transferred free and
clear of all liens, encumbrances or restrictions of any type whatsoever, other
than Permitted Encumbrances (as defined in Section 3.11 hereof) and the Assumed
Liabilities (as defined in Section 1.3 hereof); provided, however, that unless
and until any required consents and approvals have been obtained, the
Transferred Assets shall not include any contracts or agreements which by their
terms prohibit or restrict the transfer or assignment of Sellers' rights
thereunder, or the delegation of Sellers' duties thereunder, without the consent
or approval of other parties to such contracts or agreement (collectively,
unless and until any required consents and approvals have been obtained, the
"Non-Transferable Contracts"). Upon the receipt of the required consents and
approvals for any Non-Transferable contracts, such contracts or agreement shall
become Transferred Assets. Purchasers and Sellers shall identify the initial
Non-Transferable Contracts in writing at or before the Closing. The Transferred
Assets shall include, but shall not be limited to, all right, title and interest
of Sellers (other than AGP) in, to and under the following (except to the extent
the following would include any Non-Transferable Contract prior to the obtaining
of requisite consents or approvals of other parties):
(i) Sellers' rights under management agreements with professional
corporations or similar organizations related to the Business and set forth
on Schedule 1.2(i) hereto;
(ii) Sellers' rights under contracts with managed care organizations
and corporations related to the Business and set forth on Schedule 1.2(ii)
hereto;
(iii) all of the Sellers' inventories of materials and supplies
related to the Business at the Clinic Locations;
(iv) the trademarks, trade names, service marks, logos, inventions,
patents, patent rights, applications for patents and similar rights, trade
secrets, know-how and designs of the Sellers related to or used in the
Business and set forth on Schedule 1.2(iv);
(v) all marketing studies, customer lists, files, supplier files,
credit files, credit data, appraisals, valuations, and consulting studies
and all other records and reports relating to the Business or the
Transferred Assets, all clinical and administrative policy and procedure
manuals and all catalogues relating to the Business at the Clinic
Locations;
(vi) the computer programs, computer software, computer manuals,
flowcharts, printouts, data files, program documentation and related
materials and copies thereof relating to the Business or the Transferred
Assets and set forth on Schedule 1.2(vi);
(vii) subject to applicable laws and regulations, all transferable
licenses and other regulatory approvals necessary for or incident to the
operation of the Business;
(viii) all deposits and the expenses and deferred charges relating to
the Business that have been prepaid or paid in advance by Sellers prior to
the Closing, as set forth on Schedule 1.2(viii) hereto;
(ix) the automobiles and vehicles owned by the Sellers, relating to
the Business and set forth on Schedule 1.2(ix) hereto;
(x) the furniture, computers, accessories and other personal property
owned by the Sellers and used in the Business at the Clinic Locations;
(xi) all machinery and equipment owned by the Sellers and used in the
Business at the Clinic Locations;
(xii) all accounts receivable of the Sellers relating to the Business
and all cash and cash equivalents of the Sellers relating to the Business,
whether on hand or in cash accounts of the Business;
(xiii) all of Sellers' rights under all other contracts and agreements
of the Sellers relating to the Business, as set forth on Schedule 1.2(xiii)
hereto;
(xiv) all indebtedness and other amounts relating to the Business and
owed to any of Sellers in the ordinary course of business, except for those
items listed on Schedule 1.3 hereto;
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(xv) all patient and billing files, records and documentation
necessary to effectuate the transfer of the Transferred Assets and to
operate the Business (including ledger books and any books of account of
the Sellers relating to the Business and located at the Clinic Locations);
(xvi) all of Sellers' rights under express and implied warranties of
third parties that continue in effect with respect to any of the assets
described in paragraphs (i) through (vii) above; and
(xvii) all other assets and rights of every kind and nature (whether
or not of a kind or nature referred to in items (i) through (xvi) above)
owned or held by the Sellers on the date of the Closing (hereinafter
defined) and relating to or used in the Business at the Clinic Locations,
whether or not specifically referred to in clauses (i) through (xvi) of
this Section 1.2 or in the Schedules hereto, except for the Excluded Assets
(as defined in Section 1.3 hereof) and any Non-Transferable Contracts.
SECTION 1.3 EXCLUDED ASSETS. The assets of Sellers which are not to be
transferred pursuant to this Agreement are the assets of the Sellers not located
at the Clinic Locations or described in Section 1.2(i) through 1.2(xvii) hereto
(the "Excluded Assets") and:
(i) The stock, corporate minute books, stock ledgers and stock
transfer records of the Subsidiaries; and
(ii) Those assets listed on Schedule 1.3 hereto.
SECTION 1.4 ASSUMED LIABILITIES. Except to the extent prohibited or
restricted by any Non-Transferable Contracts prior to the obtaining of requisite
consents or approvals of other parties, Purchasers agree to assume at the
Closing the following obligations (the "Assumed Liabilities"):
(i) all liabilities and obligations arising after the Closing with
respect to clinic lease obligations of Sellers related to the Business, as
set forth on Schedule 3.11 hereto;
(ii) all liabilities and obligations as of the Closing with respect to
accounts payable, accrued payroll taxes and other accrued expenses of
Sellers related to the Business, such accrued expenses to include accrued
clinician compensation and accrued patient facility costs related to the
Business, as set forth on the Closing Financial Statements (as hereinafter
defined), plus any obligations in the nature of accounts payable, accrued
payroll taxes and other accrued expenses of Sellers, not to exceed $50,000,
that do not appear on the Closing Financial Statements;
(iii) all liabilities and obligations arising after the Closing with
respect to earnout contingent liabilities (including any contingent
promissory notes) ("Earnout Liabilities") of Sellers associated with
Sellers' prior acquisitions of certain of the Transferred Assets related to
the Business, as set forth on Schedule 1.4(a)(iii) hereto, except for the
Earnout Liabilities for which Sellers are responsible pursuant to Section
5.5(a) hereof;
(iv) all liabilities and obligations with respect to the contracts and
obligations, including employment agreements of Sellers related to the
Business, as set forth on Schedule 1.4(a)(iv) hereto;
(v) any obligations under the leases (other than clinic leases)
related to the Business to which any of Sellers are a party as set forth on
Schedule 1.4(a)(v) hereto; and
(vi) all liabilities and obligations arising from the conduct of the
Business after the Closing of the nature of the liabilities set forth in
Section 1.4(ii).
SECTION 1.5 RETAINED LIABILITIES. Except for the Assumed Liabilities,
Purchasers shall not assume or otherwise agree to pay, discharge or perform any
other liabilities or obligations of Sellers, whether or not in respect of the
Business, (whether accrued, absolute, contingent or otherwise, whether or not
disputed, or whether or not disclosed to Purchasers) (all such liabilities and
obligations, the "Retained Liabilities"). The Retained Liabilities shall include
any severance payments that may be due either prior to or following the Closing
to James Dorsey, M.D. or AHRC, Inc. pursuant to Article X of that certain
Management Agreement dated as of February 18, 1997 among AHRC, Inc., a Florida
corporation, AGP Acquisition Corp., a Delaware corporation, and Apogee, Inc., a
Delaware corporation, to the Manager (as defined therein), but only to the
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extent that such payments are due as a result of the transactions contemplated
by this Agreement. In addition, PsychPartners may, at its sole discretion, elect
not to assume the lease with CMD Realty Investment Fund relating to the
Southeast Regional Office (the "Divisional Lease"), and shall so notify Sellers
as soon as reasonably practicable following the Closing of such election. Should
PsychPartners so elect pursuant to this Section 1.5, the Retained Liabilities
shall include the Divisional Lease.
SECTION 1.6 PURCHASE PRICE. Subject to any adjustments required by
Section 1.7(a) hereof, the purchase price for the Transferred Assets (the
"Purchase Price"), payable in accordance with Section 1.8 herein, is as follows:
(a) Twenty-Seven Million and No/100 Dollars ($27,000,000.00); plus
(b) A warrant to purchase 400,000 Common Units (as defined in the
Second Amended and Restated Operating Agreement of PsychPartners, L.L.C.
dated as of July 17, 1997) (the "Operating Agreement") of PsychPartners at
a price of $.05 per Common Unit, exercisable by Apogee for a period of five
(5) years from the date of Closing (the "Warrant") in substantially the
form attached hereto as Exhibit B.
SECTION 1.7 POST-CLOSING ADJUSTMENTS.
(a) At the Closing, Sellers shall deliver to Purchasers true and complete
copies of the balance sheet of the Business and the monthly profit and loss
statements of the Practices as of and for the month ending on November 30, 1997
(the "November Statements"), which have been prepared in accordance with the
Companies' historic internal accounting practices on a basis consistent with
prior periods. Included in the November Statements shall be the balance sheet of
the Business as of November 30, 1997, including a computation of the liabilities
as of November 30, 1997 assumed by Purchasers pursuant to Section 1.4(a)(ii)
(the "November Payables and Expenses") and an estimate as of November 30, 1997
of the earnout contingent liabilities assumed by Purchasers pursuant to Section
1.4(a)(iii) (collectively, the "November Liabilities") and the (x) cash and cash
equivalents and (y) deposits and the expenses and deferred charges relating to
the Business which had been prepaid or paid in advance by Sellers prior to
November 30, 1997 included in the Transferred Assets and the accounts receivable
of the Business as of November 30, 1997 (collectively, the "November Assets").
At the Closing, Purchasers shall deliver the amount by which the November
Liabilities exceed the November Assets (the "Balance Sheet Adjustment Escrow
Amount") to the Escrow Agent, to be held pursuant to the terms of an Escrow
Agreement, in substantially the form of Exhibit C attached hereto (the "Escrow
Agreement"). The parties anticipate as of the date hereof that the Balance Sheet
Adjustment Escrow Amount will be approximately $600,000, but recognize that the
final Balance Sheet Adjustment Escrow Amount is subject to the calculation to be
performed pursuant to the preceding sentence. As soon as reasonably practicable
following the Closing Date, and in no event more than ninety (90) calendar days
after the Closing Date, Sellers shall deliver to Purchasers financial statements
of the Business, as of and for the period ending on Closing Date (the "Closing
Financial Statements") which have been prepared in accordance with the
Companies' historic internal accounting practices on a basis consistent with
prior periods. Included in such financial statements shall be the balance sheet
of the Business as of the Closing Date, including a computation of the
liabilities assumed by Purchasers pursuant to Section 1.4(a)(ii) (the "Closing
Payables and Expenses") and an estimate of the earnout contingent liabilities
assumed by Purchasers pursuant to Section 1.4(a)(iii) (collectively, the
"Closing Liabilities") and the (x) cash and cash equivalents and (y) deposits
and the expenses and deferred charges relating to the Business which had been
prepaid or paid in advance by Sellers prior to the Closing included in the
Transferred Assets and the accounts receivable of the Business as of the Closing
Date (collectively, the "Closing Assets"). If, as indicated in the Closing
Financial Statements, the Closing Liabilities exceed the Closing Assets, Sellers
shall pay from the escrow account described hereinafter to Purchasers an amount
equal to such difference within ten days after such amount is determined,
including any resolution of any Disagreement (as defined hereinafter) relating
thereto pursuant to Section 1.7(c) hereof. As soon as practicable following the
delivery of the Closing Financial Statements and the resolution of any
Disagreement (as defined hereinafter) relating thereto, the Escrow Agent shall
deliver such amounts of the Balance Sheet
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Adjustment Escrow Amount to Purchasers as are required by the Escrow Agreement,
and shall deliver any remaining amounts to Sellers.
(b) As soon as reasonably practicable following the first anniversary of
the Closing Date (the "Adjustment Date") and in no event more than ninety (90)
days subsequent thereto, Purchasers shall deliver to Sellers financial
statements of each of the 22 behavioral practices which constitute the Business
(the "Operating Profit Statements"), which statements shall calculate the
Operating Profit as defined below, for each such practice for the period from
the Closing Date through the Adjustment Date (the "Adjustment Period"). For
purposes of this Section 1.7(b), "Operating Profit" shall mean the earnings
before income taxes of each such practice (or, in the event that all or
substantially all the assets and business of such practice shall have been
transferred to another entity or entities, the allocable portion of the pre-tax
earnings of such other entity or entities) for the Adjustment Period as
determined in accordance with the Companies' historic internal accounting
practices on a basis consistent with prior periods. For purposes of calculating
Operating Profit, all revenues associated with the operation of such practice
will be recognized during the period in which they are earned. Such operating
revenues will include all charges directly related to the daily operations of
the Business as determined in accordance with the Companies' historic internal
accounting practices on a basis consistent with prior periods, including, but
not limited to, gross revenues less contractual allowances, contract revenue and
other income. For purposes of calculating Operating Profit, all expenses
associated with the operation of such practice will be recognized during the
period in which they are incurred. Such operating expenses will include all
charges directly related to the daily operations of the Business, determined in
accordance with the Companies' historic internal accounting practices on a basis
consistent with prior periods, including, but not limited to:
(i) Clinical salaries and benefits, related contract labor (including
Medical Directors);
(ii) Administrative salaries and benefits and related contract labor;
(iii) Amounts paid to independent contractors;
(iv) Expenses for office supplies consumed, printing, postage and
delivery;
(v) Telephone, cellular phone expenses and utilities;
(vi) Insurance costs directly related to the worker's compensation,
professional and general liability or property insurance associated with
the Business;
(vii) Therapy/testing supplies consumed by the Business;
(viii) Travel and entertainment expenses incurred, except for those
expenses required to attend any of the Purchaser's corporate or regional
meetings;
(ix) Expenses for the lease or rental of any equipment used in the
office or directly by employees or independent contractors, including
repairs and maintenance;
(x) Rents, including storage, and other charges for facilities used in
the operation of the Business, including repairs and maintenance;
(xi) Charges incurred for the processing of payroll for MPG only;
(xii) Advertising expenses in local newspapers and publications and
costs of marketing materials and supplies;
(xiii) Amounts related to the write-off or reserving of bad debts;
(xiv) Expenses related to the collection of bad debts and the income
therefrom;
(xv) Expenses relating to clinical supervision;
(xvi) Employee development;
(xvii) Professional/outside meetings;
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(xviii) Cost of outside services, such as janitorial, transcription
and answering service;
(xix) Dues, books and subscriptions;
(xx) Taxes and licenses, except for income taxes;
(xxi) Recruitment and relocation to support existing business; and
(xxii) Miscellaneous other expenses specifically related to a
facility.
For purposes of calculating Operating Profit, operating expenses will not
include the following charges:
(i) corporate and divisional overhead allocations including interest
obligations on any inter-company debt and expenses of any corporate or
divisional employees;
(ii) interest and amortization expense;
(iii) depreciation costs related to assets used in connection with the
operation of any of the practices;
(iv) acquisition-related interest expense;
(v) legal and accounting fees; and
(vi) expenses incurred in connection with the transactions
contemplated hereby.
The Purchase Price shall be adjusted based on such Operating Profit, as
follows:
(i) If the Metropolitan Psychiatric Group MPG") has an Operating
Profit for the Adjustment Period that is less than $630,000, then Sellers
shall forfeit a portion of the Warrant (valued at $5 per underlying Common
Unit) with a value equal to 4.5 times the dollar amount by which such
Operating Profit is less than $630,000; provided, however, that the maximum
value of Warrant forfeited pursuant to this Section 1.7(b)(i) shall not
exceed $1,350,000.
(ii) If the Rainbow Practice Group ("RPG") has an Operating Profit for
the Adjustment Period that is less than $1,150,000, then Sellers shall
forfeit a portion of the Warrant (valued at $5 per underlying Common Unit)
with a value equal to 4.5 times the dollar amount by which such Operating
Profit is less than $1,150,000; provided, however, that the maximum value
of Warrant forfeited pursuant to this Section 1.7(b)(ii) shall not exceed
$650,000.
(iii) Notwithstanding the foregoing subsections (i) or (ii), Sellers
shall not forfeit any portion of the Warrant pursuant to this Section
1.7(b) if the Operating Profit of all 22 behavioral health Practices
comprising the Business exceeds $6,265,000 in the aggregate for the
Adjustment Period.
Notwithstanding anything above to the contrary, no portion of the Warrant shall
be forfeited by Sellers pursuant to Section 1.7(b)(i) or (ii) above in the event
that (x) during the first six (6) months of the Adjustment Period, the
Purchasers terminate any of the divisional vice presidents or practice directors
of MPG or RPG employed by Sellers at the time of Closing and set forth on
Schedule 1.7(b) hereto for any reason other than for cause or (y) during the
first six (6) months of the Adjustment Period the Purchasers initiate a material
strategic decision (including, but not limited to, consolidation of offices
(except for the current ongoing consolidation efforts involving Psychogeriatric
Consultants and the Frenkel practice group); combination with current practices
or future practices acquired by the Purchasers or their affiliates; or the
elimination or addition of major clinical programs) which materially adversely
affects the Operating Profit of MPG or RPG.
(c) Within ninety (90) calendar days after Sellers' delivery of the Closing
Balance Sheets or Purchasers' delivery of the Operating Profit Statements,
respectively (collectively, the "Adjustment Statements"), the party receiving
the Adjustment Statements may dispute the Adjustments Statements as a whole by
giving written notice to the other party setting forth in reasonable detail the
basis for any such dispute (each such dispute a "Disagreement"), and Purchasers
and Sellers shall promptly commence good faith negotiations to resolve any such
Disagreement. If the receiving party does not give notice of any Disagreement
within ninety
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(90) calendar days after the Adjustment Statements have been delivered, the
receiving party shall be deemed to have irrevocably accepted the Adjustment
Statements. If Purchasers and Sellers do not resolve (evidenced by a written
agreement between Purchasers and Sellers) any such Disagreement within
forty-five (45) business days following the delivery of a notice of such
Disagreement, such Disagreement shall be referred to a national accounting firm,
which has not previously represented Sellers or Purchasers (an "Independent
Accounting Firm") mutually agreed upon by Purchasers and Sellers within five (5)
business days after the end of such forty-five (45) business day period. At the
request of either Purchasers or Sellers, the Independent Accounting Firm shall
review the entire Adjustment Statements and the basis for all comparison and
calculation reflected therein and not only those items relating to the
Disagreement. If Purchasers and Sellers are unable to agree upon an Independent
Accounting Firm, Purchasers and Sellers shall each have the right to request
that the American Arbitration Association appoint an Independent Accounting
Firm, which appointment shall be binding on Purchasers and Sellers. Purchasers
and Sellers agree to execute, if requested by the Independent Accounting Firm, a
reasonable engagement letter. The fees and expenses of the Independent
Accounting Firm retained pursuant to this Section 1.7(c) shall be borne equally
by the parties. Each party hereto shall cooperate with such Independent
Accounting Firm and provide such firm with reasonable access to its books and
records relating to the Business and such other information as such firm may
reasonably require in order to render its determinations. All such
determinations shall be made by the Independent Accounting Firm within sixty
(60) calendar days of its selection, shall be set forth in a written statement
delivered to Purchasers and Sellers, and shall be final, binding and conclusive.
SECTION 1.8 PAYMENT OF PURCHASE PRICE.
(a) At Closing the sum of Twenty-Seven Million and No/100 Dollars
($27,000,000.00) shall be payable in cash or immediately available funds (the
"Cash Purchase Price"). The Cash Purchase Price shall be paid (i) to the Escrow
Agent to the extent required by Section 1.7(c) hereof, and (ii) otherwise by
wire transfer to such account and pursuant to such wire transfer instructions as
are provided by Apogee to the Purchasers in writing prior to Closing.
(b) At Closing, PsychPartners shall issue the Warrant, which shall be
delivered to the Escrow Agent and held pursuant to the Escrow Agreement. The
Escrow Agent shall deliver the Warrant to Apogee, subject to any adjustments
made pursuant to Section 1.7(b) hereof, as soon as practicable after the
Adjustment Date.
SECTION 1.9 ALLOCATION OF PURCHASE PRICE. The parties agree that the
Purchase Price shall be allocated among the Transferred Assets as set forth in
Schedule 1.9 hereto and in accordance with Section 1060 of the Internal Revenue
Code of 1986, as amended (the "Code"), and the regulations thereunder. Within
ninety (90) days following the Closing, Purchasers and Sellers shall prepare and
submit Internal Revenue Form 8594 prepared in accordance with the mutually
agreed upon allocation and this Section 1.9, and Sellers and Purchasers shall
file all tax returns consistent with Schedule 1.9 and the Form 8594, and
Purchasers and Sellers shall report all other matters in a manner consistent
with that reported by the other party and shall not take any position
inconsistent with this Section 1.9.
ARTICLE II
THE CLOSING
SECTION 2.1 DATE AND PLACE. The parties contemplate that the closing of
the transactions contemplated hereby (the "Closing") shall take place on
February 28, 1998, or as soon thereafter as practicable following the vote of
the shareholders of Apogee in favor of the transactions contemplated by this
Agreement. The Closing shall take place at the offices of Balch & Bingham LLP in
Birmingham, Alabama, or such other location upon which the parties may mutually
agree. The transactions contemplated by this Agreement shall be deemed to be
effective for all purposes as of 12:01 a.m. on the Closing Date.
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SECTION 2.2 DELIVERY OF DOCUMENTS.
(a) At Closing, Sellers shall execute and deliver to Purchasers the Bill of
Sale and Assignment Agreement (as both are defined herein) and any other
instruments of transfer necessary to convey to Purchasers all of Sellers' right,
title and interest in and to the Transferred Assets.
(b) At Closing, Apogee shall execute and deliver to Purchasers certificates
for the AGP Stock, duly endorsed or accompanied by stock powers duly endorsed in
blank, in proper form for transfer.
(c) At Closing, Sellers shall deliver to Purchasers the items specified in
Section 6.3 and Purchasers shall deliver to Sellers the items specified in
Section 7.3.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLERS
Each Seller, jointly and severally, hereby represents, warrants and
covenants to PsychPartners and Purchasers as of the date hereof that:
SECTION 3.1 CORPORATE ORGANIZATION. Each of Sellers (other than Family
Social & Psychological Services, L.L.C.) is a corporation duly organized,
validly existing and in good standing under the laws of the state of its
formation. Family Social & Psychological Services, L.L.C. is a limited liability
company duly organized, validly existing and in good standing under the laws of
the state of its organization. Each of Sellers has the requisite corporate or
limited liability company (as applicable) power and authority to carry on its
business as it is now being conducted and to own the properties and assets it
now owns; and each of Sellers is duly licensed and qualified to do business in
each state where the nature of the business conducted by it or the character and
location of any properties and assets owned or leased by it make such
qualification necessary (each of which are set forth in Schedule 3.1), except
where the failure to so qualify would not have a Material Adverse Effect (as
hereinafter defined) on the Business or the Transferred Assets. The copies of
the Articles of Incorporation, Articles of Organization, Bylaws or Operating
Agreement, as applicable, of each of Sellers made available to Purchasers are
true, complete and accurate copies of such instruments as presently in effect.
For purposes of this Agreement, "Material Adverse Effect," when used in
connection with any of the Sellers, shall mean any condition, change or effect
that, individually or when taken together with all other such conditions,
changes or effects that existed or occurred prior to the date of determination
of the existence or occurrence of the Material Adverse Effect, is or is
reasonably likely to be materially adverse to the business, assets (including
intangible assets), financial condition or results of operations of the
Business, taken as a whole (other than any change relating to the United States
economy in general).
SECTION 3.2 CORPORATE AUTHORITY; AUTHORIZATION OF AGREEMENT. Each of
Sellers has the requisite corporate or limited liability company (as applicable)
power and authority to execute and deliver this Agreement, to consummate the
transactions contemplated hereby, and to perform all the terms and conditions
hereof to be performed by it, subject only to obtaining the approval of the
shareholders of Apogee of this Agreement and the transactions contemplated
hereby. The execution and delivery of this Agreement, the performance of all the
terms and conditions hereof to be performed by Sellers and the consummation of
the transactions contemplated hereby have been duly authorized and approved by
the Board of Directors, Board of Managers or Members, as applicable, of each of
Sellers. This Agreement has been duly executed and delivered by each of Sellers
and constitutes the valid and binding obligation of Sellers enforceable against
each of Sellers in accordance with its terms, except as such enforceability may
be limited by bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium or other laws relating to or affecting the enforcement of creditors'
rights generally and except that equitable remedies may not in all cases be
available (regardless of whether such enforceability is considered in a
proceeding in equity or at law).
SECTION 3.3 CAPITAL STOCK. The authorized capital stock of AGP consists
solely of 1,000 shares of common stock, par value $.01 per share, all of which
are validly issued and outstanding, fully paid and non-assessable. Such validly
issued and outstanding, fully paid and non-assessable shares constitute the AGP
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Stock. Except for the AGP Stock, there are no issued and outstanding shares of
capital stock of AGP and there are no outstanding options, warrants or other
rights to subscribe for or purchase any such shares.
SECTION 3.4 SUBSIDIARIES. Attached hereto as Schedule 3.4 is a complete
list of all of the subsidiaries of AGP and of all corporations, partnerships or
other entities in which AGP has an interest.
SECTION 3.5 TITLE TO STOCK AND POWER TO CONVEY. Except as set forth on
Schedule 3.5 hereto, Apogee is the sole record and beneficial owner of, and has
good title to, all of the issued and outstanding shares of capital stock, $.01
par value, of AGP, which shares constitute the AGP Stock proposed to be sold by
Apogee hereunder. Except as set forth on Schedule 3.5 hereto, Apogee has full
right and capacity to sell and deliver the AGP Stock to be delivered by it as
contemplated by this Agreement. Upon endorsement and delivery of certificates
evidencing the AGP Stock to Purchasers at the Closing, Purchasers shall have
acquired from Apogee good, legal and equitable title to the AGP Stock free and
clear of all pledges, liens, security interests, claims, charges, restrictions,
options or encumbrances of any nature whatsoever. Except as set forth on
Schedule 3.5 hereto, all other previously issued shares of capital stock of AGP
have been properly redeemed and cancelled. Except as set forth on Schedule 3.5
hereto, there are no rights to any shares of capital stock of AGP existing in
any person other than Apogee pursuant to inheritance, devise, descent or
distribution.
SECTION 3.6 NO VIOLATION. Neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby will: (a)
conflict with or violate any provision of the Articles of Incorporation,
Articles of Organization, Bylaws or Operating Agreement, as applicable, of any
Seller; (b) except as set forth on Schedule 3.26 or 3.27 hereto, violate,
conflict with, constitute a default (or an event which, with or without notice,
lapse of time or both, or the occurrence of any other event, would constitute a
default) under, result in the termination of, accelerate the performance
required by, cause the acceleration of the maturity of any debt or obligation
pursuant to, or result in the creation or imposition of any security interest,
lien or other encumbrance upon any property or assets of any Seller related to
the Business under any agreement or commitment related to the Business to which
any Seller is a party or by which any Seller is bound, or to which the property
of any Seller related to the Business is subject, except for conflicts,
violations, defaults, breaches or other matters which would not have a Material
Adverse Effect; or (c) violate any federal, state or local law, except for
violations which would not have a Material Adverse Effect, or any judgment,
decree, order, regulation or rule of any court or governmental authority to
which any of Sellers are a party or have knowledge.
SECTION 3.7 FINANCIAL STATEMENTS.
(a) Apogee has filed with the Securities and Exchange Commission (the
"SEC") all forms, reports, registration statements, proxy statements and other
documents (collectively, the "Apogee Reports") required to be filed by Apogee
under the Securities Act of 1933, as amended, the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder
(collectively, the "Securities Laws"), except failures to file which,
individually or collectively, would not have a Material Adverse Effect. As of
their respective dates, or, in the case of registration statements, as of the
effective dates, all of the Apogee Reports, including all exhibits and schedules
thereto and all documents incorporated by reference therein, (i) complied as to
form in all material respects with the requirements of the Securities Laws
applicable thereto and (ii) did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements, in light of the circumstances under which they were
made, not misleading. Apogee has filed with the SEC all documents and agreements
which were required to be filed as exhibits to the Apogee Reports, except
failures to file, if any, which individually or collectively, would not have a
Material Adverse Effect. The audited consolidated financial statements and
unaudited interim consolidated financial statements of Apogee included or
incorporated by reference in the Apogee Reports (collectively, the "Apogee
Financial Statements") have been prepared in accordance with generally accepted
accounting principles ("GAAP") applied on a consistent basis and fairly present
the financial position of Apogee as of and at the dates thereof and the results
of operations and cash flows for the periods then ended, subject in the case of
the unaudited interim financial statements, to normal, recurring year-end
adjustments and any other adjustments described therein, which were not and are
not expected to be material in amount or effect.
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(b) Sellers have delivered to Purchasers true and complete copies of (i)
the balance sheet of the Business as of September 30, 1997, a copy of which is
attached hereto as Schedule 3.7(b) (the "Business Balance Sheet"); and (ii)
monthly profit and loss statements (the "Monthly Statements") of each of the
Practices identified on Exhibit A, for the time period of January 1996 through
September 1997. The Business Balance Sheet, the Monthly Statements and the
November Statements are hereinafter collectively referred to as the "Business
Financial Statements"). The Business Financial Statements have been prepared in
accordance with the Companies' historic internal accounting practices on a basis
consistent with prior periods, the Business Balance Sheet presents fairly, in
all material respects, the assets (other than cash, deferred taxes and goodwill
and other intangible assets) and liabilities (whether accrued, absolute,
contingent or otherwise) (other than Earnout Liabilities, promissory notes
payable, deferred taxes payable and stockholders' equity) of the Business at the
dates indicated and, subject to normal, recurring year-end adjustments, the
Monthly Statements present fairly, in all material respects, the operating
profits during the periods indicated of the individual practices comprising the
Business.
SECTION 3.8 NO UNDISCLOSED LIABILITIES. Except as set forth or reflected
in the consolidated balance sheet of Apogee in the Apogee Reports and in the
Business Financial Statements as of September 30, 1997, and except for Earnout
Liabilities, promissory notes payable and deferred taxes payable, neither
Apogee, the Companies, nor any of the Practices comprising the Business has any
liabilities or obligations of any nature (whether absolute, accrued, contingent
or otherwise and whether due or to become due) relating to the Business or the
Transferred Assets which would be required to be reflected or reserved against
in such consolidated balance sheet of Apogee or in the notes thereto, prepared
in accordance with GAAP, consistently applied, or in the Business Balance Sheet,
except liabilities or obligations (i) described or otherwise disclosed on, or
which may arise out of with respect to the matters or agreements described or
otherwise disclosed on, the Schedules to this Agreement, or those which may
arise out of or with respect to matters or agreements that would be required to
be disclosed on such Schedules but for the limitations on such disclosure
contained in the representations and warranties relating to such Schedules, (ii)
arising in the ordinary course of business or (iii) which, individually or
collectively, would not have a Material Adverse Effect.
SECTION 3.9 ABSENCE OF CHANGES. Except as set forth on Schedule 3.9
hereto, since September 30, 1997 there has been no:
(i) transaction related to the Business by any Seller except in the
ordinary course of business;
(ii) event or occurrence which has had a Material Adverse Effect;
(iii) destruction of, damage to, or loss of any of the assets of any
Seller used in the Business (whether or not covered by insurance) having a
Material Adverse Effect;
(iv) sale or transfer of any material asset used in the Business and
located at the Clinic Locations, except in the ordinary course of business;
(v) amendment or termination of any material contract, agreement or
license to which any Seller is a party and related to the Business, except
in the ordinary course of business;
(vi) waiver of any right of material value related to the Business;
(vii) mortgage, pledge or other encumbrance of any material asset of
any Seller related to the Business;
(viii) waiver or release of any material asset related to the Business
of any Seller, except in the ordinary course of business;
(ix) any capital expenditure by any Seller (or series of related
capital expenditures) related to the Business and involving more than
$20,000;
(x) creation, incurrence, assumption, or guarantee, except in the
ordinary course of business, by any Seller of any indebtedness related to
the Business other than its trade payables;
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(xi) delay or postponement by any Seller, beyond its normal practice,
of the payment of accounts payable and other liabilities related to the
Business, and no Seller has instituted any unusual or accelerated
collection efforts with respect to its accounts receivable;
(xii) loan related to the Business made by any Seller to, or any other
transaction with, any of such Seller's directors, officers, and employees
which could give rise to any claim or right on the part of such Seller
against any such person, or on the part of any such person against such
Seller, which exceeds $50,000, other than as reflected on the Apogee
Financial Statements or the Company Financial Statements; or
(xiii) any other change in the compensation terms in any employment
contracts, written or oral, of Sellers (other than increases not exceeding
5% of such employee's salary previously in effect).
SECTION 3.10 LIMITATION ON SALES. Sellers acknowledge that the Warrant
and the Common Units of PsychPartners (the "Common Units") which may be issued
upon the exercise of the Warrant have not been registered under the Securities
Act of 1933, as amended (the "Act"), and Sellers represent that they will
acquire such Warrant and Common Units for investment purposes only, and not with
a view towards distribution in violation of the Act. Sellers agree not to sell,
pledge, distribute, offer for sale, transfer or otherwise dispose of the Warrant
or any Common Units issued upon exercise of the Warrant in the absence of (a) an
effective registration statement under the Act as to such Warrant or such Common
Units and registration or qualification of the Warrant or such Common Units
under any applicable Blue Sky or state securities law then in effect, or (b) an
opinion of counsel reasonably satisfactory to Purchasers that such registration
and qualification are not required. Each certificate or other instrument for the
Warrant and for the Common Units issued upon the exercise of the Warrant shall
bear a legend substantially to the foregoing effect.
SECTION 3.11 TITLE TO PROPERTIES; ENCUMBRANCES. Except as set forth on
Schedule 3.11 hereto, each Seller has good and valid title to the Transferred
Assets owned by such Seller. Except as set forth on Schedule 3.11 hereto, all of
the Transferred Assets are free and clear of all title defects or objections,
liens, claims, charges, security interests or other encumbrances of any nature
whatsoever including, without limitation, leases, chattel mortgages, pledges,
conditional sales contracts, collateral security arrangements and other title or
interest retention arrangements (collectively, "Liens") except for Permitted
Encumbrances (as hereinafter defined). For purposes of this Agreement,
"Permitted Encumbrances" means (a) statutory Liens for current taxes not yet due
and payable or being contested in good faith by appropriate proceedings and for
which adequate reserves have been established, (b) mechanics', carriers',
workers', repairers', and other similar liens imposed by law arising or incurred
in the ordinary course of business for obligations, (c) Liens on leases of real
property arising from the provisions of such leases, including, in relation to
leased real property, any agreements and/or conditions imposed on the issuance
of land use permits, zoning, business licenses, use permits, or other
entitlements of various types issued by any governmental entity, necessary or
beneficial to the continued use and occupancy of the Sellers' assets related to
the Business or the continuation of the operation of the Business, (d) those
Liens set forth on Schedule 3.11 hereto and marked with an asterisk, (e) Liens
securing leases of vehicles and other personal property, as set forth in
Schedule 1.4(v) which do not, individually or in the aggregate, materially
impair the operation of the Business at the location at which such leased
equipment or other personal property is located, or (f) other Liens securing
Assumed Liabilities incidental to the operation of the Business or the ownership
of the Transferred Assets which do not materially impair the value of the
Business. Liabilities.
SECTION 3.12 TITLE CONVEYED. Except as set forth on Schedule 3.12 hereto
and except for the Excluded Assets, the Transferred Assets include all assets,
properties and rights currently being used by Sellers in the operation of the
Business, and all assets, properties and rights necessary to permit Purchasers
to conduct the Business in all material respects in the same manner as Sellers
have conducted the Business to date. Except as set forth on Schedule 3.12
hereto, Sellers have the power and authority and the right to sell, transfer,
convey, assign, and deliver to Purchasers, and upon consummation of the
transactions contemplated by this Agreement, Purchasers will acquire title to,
all the Transferred Assets, free and clear of all title defects or objections,
liens, claims, charges, security interests or other encumbrances, including,
without limitation,
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leases, chattel mortgages, pledges, conditional sales contracts, collateral
security arrangements and other title or interest retention arrangements, except
for Permitted Encumbrances. The bills of sale, deeds, assignments and other
instruments to be executed and delivered to Purchasers by Sellers at the Closing
will be valid and binding obligations of Sellers enforceable in accordance with
their terms, except as such unenforceability may be limited by bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium or other laws
relating to or affecting the enforcement of creditors' rights generally and
except that equitable remedies may not in all cases be available (regardless of
whether such enforceability is considered in a proceeding in equity or at law),
and will vest in Purchasers title to all the Transferred Assets.
SECTION 3.13 REAL PROPERTY. None of Sellers owns any real property used
in or related to the Business.
SECTION 3.14 LEASES. Schedule 3.14 hereto contains an accurate and
complete list of all leases and subleases pursuant to which Sellers lease real
or personal property used in or relating to the Business, each of which is to be
assumed by Purchasers as part of the transactions contemplated hereby. Except as
set forth on Schedule 3.14 hereto, all such leases to be assumed by Purchasers
are valid, binding and enforceable against each Seller which is a party thereto
in accordance with its terms, except to the extent that such enforcement may be
subject to bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium or other similar laws relating to creditors' rights and remedies
generally, and are in full force and effect; there are no existing defaults by
any Seller thereunder and no event of default by such Seller, or to such
Seller's knowledge, any other party thereto has occurred which (whether with or
without notice, lapse of time or the happening or occurrence of any other event)
would have a Material Adverse Effect. No Seller is a party to any written or
oral commitment or agreement for any leasehold improvement in excess of $20,000
relating to the Business.
SECTION 3.15 ACCOUNTS RECEIVABLE. Except as set forth on Schedule 3.15
hereto, each of the accounts receivable of Sellers included in the Transferred
Assets arose in the ordinary course of business of Sellers and was created in
compliance in all material respects with applicable law. Unless paid prior to
Closing, such accounts receivable are or will be as of Closing, current and
collectible net of the reserves shown on the Apogee Financial Statements or the
Business Financial Statements. Sellers and their respective collection agents
have complied with all laws, rules and regulations with respect to the
receivables, except where such noncompliance, individually or in the aggregate,
would not have a Material Adverse Effect. Sellers or the professional
corporations managed by Sellers are the sole beneficial and legal owners of all
receivables. The Transferred Assets include sufficient records with respect to
the receivables to determine the status of collection efforts and to enforce
collection thereof. Except for liabilities included in the Assumed Liabilities,
and any collection costs associated with the collection of such receivables, any
liabilities arising in connection with the creation by Sellers of the
receivables or the collection by Sellers or their respective agents of the
receivables shall remain the liability of Sellers.
SECTION 3.16 ACCOUNTS PAYABLE. Except as set forth on Schedule 3.16
hereto, each of the accounts payable of Sellers related to the Transferred
Assets or the Business arose in the ordinary course of business was incurred in
connection with the operation of the Business, is materially current in
repayment status and Sellers are not otherwise in default in payment of any of
such obligations.
SECTION 3.17 INTELLECTUAL PROPERTY MATTERS. Except as set forth on
Schedule 3.17 hereto, Sellers do not own or use any patents, trademarks, trade
names, service marks, copyrights and trade secrets in connection with the
Business. Except as set forth on Schedule 3.17 hereto, to the Seller's
knowledge, Sellers do not infringe upon or unlawfully or wrongfully use any
patent, trademark, trade name, service mark, copyright, or trade secret owned or
claimed by another, except where such infringement would not have a Material
Adverse Effect.
SECTION 3.18 CONTRACTS AND COMMITMENTS. Schedule 3.18 hereto lists all of
the written or oral provider, payor, managed care, employee, stipend and
clinical services agreements related to the Business and material to the
operations or prospects of the Business, other than the leases identified on
Schedule 3.14
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hereto. For purposes of this section, a "material" agreement shall mean any
agreement where the aggregate annual payments by Sellers exceed $75,000. Except
as set forth on Schedule 3.18 hereto:
(i) No Seller is in breach or default under or in violation of any
contract, agreement or commitment relating to the Business, except where
such breach or default, individually or in the aggregate, would not have a
Material Adverse Effect;
(ii) No Seller is a party to any written or oral agreement, contract
or commitment with any present or former employee or consultant or for the
employment of any person, including any consultant, who is engaged in the
conduct of the Business;
(iii) No Seller is a party to any written or oral commitment or
agreement for any capital expenditure in excess of $20,000 relating to the
Business; and
(iv) No Seller is a party to any written or oral agreement, contract
or commitment limiting or restraining any Seller, the Business or any
successor thereto from engaging or competing in any manner or in any
business, nor, to such Seller's knowledge, is any employee of any Seller
engaged in the conduct of the Business subject to any such agreement,
contract or commitment.
SECTION 3.19 AGREEMENTS IN FULL FORCE AND EFFECT. All contracts,
agreements, benefit plans (as defined in Section 3.23 hereof), leases, licenses
and other instruments set forth in the Schedules hereto are valid and in full
force and effect, and true copies of all written documents thereof have been
heretofore made available to Purchasers. Sellers have performed all obligations
required to be performed by them under, and are not in default in any respect
under, in conflict in any respect with, or in violation in any respect of, any
agreement, benefit plan, lease, policy, mortgage, note, bond, indenture, license
or other document or undertaking, oral or written, to which any Seller in
connection with the Business is a party or by which any Seller in connection
with the Business is bound and which affects Sellers in connection with the
Business or the Business except where such nonperformance, default, conflict or
violation would not have a Material Adverse Effect.
SECTION 3.20 INSURANCE.
(a) Schedule 3.20 hereto contains (i) an accurate and complete list of all
policies of insurance providing coverage for Sellers with respect to the
Transferred Assets or the Business, and (ii) a schedule setting forth the
aggregate claims and all individual claims made under each such policy (or any
predecessor policy) during the last two years.
(b) No written or, to the knowledge of Sellers, oral notice of
cancellation, termination or reduction in coverage has been received with
respect to any policy listed on Schedule 3.20 hereto. No Seller has been refused
any insurance with respect to its assets or operations, nor has its coverage
been limited, by any insurance carrier to which it has applied for any such
insurance or with which it has carried insurance during the last two years.
SECTION 3.21 COMPLIANCE WITH LAWS. Except as set forth on Schedule 3.21
hereto:
(i) Each Seller has conducted the Business in accordance in all
material respects with all applicable laws, rules, regulations, judgments,
orders and other requirements of all courts, administrative agencies, or
governmental authorities having jurisdiction over Sellers, including,
without limitation, applicable laws, rules, regulations and requirements
relating to antitrust, consumer protection, equal opportunity, occupational
safety and health, the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), employment, labor, wage and hour, pension, welfare and
securities matters;
(ii) No Seller has received within the last two years any written or,
to the knowledge of Sellers, oral notification of any asserted present or
past failure by any Seller to comply with such laws, rules or regulations
that relates in any way to the Business except for notices with respect to
failures to comply which would not have a Material Adverse Effect;
(iii) Each Seller has all licenses, certificates of occupancy, permits
and other governmental authorizations or approvals (collectively,
"Licenses") required for the operation of the Business and the
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current use of the properties of the Business, except where the failure to
have a License would not have a Material Adverse Effect and all such
Licenses are valid and in effect;
(iv) No Seller is in violation of any License, and the consummation of
the transactions contemplated by this Agreement will not result in a
violation or termination of any License except for such violations which
would not have a Material Adverse Effect; and
(v) Each Seller has complied with all Medicare and Medicaid rules and
regulations, all federal, state and local licensing requirements and health
laws and requirements and other similar statutes, except for such
noncompliance which would not have a Material Adverse Effect, and no
written or, to the knowledge of Sellers, oral notice of any pending
inspection or violation of any such act or statute has been received by
Sellers in connection with the Business.
SECTION 3.22 EMPLOYMENT MATTERS.
(a) Each Seller is in compliance with all federal, state and local laws,
ordinances and regulations respecting employment practices, terms and conditions
of employment and wages and hours, except where noncompliance would not have a
Material Adverse Effect, and is not and has not engaged in any unfair labor
practice in respect of the operations of the Business. Except as set forth on
Schedule 3.22(a) hereto, there is no unfair practice complaint against any
Seller pending or, to Sellers' knowledge, threatened, in respect of the
operations of the Business.
(b) Schedule 3.22(b) hereto contains a list of all employees of Sellers in
connection with the Business, including their wages and other remuneration of
every kind. Such employees, except for employees as to which an employment
agreement is set forth on Schedule 3.18, are terminable at will by Sellers at no
cost to Sellers, except for such costs as result from the application of
Seller's severance policies to such employee termination.
(c) No Seller is a party to any collective bargaining agreement with any
labor union or other association of employees and, to the best of Sellers'
knowledge, no attempt has been made to organize or certify the employees of any
Seller as a bargaining unit.
(d) To the knowledge of Sellers, no Seller has been the subject of any
inspection or investigation relating to its compliance with or violation of the
Immigration Reform and Control Act of 1986, and the rules and regulations
promulgated thereunder (the "Immigration Laws"). No Seller has been fined or
otherwise penalized by reason of any failure to comply with the Immigration
Laws, nor is any such proceeding pending or, to the knowledge of Sellers,
threatened all in respect of the Business.
(e) Each Seller has complied with the requirements of ERISA except where
the failure to comply would not have a Material Adverse Effect.
SECTION 3.23 EMPLOYEE BENEFIT PLANS AND ARRANGEMENTS. Schedule 3.23
hereto contains a complete list of all employee benefit plans, whether or not
set forth in writing, and whether covering one person or more than one person,
sponsored or maintained by any of Sellers relating to the Business. For the
purposes hereof, the term "benefit plan" includes all plans, funds, programs,
policies, arrangements, practices, customs and understandings for providing
benefits of economic value to any employee, former employee, or present or
former beneficiary, dependent or assignee of any such employee or former
employee other than regular salary, wages or commissions paid substantially
concurrently with the performance of the services for which paid. Without
limitation, the term "benefit plan" includes all employee welfare benefit plans
within the meaning of section 3(1) of ERISA and all employee pension benefit
plans within the meaning of section 3(2) of ERISA.
SECTION 3.24 LITIGATION. Except as set forth on Schedule 3.24 hereto,
there is no action, suit, claim, inquiry, proceeding or investigation pending
against any Seller which affects the Business or the Transferred Assets or, to
the knowledge of any Seller, involving or threatened against any Seller which
affects the Business or the Transferred Assets or which questions or challenges
the validity of this Agreement or any action taken or to be taken pursuant to
this Agreement or in connection with the transactions contemplated hereby, and
Sellers have no knowledge or reasonable grounds for believing that there is any
basis for any such action, suit,
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claim, inquiry, proceeding or investigation. No Seller is subject to any
judgment, order or decree entered in any proceeding or investigation.
SECTION 3.25 COMPLIANCE WITH FRAUD AND ABUSE STATUTES. Sellers and all
persons and entities providing professional services for the Business have not,
to the knowledge of Sellers, engaged in any activities with respect to the
Business which are prohibited under 42 U.S.C. sec. 1320a-7b or the regulations
promulgated thereunder, 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) any failure by a claimant to
disclose knowledge of the occurrence of any event affecting the initial or
continued right to any benefit or payment on its own behalf or on behalf of
another, with the intent to fraudulently secure such benefit or payment; and (d)
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, or offering to pay or receive such remuneration (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, lease or ordering any
good, facility, service or item for which payment may be made in whole or in
part by Medicare or Medicaid.
SECTION 3.26 GOVERNMENTAL CONSENTS. Except as set forth on Schedule 3.26
hereto, no consent, approval or authorization of, notice to, or declaration,
filing or registration with, any governmental or regulatory authority, domestic
or foreign, is required in connection with the execution, delivery and
performance of this Agreement by Sellers or the consummation of the transactions
contemplated hereby.
SECTION 3.27 OTHER CONSENTS. Except as set forth on Schedule 3.27 hereto,
no consent, approval or authorization of, or notice to, any other person or
entity, including, without limitation, parties to loans, contracts, leases or
other agreements, is required in connection with the execution, delivery and
performance of this Agreement by Sellers or the consummation by it of the
transactions contemplated hereby.
SECTION 3.28 ENVIRONMENTAL MATTERS. Except as set forth on Schedule 3.28
hereto:
(i) Sellers have obtained all permits, licenses and other
authorizations which are required in connection with the conduct of the
Business under regulations relating to pollution or protection of the
environment, including regulations relating to emissions, discharges,
releases or threatened releases of pollutants, contaminants, chemicals, or
industrial, toxic or hazardous substances or wastes into the environment
(including without limitation ambient air, surface water, groundwater, or
land), or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport, or handling of pollutants,
contaminants, chemicals, or industrial, toxic or hazardous substances or
wastes ("Environmental Law"), each of which are set forth on Schedule 3.28,
except where the failure to have obtained any such permit, license or
authorization would not have a Material Adverse Effect;
(ii) Sellers are in material compliance with the terms and conditions
of all Sellers' permits, licenses and other authorizations obtained in
connection with the conduct of the Business and required under any
Environmental Law, except where any non-compliance would not have a
Material Adverse Effect;
(iii) No Seller has received written or, to the actual knowledge of
such Seller, oral notice of any past or present events, conditions,
circumstances, activities, practices, incidents, actions or plans in
connection with the Business that could reasonably be expected to interfere
with or prevent continued material compliance with the permits, licenses
and other authorizations referred to above or with any Environmental Law;
(iv) To Sellers' actual knowledge, no asbestos or equipment containing
polychlorinated biphenyls or leaking underground or above-ground storage
tanks is contained in or located at any facility leased by any Seller in
connection with the Business that would give rise to any liability of such
Seller under any Environmental Law that would have a Material Adverse
Effect;
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(v) Each Seller is in compliance with all Environmental Laws, and has
fully disclosed all past (to the extent not cured) and present
noncompliance actually known by Sellers with such Environmental Laws in
connection with the conduct of the Business except, in each case, where any
noncompliance by any such Seller with such Environmental Law would not have
a Material Adverse Effect, and all known past "releases" by any Seller of a
"reportable quantity" of any "hazardous substance", or releases by any
Seller of oil, that would form the basis of any claim, action, suit,
proceeding, hearing or investigation regarding any Seller under any
Environmental Law that would have a Material Adverse Effect; and
(vi) No Seller has received written or, to the actual knowledge of
Sellers, oral notice of any past or present events, conditions,
circumstances, activities, practices, incidents, actions or plans that have
resulted in (to the extent not resolved) or threaten to result in any
common law or legal liability, of any Seller, or otherwise form basis of
any claim, action, suit, proceeding, hearing or investigation in respect of
any Seller under any Environmental Law that would give rise to any
liability of such Seller under such Environmental Law and would have a
Material Adverse Effect.
SECTION 3.29 INVENTORY. The inventory included in the Transferred Assets
has not been substantially written down in value on the books of Sellers, and is
of a quality and quantity reasonably expected to be useable and saleable in the
ordinary course of the business.
SECTION 3.30. CUSTOMERS, SUPPLIERS AND SALES REPRESENTATIVES. Sellers
have provided Purchasers a list of the 10 largest customers or clients of the
Business in terms of gross revenue during the year ended December 31, 1996, and
the nine-month period ended September 30, 1997. Except as set forth on Schedule
3.30 hereto, no Seller has received notice from any such customer or client of
termination or an intention to terminate its relationship with the Business.
SECTION 3.31 BROKERS OR FINDERS. Sellers agree to indemnify and hold
Purchasers harmless from any claim by any person or entity retained by Sellers,
or any of them, for a commission or fee arising out of or as a result of the
transactions contemplated hereby for payment out of any broker's or finder's
arrangement.
SECTION 3.32 TAXES. Sellers have paid (or have made provision for the
payment of) all special charges or levies, taxes, unemployment compensation
contributions, penalties and interest that would form a charge or encumbrance on
the Transferred Assets or the Business or that would become payable by
Purchasers as a result of or in connection with any event relating to the
Business or Sellers occurring before the date of Closing. Without limiting the
generality of the foregoing, all federal, state, county and local taxes,
including, without limitation, income, corporate franchise, stamp, transfer,
sales and use, employee withholding and ad valorem taxes due and payable by any
Seller on or before the date hereof have been paid or provided for, and Sellers
have filed all tax returns and reports required to be filed by Sellers pursuant
to the operation of the Business with all applicable taxing authorities, except
where the failure to do so would not have a Material Adverse Effect. The Company
has no outstanding or unsatisfied deficiency assessments with respect to any
taxes, and to Sellers' knowledge there are no current audits or investigations
by or disputes with any authority with respect to any taxes that may affect the
Business or form a lien or charge on the Transferred Assets.
SECTION 3.33 TAX RETURNS. Sellers have delivered to Purchasers copies of
all corporate income tax returns filed by Apogee in connection with the Business
for the 1996 fiscal year.
SECTION 3.34 OSHA AND ADA AND CLEAN AIR ACT. Sellers, in the conduct of
the Business, are in compliance with all requirements of the Occupational Safety
and Health Act ("OSHA"), to the extent applicable, the Americans with
Disabilities Act ("ADA"), and the Clean Air Act pertaining to the facilities and
operations used in the Business, except for noncompliance which would not have a
Material Adverse Effect.
SECTION 3.35 FULL DISCLOSURE. The representations and warranties of
Sellers in this Agreement and in the Schedules hereto are true, complete and
correct in all material respects, and no such representation or warranty
contains any untrue statement of material fact or omits to state any material
fact necessary to make the statements made not misleading.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF
PURCHASERS AND PSYCHPARTNERS
Each of Purchasers and PsychPartners, jointly and severally, hereby
represents, warrants, covenants and acknowledges to Sellers as of the date
hereof as follows:
SECTION 4.1 ORGANIZATION. PsychPartners is a limited liability company
duly organized, validly existing and in good standing under the laws of the
State of Alabama. Purchasers are each corporations duly organized, validly
existing and in good standing under the laws of the State of Delaware. Each of
PsychPartners and Purchasers has the requisite corporate power and authority to
carry on its business as it is now being conducted and to own the properties and
assets it now owns; and each of PsychPartners and Purchasers is duly licensed
and qualified to do business in each state where the nature of the business
conducted by it or the character and location of any properties and assets owned
or leased by it make such qualification necessary, except where the failure to
so qualify would not reasonably be expected to have a material adverse effect on
their respective businesses. The copies of the Articles of Incorporation,
Articles of Organization, Bylaws or Operating Agreement, as applicable, of each
of Purchasers delivered to Sellers are true, complete and accurate copies of
such instruments as presently in effect.
SECTION 4.2 AUTHORIZATION. PsychPartners has the limited liability
company power and authority, and each of Purchasers has the requisite corporate
or limited liability company (as applicable) power and authority, to enter into
this Agreement, to carry out the transactions contemplated hereby, and to
perform all the terms and conditions hereof to be performed by it. The execution
and delivery of this Agreement, the performance of all the terms and conditions
hereof to be performed by PsychPartners and Purchasers, and the consummation of
the transactions contemplated hereby, have been duly authorized and approved by
the Board of Directors or Board of Managers, as applicable, of each of
PsychPartners and Purchasers. This Agreement has been duly executed and
delivered by each of Purchasers and PsychPartners, and constitutes the valid and
binding obligation of PsychPartners and Purchasers enforceable against each of
them in accordance with its terms, except to the extent that such enforcement
may be subject to bankruptcy, insolvency, reorganization, moratorium or other
similar laws now or hereafter in effect relating to creditors' rights and
remedies generally.
SECTION 4.3 NO VIOLATION. Neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby will (a)
violate any provision of the Articles of Incorporation, Articles of
Organization, Bylaws or Operating Agreement, as applicable, of any of
PsychPartners or Purchasers; (b) violate, conflict with, constitute a default
(or an event which, with or without notice, lapse of time or both, or the
occurrence of any other event, would constitute a default) under, result in the
termination of, accelerate the performance required by, cause the acceleration
of the maturity of any debt or obligation pursuant to any agreement or
commitment to which either PsychPartners or Purchasers is a party or by which
either PsychPartners or Purchasers is bound, or to which the property of either
PsychPartners or Purchasers is subject, or (c) violate any federal, state or
local statute or law or any judgment, decree, order, regulation or rule of any
court or governmental authority.
SECTION 4.4 LITIGATION. Except as set forth on Schedule 4.4 hereto, there
is no action, suit, claim, inquiry, proceeding or investigation pending against
any of PsychPartners or Purchasers, or to the knowledge of PsychPartners or
Purchasers, involving or threatening any of PsychPartners or Purchasers, which
questions or challenges the validity of this Agreement or any action taken or to
be taken pursuant to this Agreement or in connection with the transactions
contemplated hereby, and PsychPartners and Purchasers have no knowledge or
reasonable grounds for believing that there is any basis for any such action,
suit, claim, inquiry, proceeding or investigation. Neither of PsychPartners or
Purchasers is subject to any judgment, order or decree entered in any proceeding
or investigation.
SECTION 4.5 GOVERNMENTAL CONSENTS. Except as set forth on Schedule 4.5
hereto, no consent, approval or authorization of, notice to, or declaration,
filing or registration with, any governmental or regulatory authority, domestic
or foreign, is required in connection with the execution, delivery and
performance of this
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Agreement by PsychPartners and Purchasers or the consummation of the
transactions contemplated hereby by PsychPartners and Purchasers.
SECTION 4.6 OTHER CONSENTS. Except as set forth on Schedule 4.6 hereto,
no consent, approval or authorization of, or notice to, any other person or
entity, including, without limitation, parties to loans, contracts, leases or
other agreements, is required in connection with the execution, delivery and
performance of this Agreement by PsychPartners and Purchasers or the
consummation by PsychPartners and Purchasers of the transactions contemplated
hereby.
SECTION 4.7 NO BROKERS. PsychPartners and Purchasers hereby, jointly and
severally, agree to indemnify and hold Sellers harmless from any claim by any
person or entity retained by Purchasers or PsychPartners, or any of them, for a
commission or fee arising out of or as a result of the transactions contemplated
hereby for payment out of any broker's or finder's arrangement.
SECTION 4.8 SHARES TO BE FULLY PAID; RESERVATION OF STOCK. PsychPartners
represents that all shares of PsychPartners Common Units which may be issued
upon the exercise of the Warrant to be issued in connection with the
transactions contemplated by this Agreement will, upon issuance, be duly
authorized, validly issued, fully paid and nonassessable. PsychPartners
covenants and agrees that, during the period within which the rights represented
by the Warrant may be exercised, it will at all times have authorized and
reserved, for the purpose of issuance or transfer upon exercise of the Warrant,
a sufficient number of shares of authorized but unissued Common Units, when and
as required to provide for the exercise of the rights represented by the
Warrant. PsychPartners will take all such action as may be necessary to assure
that such shares of Common Units may be issued as provided herein without
violation of any applicable law or regulation, or of any requirements of any
domestic securities exchange upon which the Common Units may be listed;
provided, however, that PsychPartners shall not be obligated to effect a
registration under any Federal or state securities laws in connection with such
exercise.
SECTION 4.9 CAPITAL STRUCTURE OF PSYCHPARTNERS AND
PURCHASERS. PsychPartners has issued 4,766,411 Common Units. Each of the Common
Units of PsychPartners entitles the holder of such units to one vote.
PsychPartners has issued 666,667 Preferred Units (as defined in the Operating
Agreement). Each of the Preferred Units entitles the holder of such Units to a
number of votes equal to the number of Common Units into which such Preferred
Units are convertible pursuant to the Operating Agreement. Each Preferred Unit
is currently convertible into one Common Unit upon the occurrence of a
Triggering Event (as defined in the Operating Agreement). The parties recognize
that, prior to Closing, PsychPartners will significantly increase the number of
outstanding Common Units and/or Preferred Units in connection with the financing
of the transactions contemplated by this Agreement and PsychPartners will notify
Sellers in writing of such increase or other modification, including the amount
of such increase or other modification. PsychPartners is managed by a Board of
Managers, currently comprised of the individuals set forth on Schedule 4.9
hereto. All of the issued and outstanding Common Units and Preferred Units of
PsychPartners have been validly issued and are fully paid and non-assessable. A
description of the outstanding subscriptions, warrants, options, calls,
commitments or other rights or agreements to which PsychPartners is bound
relating to the issuance, sale or repurchase of any type of membership interest
in PsychPartners is set forth on Schedule 4.9 hereto. PsychPartners owns all of
the issued and outstanding shares of the capital stock of each of Purchasers. As
of the date hereof, no cash distributions have been made to any of the holders
of Common Units or Preferred Units.
ARTICLE V
ADDITIONAL COVENANTS AND AGREEMENTS
SECTION 5.1 OPERATIONS PENDING CLOSING; FILING OF TAX RETURNS.
(a) Each of the Companies agrees that without the consent of PsychPartners
and Purchasers, which consent shall not be unreasonably withheld or delayed,
from the date hereof through the Closing Date, it will not: (i) in any manner
that would have a material adverse effect on the transactions contemplated by
this Agreement, (A) amend its Articles of Incorporation (except to change its
name as herein provided) or
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Bylaws, (B) issue, sell or purchase, or enter into any contract or other
agreement to issue, sell or purchase, any share of its capital stock, any
options or rights to subscribe for any share of its capital stock or any bonds,
notes, debentures or other evidences of indebtedness, in each case, insofar as
they relate to the Business, (C) incur any indebtedness for borrowed money, or
incur or assume any other liability outside of the ordinary course of business,
in each case insofar as it relates to the Business (except as such increased
indebtedness may result from utilization of funds available from Seller's
revolving line of credit with PNC Bank), or (D) declare or pay any dividend or
declare or make any other distributions of any kind (other than distributions by
the Companies to Apogee consistent with past practices; or (ii) make any change
in its accounting methods or practices or make any change in depreciation or
amortization policies related to the Business, except as required by law or
generally accepted accounting or statutory accounting principles; (iii) enter
into any employment agreements with, increase the rate of compensation of, or
pay or agree to pay any bonus to any of its directors, officers or employees
related to the Business (provided, however, that it may grant reasonable annual
merit increases and pay bonuses to some or all employees in the ordinary course
of its business); (iv) implement any new or modify any existing employee benefit
plan related to the Business; (v) materially amend any existing employee benefit
plan or arrangement related to the Business, except as required by law; (vi)
enter into, amend in any respect or terminate any material contract related to
the Business; (vii) make any material change in the nature of its business or
operations related to the Business; or (viii) make or commit to make any capital
expenditures related to the Business in excess of $20,000 in the aggregate or as
may otherwise be reasonably required for the continued efficient operation of
the Business.
(b) Unless Purchasers consent in writing to the contrary, each Seller
covenants and agrees that, through the Closing Date, it shall not, as it relates
to the Business, (i) change its methods or payment practices in connection with
any Accounts Payable which become due prior to the Closing; or (ii) take or fail
to take any other action which, if taken or not taken, as the case may be, on or
prior to the date of this Agreement, would result in a violation of any of the
representations and warranties made under Article III of this Agreement. From
the date hereof through the Closing, each Seller shall file all tax returns in a
timely manner (subject to extensions permitted by law) and shall provide copies
of such tax returns to Purchasers within ten business days after filing.
SECTION 5.2 SHAREHOLDERS MEETING. Unless the Agreement is terminated in
accordance with Article IX prior to the date thereof, Apogee, acting through its
Board of Directors, shall, in accordance with applicable law:
(a) duly call, give notice of, convene and hold a meeting or solicit
consents (the "Shareholders Meeting") of its shareholders as soon as practicable
for the purpose of approving and adopting this Agreement and the transactions
contemplated herein;
(b) require no greater than the minimum vote required by applicable law of
each class of the shares of Apogee Common Stock (as hereinafter defined)
entitled to vote or consent in order to approve this Agreement and the
transactions contemplated herein;
(c) include in the Proxy Statement (defined in paragraph (d) below) the
unanimous recommendation of its Board of Directors that the shareholders of the
Company vote in favor of or consent to the approval and adoption of this
Agreement and the consummation of the transactions contemplated herein; and
(d) use its reasonable best efforts (i) to cause the Proxy Statement to be
mailed to its shareholders at the earliest possible time following the date of
this Agreement, and (ii) to obtain the approval and adoption of this Agreement
and the transactions contemplated by shareholders holding at least the minimum
number of shares of each class of the shares entitled to vote at the
Shareholders Meeting under applicable law. The letters to shareholders, notice
of meeting, proxy statements and form of proxy to be distributed to shareholders
in connection with the transactions contemplated herein shall be in form and
substance reasonably satisfactory to Purchasers, and are collectively referred
to herein as the "Proxy Statement."
SECTION 5.3 PROXIES. Sellers will provide to Purchasers, as soon as
practicable following the execution of this Agreement, agreements executed by
the persons set forth on Schedule 5.3 hereto, who in the aggregate hold at least
40% of the common stock, $.01 par value of Apogee (the "Apogee Common Stock"),
that such
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persons will vote the shares of Apogee Common Stock owned by them (the "Shares")
in favor of this Agreement and the transactions contemplated hereby or consent
in writing thereto, and that they will retain the right to vote such Shares or
execute a consent during the term of this Agreement. Each of such persons has
given Purchasers a proxy to vote such Shares in favor of the purchase by
Purchasers of the Transferred Assets if they should fail to do so, in
substantially the form of the Voting Agreement and Irrevocable Proxy attached
hereto as Exhibit D.
SECTION 5.4 PAYMENT OF TAXES AND CERTAIN EXPENSES.
(a) Purchasers shall pay any recording costs or fees payable in connection
with the conveyance of the Transferred Assets contemplated by this Agreement.
(b) If any state or local governmental authority requires, or subsequently
determines, the payment of any sales, use or similar tax upon the sale,
acquisition, use or disposition of any portion of the Transferred Assets
(whether under statute, regulation or rule), Sellers assume all responsibility
for and shall pay the same, directly to said authority, and shall hold
PsychPartners and Purchasers harmless from such tax(es) and any interest or
penalty thereon. Sellers shall cooperate with Purchasers in the prosecution of
any claim for refund, rebate or abatement of said tax(es).
(c) Except as otherwise explicitly provided herein, whether or not the
transactions contemplated by this Agreement are consummated, each of the parties
hereto shall pay its own expenses and costs, including legal and accounting
fees, incurred by it in connection with the negotiation, execution and
performance of this Agreement and the transactions contemplated herein.
SECTION 5.5 EARNOUT LIABILITIES.
(a) Approximately fifteen (5) days prior to the Closing, Sellers will use
their reasonable best efforts to calculate the amounts that will be payable
through the date of Closing to the individuals or entities set forth on Schedule
5.5(a) which are entitled to earnout compensation based on the operation of
certain portions of the Business (the "Estimated Earnouts"), and Sellers shall
use their best efforts to gain the consent of such individuals or entities to
payment of the Estimated Earnouts by Sellers on or prior to the date of Closing.
Sellers shall, on or prior to the Closing, pay the Estimated Earnouts to each
individual or entity from which Seller obtains such a consent. In the event
Sellers are unable to obtain such consents, Sellers shall deposit all unpaid
portions of the Estimated Earnouts with the Escrow Agent, to be held pursuant to
the terms of the Escrow Agreement.
(b) The parties recognize that certain earnout obligations included in the
Assumed Liabilities which will be payable by Purchasers after the Closing may
require payments in the form of Apogee Common Stock, and Sellers agree to use
their reasonable best efforts to reach agreements with the individuals entitled
to such earnout payments that such individuals will accept cash or PsychPartners
Common Units in lieu of Apogee Common Stock for payment of such earnout
obligations.
SECTION 5.6 BEST EFFORTS. Each of PsychPartners, Purchasers and Sellers
agrees, in good faith and in a timely manner, to (i) cooperate with each other
in satisfying the conditions in this Agreement, (ii) assist each other in
obtaining as promptly as possible all consents, approvals, authorizations, and
rulings, corporate or otherwise, as are necessary for PsychPartners, Purchasers
and Sellers (or any of them) to carry out the transactions contemplated by this
Agreement, including all consents, approvals and authorizations required by any
agreement of understanding existing at the Closing between the Sellers and any
governmental agency or third party, (iii) furnish information concerning each
other not previously provided the other, required for inclusion in any filings
or applications that may be necessary in that regard (including in connection
with preparation of the Proxy Statement), and (iv) perform all acts and execute
and deliver all documents necessary to cause the transactions contemplated by
this Agreement to be consummated at the earliest possible date. Sellers agree to
use their reasonable best efforts to cause UCC-3 Termination Statements to be
filed with respect to all encumbrances set forth on Schedule 3.11 as to which
Sellers have indicated that the underlying debt has been paid in full. Each of
PsychPartners and Purchasers agrees to pay the Assumed Liabilities as they
become due and to use its reasonable best efforts to collect in a timely manner
the accounts receivable included in the Transferred Assets. Each of
PsychPartners and Purchasers agrees to use its
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reasonable best efforts to obtain Medicare and Medicaid Provider Numbers and any
other commercial provider numbers as expeditiously as possible following the
date hereof.
SECTION 5.7 CONSENTS; DUTIES OF SELLERS. Sellers will use their
reasonable best efforts to obtain the consents of the parties to the contracts
set forth on Schedule 3.27 hereto. In the event that any of the Sellers is
unable to obtain the necessary consents set forth on Schedule 3.27 hereto prior
to Closing, such contract shall be deemed to be a Non-Transferable Contract and
each of the Sellers agrees to use its reasonable best efforts subsequent to
Closing to obtain such consents. Sellers agree that until such time as such
consents are obtained, or in the event Sellers are unable to obtain all required
consents or approvals under any Non-Transferable Contracts, Sellers shall, to
the extent practicable without causing a default under or breach of such
contracts, pass through to Purchasers the benefits and the obligations arising
under such agreements as if such agreements had been assigned to Purchasers
pursuant to this Agreement. Purchasers agree to perform fully the obligations
under such Non-Transferable Contracts to the extent Purchasers receive the
benefits therefrom. Purchasers shall indemnify and hold harmless Sellers from
any and all costs, expenses, liabilities and obligations incurred by Sellers
subsequent to Closing for actions taken by Purchasers or Sellers at the request
of Purchasers pursuant to this Section 5.7; provided, however, that Purchasers
shall not reimburse Sellers for the internal costs incurred by Sellers as a
result of Seller's compliance with this Section 5.7. In the event that any
Non-Transferable Contract cannot be administered in the manner described above
without causing a breach or default thereunder, Purchasers and Sellers shall
each bear one-half of any costs, expenses, liabilities or obligations (exclusive
of Purchasers' or Sellers' internal costs) incurred by Sellers or Purchasers in
connection with the termination or cancellation of such Non-Transferable
Contract, and Purchasers and Sellers agree to cooperate to minimize any such
costs, expenses, liabilities or obligations.
SECTION 5.8 ADDITIONAL INSURANCE COVERAGE. At or prior to the Closing,
Sellers shall purchase paid up tail insurance policies for coverage of the
Transferred Assets and the operations of the Business for all periods prior to
the Closing Date.
SECTION 5.9 TRANSITION ASSISTANCE. Purchasers and Sellers shall execute
the Interim Services Agreement in substantially the form attached hereto as
Exhibit F.
SECTION 5.10 ACCESS TO, AND INFORMATION CONCERNING, PROPERTIES AND
RECORDS. During the pendency of the transactions contemplated hereby, Sellers
shall, to the extent permitted by law, give Purchasers, their legal counsel,
accountants and other representatives full access, during normal business hours,
throughout the period prior to the Closing, to all of the Companies' properties,
books, contracts, commitments and records related to the Business, permit
Purchasers to make such inspections of the operations of the Business
(including, without limitation, physical inspection of the surface and
subsurface of any property thereof and any structure thereon, subject to the
consent of the landlord and owners of such properties and structures) as they
may reasonably require and furnish to Purchasers during such period all such
information concerning Sellers and their affairs related to the Business as
Purchasers may reasonably request, so long as such access does not materially
disrupt the Sellers' operation of the Business. All information disclosed by
Sellers to Purchasers which is confidential and which is not in the public
domain shall be held confidential by Purchasers and its representatives, except
to the extent counsel to Purchasers have advised in writing that such
information is required to or should be disclosed on a nonconfidential basis in
filings with regulatory agencies or governmental authorities or in proxy
materials delivered to shareholders of the Sellers. In the event this Agreement
is terminated pursuant to the provisions of Article VIII, upon written request
of the Sellers, Purchasers agree to destroy or return to the Sellers all copies
of such confidential information.
SECTION 5.11 NONCOMPETITION; NONSOLICITATION; NONDISCLOSURE.
(a) Each Seller agrees that for a period of five (5) years after the date
of Closing, it will not, and it will cause each of such Seller's affiliates over
which such Seller holds, either directly or indirectly, more than 50% of the
outstanding equity interest not to, directly or indirectly, (i) own, manage,
operate, join, control or participate in the ownership, management, operation or
control of, or render service to, any business, whether in corporate,
proprietorship or partnership form or otherwise, which is competitive with the
behavioral health group practice business, residential treatment centers,
outpatient chemical dependency programs, outpatient partial programs, inpatient
unit management and prison provider aspects of the Business as currently
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conducted, within a thirty-five (35) mile radius of any location of the Business
as of the Closing; (ii) either for its own benefit or for the benefit or
purposes of any other person or entity, solicit, call on, interfere with,
attempt to divert, entice away or accept any competitive business from any
person or entity which is a customer of the Business or which was a customer
within the one (1) year preceding the date of Closing; or (iii) take any action
that would reasonably be expected to cause Purchasers to lose any of their
officers, employees, agents, customers or suppliers or any of its existing
business relationships or those business relationships obtained as a result of
the transactions contemplated by this Agreement.
(b) From and after the date of Closing, no Seller will, directly or
indirectly, disclose to any other party or in any way utilize for itself or any
other party any information, data, proprietary information, intellectual
property, trade secrets, customer lists, subscriber lists, pricing information
or any other proprietary information purchased pursuant to this Agreement, used
in the operation of the Business, or otherwise relating to the Business, except
(a) to the extent necessary to carry out the terms of or to exercise such
Seller's rights under this Agreement or any document executed concurrently
herewith; (b) to governmental agencies, including taxing authorities, having a
legal right to the Information; (c) as required by law; (d) pursuant to a valid
subpoena or court order; provided, however, that prior to any disclosure
pursuant to court order or subpoena, such Seller shall provide prompt notice to
Purchasers of the receipt of any subpoena or court order requiring the
disclosure of the Information; or (e) to the extent necessary to exercise such
Seller's rights in connection with Excluded Assets or otherwise in connection
with the business of Sellers not transferred hereunder. The term "Information"
shall not include information which is or becomes published or otherwise
available in the public domain without violation of this Section 5.11 by
Sellers. This Section 5.11 shall survive the Closing.
(c) Notwithstanding anything contained herein to the contrary, the
operation by any of Sellers of the INTEGRA Business (as hereinafter defined)
pursuant to this Section 5.11(c) shall not be a violation of Section 5.11
hereof. For purposes of this Agreement, the "INTEGRA Business" shall mean
Apogee's managed behavioral health care contracting business conducted through
its employee assistance programs and managed behavioral health and substance
abuse management programs, using full and shared risk contracts with managed
care provider organizations and administrative services agreements to case
manage behavioral health claims. Currently, approximately 92% of INTEGRA's
contracts are handled through network providers. Apogee will use its reasonable
best efforts to credential, panel and otherwise facilitate the use of the
behavioral health providers of PsychPartners and Purchasers, where appropriate,
in the clinical delivery aspects of its INTEGRA contracts, as such contracts
currently exist and as such contracts may be implemented following the Closing.
Notwithstanding the foregoing, Apogee shall not manage the practice of any
behavioral health care professional, clinic or entity that operates in a group
practice setting or similar manner.
(d) The parties hereto specifically acknowledge and agree that the remedy
at law for any breach of the foregoing will be inadequate and that Purchasers,
in addition to any other relief available to them, shall be entitled to
temporary and permanent injunctive relief without the necessity of proving
actual damage. In the event that the provisions of this Section 5.11 should ever
be deemed to exceed the limitation provided by applicable law, then the parties
hereto agree that such provisions shall be reformed to set forth the maximum
limitations permitted by law.
SECTION 5.12 EXCLUSIVE AGREEMENT. Sellers will not, and their respective
directors, officers and agents (for purposes of this Section 5.12 only, being
referred to as "affiliates") will not, directly or indirectly, solicit or take
any other action to facilitate any inquiries or proposals with respect to,
engage or participate in negotiations concerning, provide any nonpublic
information or data to or have any discussions with any person other than a
party hereto or its affiliates relating to any purchase of all or any
significant portion of the Transferred Assets, or any similar transaction, other
than the Asset Purchase (such proposals, announcements, or transactions being
referred to as "Acquisition Proposals"). Notwithstanding the preceding sentence,
to the extent the Board of Directors of any Seller determines it is required to
do so in the exercise of its fiduciary duties under applicable law as so advised
in writing by counsel, Sellers and their affiliates may engage and participate
in negotiations concerning, provide nonpublic information or data to and have
discussions with any persons or their affiliates relating to a written
Acquisition Proposal. Sellers will promptly notify Purchasers orally or in
writing if any such Acquisition Proposal is received. Unless this Agreement has
been terminated
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pursuant to Article IX hereof, in the event Sellers, or any of them, prior to
April 10, 1998, reach an agreement in principle to sell the Transferred Assets,
or any substantial portion thereof, to a prospective buyer other than
Purchasers, Sellers agree to pay to Purchasers, in cash or immediately available
funds, all of the expenses of PsychPartners and Purchasers incurred in
connection with their due diligence investigation of Sellers, their negotiation
of the Agreement and all other expenses related to the transactions contemplated
hereby; provided, however, that the expense reimbursement paid pursuant to this
Section 5.12 shall not exceed $300,000.
SECTION 5.13 EMPLOYEE BENEFIT PLANS. Purchasers presently intend that,
after the Closing, they will not make additional contributions to the employee
benefit plans that were sponsored by Sellers immediately prior to the Closing.
Purchasers agree that the employees of Sellers who, immediately after the
Closing Date, accept employment with Purchasers, will be entitled to participate
as newly hired employees in the employee benefit plans and programs maintained
for employees of Purchasers, in accordance with the respective terms of such
plans and programs, and Purchasers shall take all actions necessary or
appropriate to facilitate coverage of such employees of the Business in such
plans and programs from and after the Closing. Purchasers agree that such
employees shall receive credit for time employed by Sellers for purposes of
determining the status of such employees within such employee benefit plans of
Purchasers; provided, however, that nothing in this Section 5.13 shall obligate
Purchasers to institute any new employee benefit plans or modify their existing
employee benefit plans.
SECTION 5.14 MAIL RECEIVED AFTER CLOSING. Following the Closing,
Purchasers may receive and open all mail or other communications addressed to
any Seller and deal with the contents thereof in its discretion only to the
extent that such mail relates to the Business; provided that (a) Purchasers
shall have no right to open or deal with the contents of any other such material
which do not relate solely to the Business, and (b) Purchasers shall promptly
notify any Seller as to the receipt of any such materials and make appropriate
arrangements to deliver such materials promptly to such Seller.
SECTION 5.15 COBRA. Each Seller shall have the sole responsibility and
obligation for complying with the requirements of COBRA applicable to any
termination of employment or any other qualifying event within the meaning of
COBRA which occurred before the date of Closing with respect to any employees of
such Seller. Purchasers shall have the sole responsibility and obligation for
complying with the requirements of COBRA applicable to any termination of
employment or any other qualifying event within the meaning of COBRA which
occurs on or after the date of Closing with respect to any individuals who were
employees of any Seller prior to the date of Closing.
SECTION 5.16 COMPANY NAME. Sellers specifically acknowledge and agree
that, after the Closing Date, Purchasers may continue to use the names of the
individual practices comprising the Business (except Apogee or any variants
thereof) set forth on Schedule 5.16(a) hereto, and Sellers specifically agree
that they will not, either directly or indirectly, use or permit any other
person to use any of such names or any name which is confusingly similar thereto
in connection with any business similar to the Business on the date hereof.
Sellers agree that the Companies set forth on Schedule 5.16(b) hereto will amend
their Articles of Incorporation as of the date of Closing, if necessary, to
change their names to names that do not include the words currently comprising
such names or words of confusingly similar import, and will file as promptly as
practicable after the Closing, in all jurisdictions in which such Companies are
qualified to do business, any documents necessary to reflect such changes in
their corporate names. In connection with enabling Purchasers or an affiliate of
Purchasers, at or as soon as practicable after the Closing, to use the names set
forth on Schedule 5.16(a) hereto, Sellers will, at or prior to the Closing,
execute and deliver to Purchasers all consents related to such change of name as
Purchasers may reasonably request, and will otherwise reasonably cooperate with
Purchasers.
SECTION 5.17 COOPERATION AND RECORDS RETENTION.
Purchasers and Sellers shall in a timely manner (i) provide the other with
such assistance as may reasonably be requested by any of them in connection with
the preparation of any return, audit or other examination by any taxing
authority or judicial or administrative proceeding relating to liability for
taxes, (ii) retain and provide the other any records or other information that
may be relevant to such return, audit or
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examination, proceeding, or determination, and (iii) provide the other with any
final determination of any such audit or examination proceeding, or
determination that affects any amount required to be shown on any return of the
other for any period. Without limiting the generality of the foregoing, Sellers
and Purchasers shall retain, until the applicable statutes of limitations
(including any extensions) have expired, but in no event later than the seventh
anniversary of the date of Closing, copies of all returns, supporting work
schedules, and other records or information that may be relevant to such returns
for all tax periods or portions thereof ending before or including the date of
Closing and shall not destroy or otherwise dispose of any such records without
first providing the other party with a reasonable opportunity to review and copy
the same.
SECTION 5.18 OFFERS OF EMPLOYMENT. After the Closing, Purchasers shall
offer employment to each of the employees of Sellers set forth on Schedule
3.22(b) hereto (other than the individuals set forth on Schedule 5.18 hereto) at
a rate of cash compensation and with such initial responsibilities as are
comparable to the rate of cash compensation and responsibilities each such
employee had with Sellers, and with such benefits as are offered to comparable
employees of PsychPartners.
SECTION 5.19 ASSIGNMENT AND ASSUMPTION OF CONTRACTS. Sellers and
Purchasers agree that, as of the Closing, Sellers will assign to Purchasers and
Purchasers will assume from Sellers (i) all leases set forth on Schedule 3.14
and Schedule 1.4(a)(v) hereto, (ii) the contracts set forth on Schedule 3.18
hereto, together with any and all rights and obligations thereunder, and (iii)
the other Assumed Liabilities, except, in each case, with respect to any
Non-Transferable Contracts.
SECTION 5.20 FURTHER ASSURANCES. From time to time, as requested by
Purchasers or its successors and assigns, and without further cost or expense to
Purchasers, Sellers will execute, acknowledge and deliver such other instruments
of conveyance and transfer, and take such other actions as Purchasers may
reasonably request, to implement the transactions contemplated hereby and to
vest in Purchasers good and valid title to the Transferred Assets (including,
without limitation, assistance in the collection or reduction to possession of
any of such Transferred Assets, other than accounts receivable). From time to
time, as requested by Sellers or their successors and assigns, and without
further cost or expense to Sellers, Purchasers will execute, acknowledge and
deliver such other documents and take such other actions as Sellers may
reasonably request to implement the transactions contemplated hereby.
SECTION 5.21 PUBLICITY. Purchasers and Sellers will consult with each
other before issuing any press release or otherwise making any public statement
with respect to the transactions contemplated by this Agreement, and shall not
issue any such press release or make any such public statement prior to such
consultation, except as may be required by applicable law.
SECTION 5.22 LEASE RENEWALS. Purchasers covenant and agree not to renew
or extend any of the leases set forth on Schedule 3.14 hereto without the
consent of any Seller party to or having any obligations under such leases after
such renewal or extension; provided, however, that Sellers shall not be released
from any liabilities or obligations arising under such leases relating to time
periods prior to the Closing.
ARTICLE VI
CONDITIONS TO THE OBLIGATIONS OF PURCHASERS
All obligations of Purchasers under this Agreement are subject to the
fulfillment or satisfaction, prior to or at the Closing, of each of the
following conditions precedent:
SECTION 6.1 REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties of Sellers contained in this Agreement and the Schedules hereto shall
be true and accurate in all material respects on and as of the time of Closing
with the same effect as though such representations and warranties had been made
or given on and as of the time of Closing.
SECTION 6.2 COMPLIANCE WITH THIS AGREEMENT. Sellers shall have performed
and complied in all material respects with all agreements and conditions
required by this Agreement to be performed or complied with by it prior to or at
the Closing.
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SECTION 6.3 DOCUMENTS TO BE DELIVERED.
(a) At or prior to Closing, Purchasers shall have received from Sellers:
(i) A certificate of each of the Sellers, dated as of the date of
Closing, certifying in such detail as Purchasers may reasonably request
that the conditions specified in Sections 6.1 and 6.2 hereof have been
fulfilled with respect to each Seller;
(ii) the certificate or certificates evidencing the AGP Stock,
properly executed (endorsed) for transfer to Purchaser, with all required
documentation relating thereto;
(iii) A written opinion of Haythe & Curley, counsel for Sellers, dated
as of the date of Closing, substantially in the form attached hereto as
Exhibit F;
(iv) The bill of sale ("Bill of Sale") and assignment and assumption
agreement ("Assignment and Assumption Agreement"), substantially in the
form attached hereto as Exhibits G and H;
(v) Except with respect to the Assumed Liabilities and Permitted
Encumbrances, to the extent any of the Transferred Assets are encumbered,
the Sellers shall have obtained releases of such encumbrances, which
releases shall be in form and substance acceptable to Purchasers and their
counsel;
(vi) The Interim Services Agreement; and
(vii) The Escrow Agreement.
SECTION 6.4 SHAREHOLDER APPROVAL. The Agreement and the transactions
contemplated hereby shall have been approved by a majority of Apogee's
shareholders at the Shareholders Meeting or by written consent (the "Apogee
Shareholder Consent").
SECTION 6.5 NO INJUNCTIONS. There shall be no effective injunction, writ,
preliminary restraining order or any order of any nature issued by a court of
competent jurisdiction prohibiting or imposing any condition on the consummation
of any of the transactions contemplated hereby.
ARTICLE VII
CONDITIONS TO THE OBLIGATIONS OF SELLERS
All obligations of Sellers under this Agreement are subject to the
fulfillment or satisfaction, prior to or at the Closing, of each of the
following conditions precedent:
SECTION 7.1 REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties of Purchasers contained in this Agreement shall be true and accurate
in all material respects as of the date of Closing.
SECTION 7.2 COMPLIANCE WITH THIS AGREEMENT. Purchasers shall have
performed and complied in all material respects with all agreements and
conditions required by this Agreement to be performed or complied with by it
prior to or at the Closing.
SECTION 7.3 DOCUMENTS TO BE DELIVERED. At or prior to Closing, Sellers
shall have received from Purchasers:
(i) a certificate of Purchasers, dated as of the date of Closing,
certifying in such detail as Sellers may reasonably request that the
conditions specified in Sections 7.1 and 7.2 hereof have been fulfilled
with respect to each Purchaser and certifying that Purchasers have obtained
all consents and approvals required with respect to the transactions
contemplated hereby which are listed on Schedules 4.4 and 4.5 hereof;
(ii) a written opinion of Balch & Bingham LLP, counsel to Purchasers,
dated as of the date of Closing, substantially in the form attached hereto
as Exhibit I;
(iii) the Purchase Price, in cash or immediately available funds;
(iv) the Warrant;
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(v) the Interim Services Agreement;
(vi) the Escrow Agreement; and
(vii) the Assignment and Assumption Agreement.
SECTION 7.4 NO INJUNCTION. There shall be no effective injunction, writ,
preliminary restraining order or any order of any nature issued by a court of
competent jurisdiction prohibiting or imposing any condition on the consummation
of any of the transactions contemplated hereby.
SECTION 7.5 ASSUMPTION OF ASSUMED LIABILITIES. Purchasers shall have
assumed at the Closing all of the Assumed Liabilities.
ARTICLE VIII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION
SECTION 8.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties made by the parties in this Agreement or in any
certificate, schedule, statement, document or instrument furnished hereunder or
in connection with the negotiation, execution and performance of this Agreement
shall survive the Closing for a period of the lesser of (i) 18 months, or (ii)
three months following Purchasers' receipt of the report of Purchasers'
independent public accountant regarding the financial statements of the
Purchasers for the year ending December 31, 1998, except that any representation
or warranty relating to fraud, title to the Transferred Assets, or taxes shall
extend until the expiration of the applicable statute of limitations.
Notwithstanding any investigation or audit conducted before or after the date of
Closing or the decision of any party to complete the Closing, each party shall
be entitled to rely upon the representations and warranties set forth herein and
therein.
SECTION 8.2 INDEMNIFICATION BY SELLERS. From and after the Closing,
Sellers shall, jointly and severally, reimburse, indemnify and hold harmless
PsychPartners and Purchasers and their respective, employees, shareholders,
members, officers, agents, directors, successors and assigns against and in
respect of:
(i) any and all damages, losses, deficiencies, liabilities, costs and
expenses, including, without limitation, reasonable legal fees and expenses
(collectively, "Damages") incurred or suffered by Purchasers or their
successors or assigns that result from, relate to or arise out of:
(A) the failure of Seller fully to pay or satisfy, or the failure
of Seller to cause to be paid or satisfied, the Retained Liabilities;
(B) any and all actions, suits, claims, or legal, administrative,
arbitration, governmental or other proceedings or investigations against
Purchasers or any affiliate of Purchasers that relate to any of the
Sellers or the Business in which the event giving rise thereto occurred
prior to the date of Closing or which result from or arise out of any
action or inaction prior to the date of Closing of Sellers or any
director, officer, employee, agent, representative or subcontractor of
Sellers, including those matters set forth on Schedule 3.24, but not
including any Assumed Liabilities; or
(C) any misrepresentations, breach of warranty or nonfulfillment of
any agreement or covenant on the part of Sellers under this Agreement,
or from any misrepresentation in or omission from any certificate or
schedule furnished to Purchasers pursuant hereto; and
(ii) any and all actions, suits, claims, proceedings, investigations,
demands, assessments, audits, fines, judgments, costs and other expenses
(including, without limitation, reasonable legal fees and expenses)
incident to any of the foregoing or to the enforcement of this Section 8.2.
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SECTION 8.3 INDEMNIFICATION BY PURCHASERS. From and after the Closing,
PsychPartners and Purchasers shall, jointly and severally, reimburse, indemnify
and hold harmless Sellers and their respective employees, shareholders, members,
officers, agents, directors, successors or assigns against and in respect of:
(i) any and all Damages incurred or suffered by Sellers or their
successors or assigns that result from, relate to or arise out of:
(A) the Assumed Liabilities;
(B) any and all actions, suits, claims, or legal, administrative,
arbitration, governmental or other proceedings or investigations against
Sellers or any affiliates of Sellers that relate to any of PsychPartners
or Purchasers or the Business in which the event giving rise thereto
occurred on or after the date of Closing or which result from or arise
out of any action or inaction on or after the date of Closing of
PsychPartners or Purchasers or any director, officer, employee, agent,
representative or subcontractor of PsychPartners or Purchasers, but not
including any Retained Liabilities; or
(C) any misrepresentation, breach of warranty or nonfulfillment of
any agreement or covenant on the part of PsychPartners or Purchasers
under this Agreement, or from any misrepresentation in or omission from
any certificate or schedule furnished to Sellers pursuant hereto; and
(ii) any and all actions, suits, claims, proceedings, investigations,
demands, assessments, audits, fines, judgments, costs and other expenses
(including, without limitation, reasonable legal fees and expenses)
incident to any of the foregoing or to the enforcement of this Section 8.3.
SECTION 8.4 NOTICE OF CLAIMS.
(a) Claims by Third Parties. Promptly after receipt by an indemnified
party of written notice of the commencement of any investigation, claim,
proceeding or other action in respect of which indemnity may be sought from the
indemnitor under either Section 8.2 or 8.3 (each, an "Action"), such indemnified
party shall notify the indemnitor in writing of the commencement of such Action;
but the omission to so notify the indemnitor shall not relieve it from any
liability that it may otherwise have to such indemnified party, except to the
extent that the indemnitor is materially prejudiced or forfeits substantive
rights or defenses as a result of such failure. In connection with any Action in
which the indemnitor and any indemnified party are parties, the indemnitor shall
be entitled to participate therein, and may assume the defense thereof.
Notwithstanding the assumption of the defense of any such Action by the
indemnitor, each indemnified party shall have the right to employ separate
counsel and to participate in the defense of such Action, and the indemnitor
shall bear the reasonable fees, costs and expenses of such separate counsel to
such indemnified party if: (i) the indemnitor shall have agreed to the retention
of such separate counsel, or (ii) the defendants in, or target of, any such
Action include more than one indemnified party or both an indemnified party and
the indemnitor, and the indemnified party shall have concluded that
representation of such indemnified party by the same counsel would be
inappropriate due to actual or, as reasonably determined by such indemnified
party's counsel, potential material differing interests between them in the
conduct of the defense of such Action, or if there may be material legal
defenses available to such indemnified party that are different from or
additional to those available to the other indemnified party or to the
indemnitor, or (iii) the indemnitor shall have failed to employ counsel
reasonably satisfactory to such indemnified party within a reasonable period of
time after notice to indemnitor of the institution of such Action and failure to
employ such counsel would materially adversely affect the position of such
indemnified party. If such indemnified party retains separate counsel in cases
other than as described in clauses (i), (ii), or (iii) above, such counsel shall
be retained at the sole expense of such indemnified party. It is hereby agreed
and understood that the indemnitor shall not, in connection with any Action in
the same jurisdiction, be liable for the fees and expenses of more than one
counsel for all such indemnified parties (together with appropriate local
counsel). The party from whom indemnification is sought shall not, without the
written consent of the party seeking indemnification (which consent shall not be
unreasonably withheld), settle or compromise any claim or consent to entry of
any judgment that does not include an unconditional release of the party seeking
indemnification from all liabilities with respect to such claim.
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(b) Other Claims. In the event one party hereunder should have a claim for
indemnification that does not involve a claim or demand being asserted by a
third party, the party seeking indemnification shall promptly send notice of
such claim to the party from whom indemnification is sought.
SECTION 8.5 LIMITS ON INDEMNIFICATION. No indemnified party shall be
entitled to indemnification under Sections 8.2(i)(C) or 8.3(i)(C) hereof unless
and until the aggregate amount of Purchasers' damages under Section 8.2(i)(C)
hereof or Sellers' Damages under Section 8.3(i)(C) hereof, as the case may be,
with respect to which Purchasers or Sellers, as the case may be, are entitled to
indemnification under this Article 8 exceeds an amount equal to $50,000, and
then only for such excess amount, if any. Notwithstanding anything contained
herein to the contrary, the aggregate liability of Sellers for Purchasers'
Damages under Section 8.2(i)(C) hereof shall be limited to $14,500,000, and the
aggregate liability of Purchasers for Sellers' Damages under Section 8.3(i)(C)
hereof shall be limited to $14,500,000.
SECTION 8.6 TAX BENEFIT AND INSURANCE PROCEEDS. Damages payable to an
indemnified party shall be reduced by (i) any Tax Benefit (as hereinafter
defined) actually received by any indemnified party on account of such
indemnification and (ii) 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 Tax
Benefit or insurance proceeds. If an indemnified party receives a Tax Benefit
after an indemnification payment is made, such indemnified party shall pay to
the indemnitor the aggregate amount of such Tax Benefit at such time or times as
and to the extent that such Tax Benefit is received. If, upon audit by the
relevant tax authority, part or all of such Tax Benefit shall be disallowed, the
indemnitor, upon written notice to that effect from such indemnified party,
shall promptly reimburse such indemnified party for the full amount so
disallowed up to the amount of the Tax Benefit credited to the indemnitor. For
purposes hereof, "Tax Benefit" shall mean any refund of tax or reduction in the
amount of taxes which would otherwise be payable. The parties hereto shall seek
full recovery under all insurance policies covering any indemnification payment
in the ordinary course of business to the same extent as they would if such
claim were not subject to an indemnification payment hereunder. In the event
that an 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 indemnitor the amount of the insurance
recovery, but not more than the amount of such indemnification payment.
SECTION 8.7 SOLE AND EXCLUSIVE REMEDY. The sole remedy for any
misrepresentation, breach of warranty or failure to fulfill any 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 party shall be governed
by and limited to the provisions of this Article VIII.
SECTION 8.8 SATISFACTION OF INDEMNIFICATION CLAIM. In the event any
Seller shall have any liability for indemnification to any Purchaser under this
Article 8, such Seller may satisfy such liability, at its option, either by
delivering to such Purchaser cash in the aggregate dollar amount of such
liability or the number of Warrants determined by dividing (i) the aggregate
dollar amount of such liability by (ii) $5.00, as adjusted as appropriate to
reflect any membership interest split, reverse split, membership dividend,
recapitalization or other similar transaction effected by PsychPartners between
the Closing and the date such liability is satisfied. Notwithstanding the
foregoing, should Sellers' liability for indemnification exceed the amount of
the Warrants delivered to Purchasers, Sellers shall then deliver cash to
PsychPartners or Purchasers in satisfaction of any liability for
indemnification.
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ARTICLE IX
TERMINATION
SECTION 9.1 TERMINATION. This Agreement may be terminated, and the
transactions contemplated hereby abandoned, prior to the Closing as follows:
(a) By written consent of Purchasers and Sellers;
(b) At the election of either Purchasers or Sellers, if the Closing
Date shall not have occurred on or before April 30, 1998, provided that no
party shall be entitled to terminate this Agreement pursuant to this
Section 9.1(b) if such party's failure to fulfill any obligation under this
Agreement has been the primary cause of, or has resulted in, the failure of
the Closing to occur on or before such date;
(c) By either Purchasers or Sellers if a court of competent
jurisdiction shall have issued an order, decree or ruling (which order,
decree or ruling the parties shall use commercially reasonable efforts to
lift) permanently restraining, enjoining or otherwise prohibiting the
transactions contemplated by this Agreement, and such order, decree, ruling
or other action shall have become final and nonappealable;
(d) by Sellers if Sellers reach an agreement in principle to sell all
of the Transferred Assets to a prospective buyer other than Purchasers;
provided, however, that Sellers may only terminate this Agreement pursuant
to this clause if (i) such agreement in principle to sell the Transferred
Assets occurs due to the Board of Directors of any Seller determining it is
required to take such action in the exercise of its fiduciary duties under
applicable law following written advice by legal counsel that the Board of
Directors of such Seller must entertain or investigate an offer from such
prospective buyer; and (ii) simultaneously with such termination Sellers
pay to Purchasers such amounts as are provided for in Section 5.12 hereof;
(e) By either Purchasers or Sellers, if the party desiring to
terminate is not in material breach of the Agreement and there has been a
breach by the other party of any representation or warranty contained in
the Agreement which would have, in the event of a breach by any Seller, a
Material Adverse Effect or, in the event of a breach by any Purchaser, a
material adverse effect on Purchasers; or
(f) By Purchasers, in the event of a Material Adverse Effect.
SECTION 9.2 OBLIGATIONS UPON TERMINATION. In the event that this
Agreement shall be terminated pursuant to Section 9.1, all obligations of the
parties hereto under this Agreement shall terminate, except for the obligations
set forth in Section 5.4(c), 10.5, 10.8, this Section 9.2 and the liability of
Sellers to pay such amounts as are provided for in Section 5.12 hereof in the
event the Agreement is terminated pursuant to Section 9.1(d), and there shall be
no liability of any party hereto to any other party except that nothing herein
will relieve any party from liability for any breach of this Agreement (other
than liability for lost profits, business interruption or any other form of
consequential loss or damage).
ARTICLE X
MISCELLANEOUS PROVISIONS
SECTION 10.1 AMENDMENT. This Agreement may be amended only by a written
agreement signed by the parties.
SECTION 10.2 WAIVER OF COMPLIANCE. Any waiver of any failure to comply
with any obligation, covenant, agreement or condition under this Agreement must
be in writing and signed by the parties. Any waiver or failure to insist upon
strict compliance with any obligation, covenant, agreement or condition shall
not operate as a waiver of, or estoppel with respect to, any subsequent or other
failure.
SECTION 10.3 NOTICES. All notices, requests, demands and other
communications required or permitted hereunder shall be provided in writing and
shall be deemed to have been duly given if delivered by hand or
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<PAGE> 161
sent by telefacsimile (with confirmation by telefacsimile answerback) or five
business days after mailing if delivered by certified or registered mail, with
postage prepaid:
(i) If to Sellers, to:
Mr. Lawrence M. Davies
Apogee, Inc.
1018 West Ninth Avenue
Suite 202
King of Prussia, PA 19406
FAX: (610) 992-9830
with a copy to:
Robert A. Ouimette, Esq.
Haythe & Curley
237 Park Avenue
New York, NY 10017
Fax: (212) 682-0200
or to such other person or address as Sellers shall furnish to Purchasers in
writing.
(ii) If to Purchasers, to:
Mr. Kerry G. Teel
PsychPartners, L.L.C.
1900 International Park Drive
Suite 220
Birmingham, AL 35243
FAX: (205) 967-3756
with a copy to:
James F. Hughey, Jr., Esq.
Balch & Bingham LLP
1901 Sixth Avenue North
Suite 2600
Birmingham, Alabama 35203
FAX: (205) 226-8799
or to such other person or address as a party shall notify all other parties in
writing.
SECTION 10.4 SPECIFIC PERFORMANCE. Each of the parties acknowledges that
money damages would not be a sufficient remedy for any breach of this Agreement
and that irreparable harm would result if this Agreement were not specifically
enforced. Therefore, the rights and obligations of the parties under this
Agreement shall be enforceable by a decree of specific performance issued by any
court of competent jurisdiction, and appropriate injunctive relief may be
applied for and granted in connection therewith. A party's right to specific
performance shall be in addition to all other legal or equitable remedies
available to such party.
SECTION 10.5 EXPENSES. Except as otherwise expressly provided herein,
whether or not the transactions contemplated by this Agreement shall be
consummated, all fees and expenses (including all fees of counsel and
accountants) incurred by any party in connection with the negotiation and
execution of this Agreement shall be borne by such party.
SECTION 10.6 SEVERABILITY. If any one or more provisions contained in
this Agreement shall, for any reason, be held to be invalid, illegal, or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provision of this Agreement, but this Agreement shall
be construed as if such invalid, illegal, or unenforceable provision had never
been contained herein.
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<PAGE> 162
SECTION 10.7 ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations hereunder may be assigned by any of the parties hereto
without the prior written consent of the other parties, except Sellers can
assign to Apogee or any of its subsidiaries any of its rights and obligations;
provided, however, that such assignment shall not release the assignor from any
such obligations. This Agreement and all of the provisions hereof shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
SECTION 10.8 GOVERNING LAW. This Agreement and the legal relations among
the parties hereto shall be governed by and construed in accordance with the
laws of the State of Delaware, without giving effect to provisions thereof
relating to conflict of laws.
SECTION 10.9 COUNTERPARTS. This Agreement may be executed simultaneously
in two or more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
SECTION 10.10 HEADINGS. The headings of the Articles and Sections of this
Agreement are inserted for convenience only and shall not constitute a part
hereof or affect in any way the meaning or interpretation of this Agreement.
SECTION 10.11 ENTIRE AGREEMENT. This Agreement, including the Schedules
hereto, as well as the other documents and certificates delivered pursuant
hereto set forth the entire agreement and understanding of the parties hereto
with respect to the subject matter hereof, and supersede all prior agreements,
promises, covenants, arrangements, communications, representations or
warranties, whether oral or written, by any officer, employee or representative
of any party hereto.
SECTION 10.12 THIRD PARTIES. Except as specifically set forth or referred
to herein, nothing expressed or implied herein is intended or shall be construed
to confer upon or give to any person or entity other than the parties hereto,
and their successors or permitted assigns, any rights or remedies under or by
reason of this Agreement.
SECTION 10.13 PERFORMANCE FOLLOWING CLOSING. Nothing in this Agreement
shall be construed to limit any covenant or agreement of the parties hereto
which by its terms contemplates performance after the Closing.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered, all as of the day and year first above written.
<TABLE>
<S> <C>
SELLERS:
WITNESS APOGEE, INC.
By: /s/ ANDREW HALLOWELL By: /s/ LAWRENCE M. DAVIES
------------------------------------------------ ------------------------------------------------
Assistant Secretary
Its: President & Chief Operating Officer
--------------------------------------------
WITNESS APOGEE OF PENNSYLVANIA, INC.
/s/ ANDREW HALLOWELL By: /s/ LAWRENCE M. DAVIES
- --------------------------------------------------- -------------------------------------------------
Assistant Secretary
Its: President
--------------------------------------------
WITNESS APOGEE OF TENNESSEE, INC.
/s/ ANDREW HALLOWELL By: /s/ LAWRENCE M. DAVIES
- --------------------------------------------------- -------------------------------------------------
Assistant Secretary
Its: President
--------------------------------------------
</TABLE>
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<PAGE> 163
<TABLE>
<S> <C>
WITNESS AGP ACQUISITION, INC.
/s/ ANDREW HALLOWELL By: /s/ LAWRENCE M. DAVIES
- --------------------------------------------------- ------------------------------------------------
Assistant Secretary
Its: President
--------------------------------------------
WITNESS WINSTON CLINICS, INC.
/s/ ANDREW HALLOWELL By: /s/ LAWRENCE M. DAVIES
- --------------------------------------------------- ------------------------------------------------
Assistant Secretary
Its: President
--------------------------------------------
WITNESS DOC SYSTEMS, INC.
/s/ ANDREW HALLOWELL By: /s/ LAWRENCE M. DAVIES
- --------------------------------------------------- ------------------------------------------------
Assistant Secretary
Its: President
--------------------------------------------
WITNESS FAMILY SOCIAL AND PSYCHOTHERAPY SERVICES, INC.
/s/ ANDREW HALLOWELL By: /s/ LAWRENCE M. DAVIES
- --------------------------------------------------- ------------------------------------------------
Assistant Secretary
Its: President
--------------------------------------------
WITNESS APOGEE SERVICES, INC.
/s/ ANDREW HALLOWELL By: /s/ LAWRENCE M. DAVIES
- --------------------------------------------------- ------------------------------------------------
Assistant Secretary
Its: President
--------------------------------------------
WITNESS APOGEE OF MARYLAND, INC.
/s/ ANDREW HALLOWELL By: /s/ LAWRENCE M. DAVIES
------------------------------------------------ -------------------------------------------
Assistant Secretary
Its: President
---------------------------------------
WITNESS ASSOCIATED MENTAL HEALTH SERVICES, LTD.
/s/ ANDREW HALLOWELL By: /s/ LAWRENCE M. DAVIES
------------------------------------------------ -------------------------------------------
Assistant Secretary
Its: President
---------------------------------------
WITNESS PSYCHIATRIC ASSOCIATES, INC.
/s/ ANDREW HALLOWELL By: /s/ LAWRENCE M. DAVIES
------------------------------------------------ -------------------------------------------
Assistant Secretary
Its: President
---------------------------------------
WITNESS PSYCHOGERIATRIC CONSULTANTS, INC.
/s/ ANDREW HALLOWELL By: /s/ LAWRENCE M. DAVIES
------------------------------------------------ -------------------------------------------
Assistant Secretary
Its: President
---------------------------------------
</TABLE>
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<PAGE> 164
<TABLE>
<S> <C>
WITNESS NAPERVILLE PSYCHIATRIC, INC.
/s/ ANDREW HALLOWELL By: /s/ LAWRENCE M. DAVIES
------------------------------------------------ -------------------------------------------
Assistant Secretary
Its: President
---------------------------------------
WITNESS APOGEE OF NORTHERN FLORIDA, INC.
/s/ ANDREW HALLOWELL By: /s/ LAWRENCE M. DAVIES
------------------------------------------------ -------------------------------------------
Assistant Secretary
Its: President
---------------------------------------
WITNESS FAMILY SOCIAL AND PSYCHOLOGICAL SERVICES, L.L.C.
/s/ ANDREW HALLOWELL By: /s/ LAWRENCE M. DAVIES
------------------------------------------------ --------------------------------------------
Assistant Secretary
Its: President
----------------------------------------
WITNESS WOODMONT PSYCHIATRIC ASSOCIATES, INC.
/s/ ANDREW HALLOWELL By: /s/ LAWRENCE M. DAVIES
------------------------------------------------ --------------------------------------------
Assistant Secretary
Its: President
----------------------------------------
WITNESS AHS OF RHODE ISLAND, INC.
/s/ ANDREW HALLOWELL By: /s/ LAWRENCE M. DAVIES
------------------------------------------------ --------------------------------------------
Assistant Secretary
Its: President
----------------------------------------
PURCHASERS:
WITNESS: PSYCHPARTNERS, L.L.C.
By: /s/ THOMAS P. KENT By: /s/ EMMETT E. MCLEAN
-------------------------------------------- --------------------------------------------
Its: Vice President Its: Senior Vice President
---------------------------------------- ----------------------------------------
WITNESS: PSYCHPARTNERS, INC.
By: /s/ THOMAS P. KENT By: /s/ EMMETT E. MCLEAN
-------------------------------------------- --------------------------------------------
Its: Vice President Its: Senior Vice President
---------------------------------------- ----------------------------------------
WITNESS: PSYCHPARTNERS MIDATLANTIC, INC.
By: /s/ THOMAS P. KENT By: /s/ EMMETT E. MCLEAN
------------------------------------------- -------------------------------------------
Its: Vice President Its: Senior Vice President
--------------------------------------- ---------------------------------------
</TABLE>
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<PAGE> 165
EXHIBIT B
BANC ONE CAPITAL CORPORATION
150 E GAY STREET 24TH FLOOR
COLUMBUS, OH 43215
March 16, 1998
Board of Directors
Apogee, Inc.
1018 W. Ninth Avenue
Suite 202
King of Prussia, PA 19406
Gentlemen:
We understand that Apogee, Inc. and its subsidiaries (collectively, the
"Company"), PsychPartners, Inc. and PsychPartners MidAtlantic, Inc.
(collectively, the "Purchasers"), and PsychPartners, L.L.C. ("PsychPartners")
have entered into an Agreement of Purchase and Sale, dated December 26, 1997
(the "Purchase Agreement"), which provides for the sale by the Company to the
Purchasers of a substantial portion (the "Divested Outpatient Business Assets")
of the assets and business of the Company's behavioral health services business
(the "Outpatient Business"), all as more specifically described in the Purchase
Agreement (the transaction contemplated by the Purchase Agreement being referred
to herein as the "Sale"). Pursuant to the Purchase Agreement, in exchange for
the Divested Outpatient Business Assets the Purchasers will assume certain
liabilities and deliver to the Company at the closing of the Sale cash in the
amount of $27,000,000, subject to adjustment (the "Cash Consideration"),
together with a five year option to acquire 400,000 Common Units, subject to
adjustment, in PsychPartners for an aggregate exercise price of $20,000 (the
"Warrant"). The Company contemplates that the assets of the Outpatient Business
not sold to the Purchasers in the Sale (the "Retained Outpatient Business
Assets") will be subsequently sold, liquidated, or discontinued in separate
transactions to be determined by the Company.
You have asked for our opinion as to whether the Cash Consideration to be
paid by the Purchasers to the Company in exchange for the Divested Outpatient
Business Assets is fair from a financial point of view to the Company.
For the purposes of the opinion set forth herein, we have: (i) reviewed
certain publicly available financial statements and reports and other
information of the Company and of certain other companies we have determined to
be comparable to the Outpatient Business; (ii) reviewed certain internal
(including estimated) financial statements, forecasts and other financial and
operating data concerning the Outpatient Business or the Divested Outpatient
Business Assets, or both, prepared by the management of the Company; (iii)
discussed with management the past, current and forecasted operations and
financial condition of the Outpatient Business or the Divested Outpatient
Business Assets, or both; (iv) reviewed recent prices and trading activity for
the Company's common stock and the stock of such comparable companies; (v)
reviewed the financial terms, to the extent publicly available, of certain
comparable acquisition transactions; (vi) reviewed the Purchase Agreement and
certain related agreements; and (vii) considered such other factors as we have
deemed appropriate.
We have assumed, and relied upon without independent verification, the
accuracy and completeness of all of the financial and other information reviewed
by us for purposes of rendering this opinion. With respect to the internal
(including estimated) financial statements, forecasts, analyses and other
financial and operating data, we have assumed that they have been reasonably
prepared on bases reflecting the best currently available estimates and
judgements of the Company's management. We have not made any independent
appraisal of the assets or liabilities of the Divested Outpatient Business
Assets, nor have we been furnished with such appraisals. Our opinion is
necessarily based on economic, market, and other conditions as in effect on, and
the information made available to us as of, the date hereof.
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<PAGE> 166
Board of Directors
Apogee, Inc.
March 16, 1998
Page 2
With your consent: (i) we limited this opinion to the fairness to the
Company, from a financial point of view, of the Cash Consideration to be
received for the Divested Outpatient Business Assets; (ii) we have not
considered either the Company's underlying business decision to effect the Sale
or the value of the Warrant and the Retained Outpatient Business Assets and
related liabilities; and (iii) we assumed that any adjustment to the Cash
Consideration will not be material, that the Sale will be consummated in
accordance with the Purchase Agreement, and that the Purchase Agreement has not
been amended or otherwise modified since its date.
The opinion expressed herein is provided for the information and assistance
of the Board of Directors of the Company in connection with its consideration of
the Sale. This opinion does not constitute a recommendation as to how any holder
of the Company's common stock should vote with respect to such transaction.
Based upon and subject to the foregoing and based upon such other matters
as we consider relevant, it is our opinion that, as of the date hereof, the Cash
Consideration to be received by the Company upon the sale of the Divested
Outpatient Business Assets pursuant to the Purchase Agreement is, from a
financial point of view, fair to the Company.
Very truly yours,
BANC ONE CAPITAL CORPORATION
By: /s/ Banc One Capital Corp.
- ----------------------------------------------------
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<PAGE> 167
APOGEE, INC.
PROXY--SPECIAL MEETING OF SHAREHOLDERS--MAY 14, 1998
COMMON STOCK
The undersigned, a shareholder of APOGEE, INC., does hereby appoint JOHN H.
FOSTER and LAWRENCE M. DAVIES, or either of them, with full power of
substitution, his proxies, to appear and vote all shares of Common Stock of the
Company which the undersigned is entitled to vote at the Special Meeting of
Shareholders to be held on May 14, 1998 at 9:00 A.M., local time, or at any
adjournments thereof, upon such matters as may properly come before the Meeting.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby instructs said proxies or their substitutes to vote as
specified on the reverse on each of the following matters and in accordance
with their judgment on any other matters which may properly come before the
Meeting.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE.)
PLEASE DETACH AND MAIL IN THE ENVELOPE PROVIDED
A /X/ Please mark your
votes as in this
example.
FOR AGAINST ABSTAIN
1. To approve the sale of substantially all / / / / / /
of the business and assets of the
Company's behavorial healthcare business
pursuant to the Purchase Agreement.
2. To approve an adjournment or postponement / / / / / /
of the Special Meeting for a period of up
to 30 days to solicit additional proxies in the event the Company does not
receive a sufficient number of proxies to constitute a quorum or approve the
sale of substantially all of the assets of the Company.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED. IF NO
DIRECTION IS INDICATED, THEY WILL BE VOTED IN FAVOR OF THE ITEM(S) FOR WHICH NO
DIRECTION IS INDICATED.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
Stockholder(s) Sign Here ____________ (L.S.)__________ (L.S.) Dated_______, 1998
IF HELD JOINTLY
IMPORTANT: Before returning this Proxy, please sign your name or names on the
line(s) above exactly as shown hereon. Executors, administrators,
trustees, guardians or corporate officers should indicate their full
titles when signing. When shares are registered in the name of joint
tenants or trustees, each joint tenant or trustee should sign.
