<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended February 28, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File number 1-13626
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HORIZON MENTAL HEALTH MANAGEMENT, INC.
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(Exact name of registrant as specified in its charter)
Delaware 075-2293354
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(State or other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
1500 Waters Ridge Drive
Lewisville, Texas 75057-6011
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(Address of principal executive offices, including zip code)
(972) 420-8200
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [ X ] NO [ ]
The number of shares outstanding of the registrant's Common Stock, $0.01 Par
Value, as of March 28, 1997 was 5,564,262 shares.
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INDEX
HORIZON MENTAL HEALTH MANAGEMENT, INC.
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S> <C>
Item 1. Financial Statements.................................................................................... 3
HORIZON MENTAL HEALTH MANAGEMENT, INC.
Consolidated Balance Sheets as of August 31, 1996,
and February 28, 1997 (unaudited).....................................................................3
Consolidated Statements of Operations for the three months ended
February 29, 1996 and February 28, 1997 (each unaudited)...............................................5
Consolidated Statements of Operations for the six months ended
February 29, 1996 and February 28, 1997 (each unaudited)...............................................6
Consolidated Statements of Cash Flows for the six months ended
February 29, 1996 and February 28, 1997 (each unaudited)..............................................7
Notes to Consolidated Financial Statements (unaudited)...................................................8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................................................16
PART II - OTHER INFORMATION
Item 2. Changes in Securities...................................................................................27
Item 4. Submission of Matters to a Vote of Security Holders.....................................................27
Item 5. Other Information.......................................................................................28
Item 6. Exhibits and Reports on Form 8-K........................................................................28
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HORIZON MENTAL HEALTH MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
August 31, February 28,
1996 1997
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(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and short-term investments $ 7,940,232 $ 8,713,746
Accounts receivable less allowance for uncollectible
accounts of $627,142 at August 31, 1996 and
$989,600 at February 28, 1997 7,096,964 9,426,252
Receivable from employees 89,126 62,399
Prepaid expenses and supplies 234,028 309,817
Other receivables 29,426 73,355
Other current assets 71,940 109,305
Current deferred taxes 1,018,602 1,270,684
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TOTAL CURRENT ASSETS 16,480,318 19,965,558
----------- -----------
PROPERTY AND EQUIPMENT:
Equipment 2,325,320 3,163,167
Buildings and improvements 109,467 61,702
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2,434,787 3,224,869
Less accumulated depreciation 1,552,975 1,797,766
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881,812 1,427,103
Goodwill, net of accumulated amortization of
$1,525,015 at August 31, 1996 and $1,711,436
at February 28, 1997 13,388,738 13,202,317
Management contracts, net of accumulated
amortization of $1,475,375 at August 31, 1996
and $1,718,261 at February 28, 1997 1,925,029 1,682,142
Other assets 195,630 392,765
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TOTAL ASSETS $32,871,527 $36,669,885
=========== ===========
</TABLE>
See notes to consolidated financial statements.
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HORIZON MENTAL HEALTH MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
August 31, February 28,
1996 1997
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(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 1,193,048 $ 418,311
Employee compensation and benefits 4,018,951 3,833,863
Accrued third party payor liabilities 142,918 142,918
Income taxes payable 9,598 31,046
Accrued expenses 4,981,386 6,310,169
Payable to health insurance program 661,248 --
----------- -----------
TOTAL CURRENT LIABILITIES 11,007,149 10,736,307
Deferred income taxes 1,496,214 1,540,967
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TOTAL LIABILITIES 12,503,363 12,277,274
Commitments and contingencies - (Note 7) -- --
Minority interest 8,755 60,315
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par value, authorized 500,000
shares; none issued or outstanding -- --
Common stock, $.01 par value, 10,000,000 and 40,000,000
shares authorized at August 31, 1996 and February 28, 1997, respectively;
5,476,027 and 5,564,262 shares issued and outstanding at August 31, 1996
and February 28, 1997, respectively 54,760 55,643
Additional paid-in capital 13,849,408 14,238,328
Retained earnings 6,455,241 10,038,325
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TOTAL EQUITY 20,359,409 24,332,296
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TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $32,871,527 $36,669,885
=========== ===========
</TABLE>
See notes to consolidated financial statements.
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HORIZON MENTAL HEALTH MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended February
----------------------------
1996 1997
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<S> <C> <C>
Net revenues $ 15,071,434 $ 18,451,689
Expenses:
Salaries and benefits 8,426,299 10,047,106
Purchased services 2,143,354 2,732,390
Provision for bad debts -- 278,168
Depreciation and amortization 324,194 366,655
Other 2,018,394 2,189,758
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Total operating expenses 12,912,241 15,614,077
Other income (expense):
Interest expense - other (4,805) --
Interest and other income 71,820 161,141
Loss on sale of fixed assets -- (546)
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Income before income taxes and minority interest 2,226,208 2,998,207
Income tax expense (Note 6) 890,503 1,177,688
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Income before minority interest 1,335,705 1,820,519
Minority interest (Note 3) -- 27,486
------------ ------------
Net income $ 1,335,705 $ 1,793,033
============ ============
Earnings per common share:
Net income $ .21 $ .27
============ ============
Weighted average shares outstanding 6,495,421 6,656,885
============ ============
</TABLE>
See notes to consolidated financial statements.
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HORIZON MENTAL HEALTH MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended February
----------------------------
1996 1997
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<S> <C> <C>
Net revenues $ 29,684,302 $ 37,358,471
Expenses:
Salaries and benefits 16,399,602 20,117,102
Purchased services 4,342,189 5,246,902
Provision for bad debts 3,060 465,450
Depreciation and amortization 642,039 798,906
Other 4,136,128 5,028,934
------------ ------------
Total operating expenses 25,523,018 31,657,294
Other income (expense):
Interest expense - other (29,242) (352)
Interest and other income 139,670 304,681
Loss on sale of fixed assets -- (3,061)
------------ ------------
Income before income taxes and minority interest 4,271,712 6,002,445
Income tax expense (Note 6) 1,687,178 2,367,801
------------ ------------
Income before minority interest 2,584,534 3,634,644
Minority interest (Note 3) -- 51,560
------------ ------------
Net income $ 2,584,534 $ 3,583,084
============ ============
Earnings per common share:
Net income $ .40 $ .54
============ ============
Weighted average shares outstanding 6,477,357 6,641,841
============ ============
</TABLE>
See notes to consolidated financial statements.
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HORIZON MENTAL HEALTH MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
February 29, February 28,
1996 1997
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<S> <C> <C>
Operating activities:
Net income $ 2,584,534 $ 3,583,084
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 642,039 798,906
Loss on sale of equipment -- 3,061
Minority interest -- 51,560
Changes in net assets and liabilities:
Increase in accounts receivable (2,086,800) (2,329,288)
Decrease (increase) in other receivables 70,084 (17,191)
Increase in prepaid expenses and supplies (250,900) (75,789)
Increase in other assets (202,560) (486,582)
Increase in accounts payable, accrued expenses and
other liabilities 616,958 435,151
Decrease in payable to health insurance program -- (661,248)
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Net cash provided by operating activities 1,373,355 1,301,664
Investing activities:
Purchase of property and equipment (291,994) (928,323)
Proceeds from sale of equipment -- 10,370
----------- -----------
Net cash used in investing activities (291,994) (917,953)
Financing activities:
Payments of long-term debt (3,807,248) --
Proceeds from line of credit 1,300,000 --
Net proceeds from issuance of common stock 3,751 145,698
Tax benefit related to stock option exercise 10,731 244,105
----------- -----------
Net cash provided by (used in) financing activities (2,492,766) 389,803
----------- -----------
Net increase (decrease) in cash and short term investments (1,411,405) 773,514
----------- -----------
Cash and short-term investments at beginning of period 3,167,036 7,940,232
----------- -----------
Cash and short-term investments at end of period $ 1,755,631 $ 8,713,746
=========== ===========
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 29,242 $ 352
=========== ===========
Income taxes $ 2,134,436 $ 2,213,074
=========== ===========
</TABLE>
See notes to consolidated financial statements.
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HORIZON MENTAL HEALTH MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION
Horizon Mental Health Management, Inc. ("Horizon" or the "Company") is
a contract manager of mental health programs offered by general acute
care hospitals in the United States. These management contracts are
generally for terms ranging from three to five years, the majority of
which have automatic renewal provisions. Horizon currently has offices
in the Dallas, Texas; San Francisco, California; Chicago, Illinois;
Tampa, Florida; and Boston, Massachusetts metropolitan areas.
Horizon was formed in July 1989 for the purpose of acquiring all the
assets of two companies. One of the companies, known as Horizon Health
Management Company, had been formed in 1981 and since that time had
been engaged in the mental health contract management business. The
other company owned and operated a freestanding psychiatric hospital in
California. Effective March 1, 1990, the assets constituting the
contract management business and the psychiatric hospital were
transferred to Horizon. Horizon sold the freestanding psychiatric
hospital in 1992.
A subsidiary of Horizon leased and began operating Mountain Crest
Hospital ("MCH") in December 1990. In July 1994, Horizon subleased MCH
to Mental Health Management, Inc. ("MHM") for a period commencing July
31, 1994 through December 31, 2000. Horizon, which had previously
guaranteed the obligations under the primary lease, has provided the
substitute guaranty of MHM to the lessor. Management believes it has
satisfied the conditions in the primary lease for release of Horizon's
guaranty. The sublease requires monthly rental payments to Horizon of
50% of operating cash flow, as defined, subject to a minimum monthly
payment of $20,000, not to exceed $1,200,000 in the aggregate over the
sublease life which expires upon expiration of the primary lease on
December 31, 2000. As of February 28, 1997, Horizon has received
$723,686 of the $1,200,000 resulting in future receipts of $476,314 to
be received on or before February 1, 1999 assuming minimum monthly
payments of $20,000.
On August 1, 1994 Horizon signed a contract with Horizon Mental Health
Management, L.L.C. (the "Horizon LLC") to have it manage all of
Horizon's then existing management contract obligations for a 72.5%
interest in the Horizon LLC. Prior to March 20, 1995, the remaining
27.5% interest in the Horizon LLC was held by MHM which signed a
contract with the Horizon LLC to have it manage all of MHM's then
existing management contract obligations. Upon completion of its
initial public offering of common stock, Horizon became contractually
obligated to acquire the minority interest of MHM in the Horizon LLC.
March 13, 1995 was the effective date of the initial public offering.
The acquisition of the minority interest of MHM was effective March 20,
1995. As such, the Horizon LLC became a wholly-owned subsidiary of
Horizon. Effective September 1, 1995, the Horizon LLC was dissolved and
its operations combined with Horizon.
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On July 31, 1996, Horizon acquired eighty percent (80%) of the
outstanding common stock of Florida Professional Psychological
Services, Inc., also known as Professional Psychological Services, Inc.
("PPS"). Based in Clearwater, Florida, PPS specializes in full risk,
capitated managed behavioral health programs and employee assistance
programs. (See Note 3)
Effective March 15, 1997, the Company purchased all of the outstanding
capital stock of Geriatric Medical Care, Inc., a Tennessee corporation
("Geriatric"), from the stockholders of Geriatric. Geriatric is a
contract manager of mental health services for acute care hospitals.
Geriatric had total revenues of approximately $5.7 million in 1996 and
currently has 17 management contract locations, of which two are not
yet in operation at the date of this report. The cash purchase price of
approximately $4.3 million, which was paid at closing from existing
cash of the Company, included retiring essentially all of Geriatric's
outstanding debt. In connection with the stock purchase, the Company
also agreed to pay an additional $270,000 (which, if required, the
Company expects to pay from its available cash) to the sellers in the
event a qualifying management contract is signed on or before August
17, 1997. The purchase price was determined based on negotiations
between the sellers and the Company.
Effective March 15, 1997, the Company purchased all of the outstanding
capital stock of Clay Care, Inc., a Texas corporation ("CCI"), from
Clayton V. Deardorff. CCI is a contract manager of mental health
services for acute care hospitals. CCI currently has management
contracts with five hospitals of which four are in operation and one is
scheduled to open in April 1997. CCI had total revenues of
approximately $1.3 million in 1996. The $975,000 cash purchase price
was determined based on negotiations between the seller and the
Company. A total of $475,000 of the purchase price was paid at the
closing from existing cash of the Company. The remaining $500,000 of
the total purchase price, which the Company also expects to pay from
available cash, is due ninety (90) days from the closing date, subject
to reduction under certain circumstances specified in the stock
purchase agreement.
BASIS OF PRESENTATION
The accompanying consolidated balance sheet at February 28, 1997, the
consolidated statements of operations for the three and six month
periods ended February 1996 and 1997, and the consolidated statements
of cash flows for the six months ended February 1996 and 1997 are
unaudited. These financial statements should be read in conjunction
with the Company's audited financial statements for the year ended
August 31, 1996. In the opinion of Company management, the unaudited
consolidated financial statements include all adjustments, consisting
only of normal recurring accruals, which the Company considers
necessary for a fair presentation of the financial position of the
Company as of February 28, 1997, and the results of operations for the
three months and six months ended February 1996 and 1997.
Operating results for the three and six month periods are not
necessarily indicative of the results that may be expected for a full
year or any portion thereof.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND SHORT-TERM INVESTMENTS: Cash and short-term investments
include securities with original maturities of three months or less
when purchased.
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PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost.
Depreciation expense is provided on the straight-line basis over the
assets' estimated useful lives. The useful life of furniture and
fixtures and computer equipment are estimated to be five years and
three years, respectively. Routine maintenance and repair items are
charged to current operations.
NET REVENUES: Net revenue is reported at the estimated net realizable
amounts from contracted hospitals for contract management services
rendered. Adjustments are accrued on an estimated basis in the period
the related services are rendered and adjusted in future periods as
final settlement is determined.
Some management contracts include a clause which states that Horizon
will indemnify the hospital for any third-party payor denials,
including Medicare. At the time the charges are denied, an allowance
for 100% of the disputed amount is recorded by Horizon. Management
believes it has adequately provided for any potential adjustments that
may result from final settlement of these denials.
At February 28, 1997, Horizon had management contracts with 31
hospitals directly or indirectly owned by Columbia/HCA Healthcare
Corporation ("Columbia/HCA"), of which 27 had programs in operation.
These 27 contracts accounted for 22.1% of the Company's net revenues
for the six months ended February 28, 1997. In the aggregate, including
terminated contracts, revenues generated by hospitals directly or
indirectly owned by Columbia/HCA accounted for 23.1% of the Company's
net revenues for the six months ended February 28, 1997. Of the 31
Columbia/HCA contracts at February 28, 1997, 18 contracts contain a
provision limiting the number of contracts which Columbia/HCA can
cancel without cause to 33.3% during any calendar year. The termination
or non-renewal of all or a substantial part of the management contracts
with hospitals owned by Columbia/HCA could have a material adverse
effect on the Company's business, financial condition or results of
operations. In addition, at February 28, 1997, Horizon had eight
management contracts with hospitals owned by Community Health Systems,
of which seven had programs in operation and accounted for 5.6% of the
Company's net revenues for the six months ended February 28, 1997. In
addition, Horizon had six management contracts with hospitals
affiliated with tenant, which accounted for 4.2% of the Company's net
revenues for the six months ended February 28, 1997.
The customers of Horizon are not concentrated in any specific
geographic region, but are concentrated in the health care industry.
Horizon generally does not require collateral to support outstanding
accounts receivable.
HEALTH INSURANCE PROGRAM REIMBURSEMENT: Services were provided under
Horizon's management to patients who are eligible for coverage under
Title XVIII (Medicare) Health Insurance Programs. Amounts received are
generally less than the standard billing rates of the hospital and
receivables are recorded in the consolidated balance sheet at the
estimated amount to be reimbursed.
Amounts due to/from Health Insurance Programs under Medicare are
subject to final determination through an audit by a fiscal
intermediary. Any difference between the final determination and
estimated amounts accrued is accounted for as an adjustment to patient
service revenue in the year of final determination. Management believes
it has adequately provided for any potential adjustments resulting from
an audit.
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LONG-LIVED AND INTANGIBLE ASSETS: The Company has 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
No. 121), effective September 1, 1994. Under SFAS 121, the Company
recognizes impairment losses on property and equipment whenever events
or changes in circumstances indicate that the carrying amount of
long-lived assets, on an individual property basis, may not be
recoverable through undiscounted future cash flows. Such losses are
determined by comparing the sum of the expected future discounted net
cash flows to the carrying amount of the asset. Impairment losses are
recognized in operating income as they are determined. As of February
28, 1997, no impairment losses have been incurred.
INCOME TAXES: Horizon has adopted Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes." SFAS 109
generally requires an asset and liability approach and requires
recognition of deferred tax assets and liabilities resulting from
differing book and tax bases of assets and liabilities. It requires
that deferred tax assets and liabilities be determined using the tax
rate expected to apply to taxable income in the periods in which the
deferred tax asset or liability is expected to be realized or settled.
Under this method, future financial results will be impacted by the
effect of changes in income tax rates on cumulative deferred income tax
balances.
NET INCOME PER SHARE: Net income per common share is calculated using
the weighted average number of common and common equivalent shares
outstanding during the respective periods. Dilutive common equivalents
consist of stock options calculated using the treasury stock method.
USE OF ESTIMATES: The Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
3. INVESTMENT IN PPS
On July 31, 1996, Horizon acquired eighty percent (80%) of the
outstanding common stock of Florida Professional Psychological
Services, Inc., also known as Professional Psychological Services, Inc.
("PPS"), and PPS has been consolidated with Horizon as of August 1,
1996. Horizon accounted for the acquisition of PPS by the purchase
method as required by generally accepted accounting principles. Based
in Clearwater, Florida, PPS specializes in full risk, capitated managed
behavioral health programs and employee assistance programs. The
purchase price is based primarily on a multiple of the 1996 pre-tax
income of PPS. Horizon currently estimates the purchase price will be
between $2,225,000 and $2,900,000, of which $1,225,000 was paid on July
31, 1996. Horizon expects to pay an interim amount of $1,000,000 on or
about March 31 ,1997. The final reconciliation statement of income of
PPS for the twelve months ended December 31, 1996 is to be delivered
on or before July 15, 1997, and any remaining purchase price is to be
paid within 30 days after determination thereof.
In addition, Horizon also obtained an option to acquire the remaining
twenty percent (20%) of the outstanding PPS common stock at a future
date. The sellers, constituting all the shareholders of PPS, also
obtained the right to put to Horizon such shares on certain dates. The
option and put prices for the remaining PPS shares are based on a
multiple of the pre-tax income of PPS in future years.
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For the three and six months ended February 28, 1997, PPS generated
$1,281,487 and $2,545,184 in gross revenues, respectively, and net
income of $137,429 and $257,802, respectively.
4. LONG-TERM DEBT
Effective September 29, 1995, the Company entered into a loan agreement
with Texas Commerce Bank (TCB) for a revolving line of credit with a
maximum advance commitment of $11,000,000. On December 12, 1995, the
Company paid TCB the outstanding balance of $1,300,000 originally
advanced to the Company during the quarter ended November 30, 1995,
plus accrued interest. As of February 28, 1997, the Company has
borrowed $0 against the available line of credit, and has $9.3 million
available for advances under the revolving credit facility.
The line of credit bears interest at (1) the lesser of the Floating
Base Rate or the maximum nonusurious interest rate permitted by law
and/or (2) the lesser of the LIBOR Rate plus LIBOR Margin or the
maximum nonusurious interest rate permitted by law.
Floating Base Rate means the greater of (i) TCB's prime rate of
interest or (ii) the weighted average of the rates on overnight federal
funds transactions with members of the Federal Reserve System arranged
by federal funds brokers plus one-half of one percent (.5%). LIBOR Rate
means the quotient of (i) the Interbank Offered Rate divided by (ii)
the remainder of 1.0 minus the LIBOR reserve requirement. LIBOR Margin
is 1.25% to 1.75% depending on the debt coverage ratio.
The original maturity date of this line of credit is December 15, 1998;
however, it may be extended to December 15, 2000 if certain debt
coverage ratios are met.
5. STOCK OPTIONS
In accordance with Horizon's 1989 and 1995 Stock Option Plans, there
are 1,931,843 shares of common stock reserved for grant to key
employees. Of which, 256,016 were granted and previously exercised as
of August 31, 1996. In addition, 1,411,268 options and 1,461,327
options were issued and outstanding at August 31, 1995 and 1996,
respectively. During fiscal 1995 nonstatutory stock options to purchase
168,000 shares of common stock were granted with an exercise price of
$4.00, $6.6667, $7.4167 or $8.7833 per share, respectively. On
September 1, 1995, the Company granted an additional 127,500 options
under the 1995 Stock Option Plan at $9.75 per share subject to
shareholder approval which was received on January 11, 1996. An
additional 128,250 shares with an exercise price of $14.1667 were
granted on August 15, 1996. An additional 4,500 shares with an exercise
price of $16.3333 were granted during the first six months of fiscal
year 1997. Management believes the exercise prices of the options
approximated or exceeded the market value of the common stock at the
date of grant. As such, no expense is recognized in the accompanying
statements of income as a result of such issuance. The options are
generally exercisable in cumulative installments over a four-year
period and terminate 10 years from the date of grant. During fiscal
1995 and 1996, 39,000 and 11,250 options granted to former officers
were canceled respectively. An additional 27,937 options were canceled
during the first six months of fiscal year 1997. During fiscal 1995,
vested options of 101,250 and 17,325 have been exercised by certain
officers at exercise prices of $0.8333 and $2.1417, respectively.
During fiscal 1996, vested options of 42,000 at $0.50, and 38,816 at
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<PAGE> 13
$0.8333 and 53,625 at $1.00 have been exercised by certain key
employees. During fiscal 1997, vested options of 22,500 at $1.00 and
18,750 at $3.6157 and 3,750 at $4.00 and 750 at $6.6667, and 42,485 at
$0.8333 have been exercised by certain key employees.
At February 28, 1997 there were 1,931,843 shares reserved, of which
344,250 shares were issued and exercised, 1,349,656 shares were issued
and unexercised and 237,937 shares remain unissued. Of the 1,349,656
shares issued and unexercised, 539,589 shares were exercisable.
On April 28, 1995 the board of directors created a stock option plan
for outside directors owning less than 5% of the stock of the Company.
150,000 shares of common stock are reserved for issuance under this
plan. This plan has been amended and restated to also provide for 3,000
option grants to each eligible director each time they are re-elected
to the board after having served as a director for at least one year
since their initial grant under the plan. At February 28, 1997 there
were 150,000 shares reserved under this plan, of which no shares were
issued and exercised, 72,000 shares were issued and unexercised and
78,000 shares remain unissued. Of the 72,000 shares issued and
unexercised, 12,000 shares were exercisable. 12,000 options were issued
to outside directors during the first six months of fiscal year 1997
due to re-election at the January 29, 1997 Annual Meeting of
Stockholders.
On April 1, 1996 the Company filed an S-8 registration statement which
registered 2,054,549 shares granted to or eligible for granting to
employees and directors under the 1989 and 1995 Stock Option Plans, as
amended, and the outside director stock option plan. This registration
includes a separate reoffer prospectus to allow any shares issued in
the future and most previously exercised shares under the 1989 and 1995
Stock Option Plans to be traded at any time without any holding period
or volume restrictions.
6. PROVISION FOR INCOME TAXES
The Company recorded federal and state income taxes for the three and
six months ended February 28, 1997, in the amount of $1,178,000 and
$2,368,000, respectively, resulting in a combined tax rate of 39.3% and
39.5%, respectively. For each period, the Company has reflected the
benefit from utilization of available net operating loss carryforwards
through a change in deferred taxes rather than a benefit to income tax
expense.
7. COMMITMENTS AND CONTINGENCIES
Horizon leases various office facilities and equipment under operating
leases. In addition, Horizon leases space for one partial
hospitalization program in association with one management contract.
The following is a schedule, as of February 28, 1997, of minimum rental
payments under these leases which expire at various dates:
<TABLE>
<S> <C>
Six months ending August 31, 1997 $ 373,931
For the year ending August 31, 1998 651,838
For the year ending August 31, 1999 504,778
For the year ending August 31, 2000 476,883
For the years ending August 31, 2001 and thereafter 449,586
----------
$2,457,016
==========
</TABLE>
-13-
<PAGE> 14
On December 20, 1995 the Company entered into a lease agreement with a
term of approximately five years for a building to be constructed in
Lewisville, Texas to the Company's specifications. On September 27,
1996, a certificate of occupancy was issued and the Company occupied
the building as its executive offices and National Support Center.
Rental payments commenced the same date. In connection with the lease
transaction, the Company has guaranteed a loan of approximately
$900,000. The loan was by a financial institution to the building
owner. The Company also agreed to purchase the leased building for
approximately $4.5 million at the end of the lease term if it is not
sold to a third party, or the Company does not extend its lease.
On July 31, 1996, Horizon acquired eighty percent (80%) of the
outstanding common stock of Florida Professional Psychological
Services, Inc. ("PPS"). The purchase price is based primarily on a
multiple of the 1996 pre-tax income of PPS. Horizon currently estimates
the purchase price will be between $2,225,000 and $2,900,000, of which
$1,225,000 was paid on July 31, 1996. Horizon expects to pay an interim
amount of $1,000,000 on or about March 31, 1997. The final
reconciliation statement of income of PPS for the twelve months ended
December 31, 1996 is to be delivered on or before July 15, 1997, and
any remaining purchase price is to be paid within 30 days after
determination thereof.
In connection with its purchase of the capital stock of Geriatric, the
Company agreed to pay an additional $270,000 to the sellers in the
event a qualifying management contract is signed on or before August
17, 1997.
The remaining $500,000 of the purchase price payable by the Company for
the capital stock of CCI, subject to reduction under certain
circumstances specified in the stock purchase agreement, is due on or
before ninety (90) days after March 15, 1997.
Horizon is insured for professional and general liability on a
claims-made policy, with additional tail coverage being obtained when
necessary. Management is unaware of any claims against the Company that
would cause the final expenses for professional and general liability
to vary materially from amounts provided.
Horizon is involved in litigation arising in the ordinary course of
business, including matters involving professional liability. It is the
opinion of management that the ultimate disposition of such litigation
would not be in excess of any reserves or have a material adverse
effect on Horizon's financial position or results of operations.
8. COMMON STOCK
The Board of Directors of the Company approved a three-for-two stock
split effected in the form of a 50% stock dividend, pursuant to which
one additional share of Common Stock of the Company was issued on
January 31, 1997 for every two shares of Common Stock held by
stockholders of record at the close of business on January 22, 1997. As
a result of such stock split/dividend, a total of $18,253 originally
recorded as additional paid in capital was reclassified as common
stock. Such stock split/dividend has been retroactively reflected in
the consolidated financial statements included in this report. Upon
effecting the stock split/dividend, the stock options and their related
exercise prices were adjusted proportionately.
In February 1997, the Certificate of Incorporation, as amended, of the
Company was amended to increase the number of authorized shares of
Common Stock, $.01 par value per share, of the Company from 10,000,000
shares to 40,000,000 shares.
-14-
<PAGE> 15
In February 1997, the Company entered into a Rights Agreement pursuant
to which it approved the distribution of one Common Stock purchase
right for each outstanding share of Common Stock of the Company. The
Rights Agreement and the amendment to the Certificate of Incorporation
referred to above were approved by the stockholders of the Company at
the Annual Meeting of Stockholders held on January 29, 1997.
-15-
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company was formed in July 1989 for the purpose of acquiring all the
assets of two companies. One company, known as Horizon Health Management
Company, had been formed in 1981 and since that time had been engaged in the
mental health contract management business. The other company owned and
operated a freestanding psychiatric hospital in California. Although Horizon
owned, leased or managed a few freestanding psychiatric or substance abuse
facilities beginning March 1, 1990, the mental health contract management
business formed by Horizon's predecessor in 1981 has been Horizon's primary
business since subleasing its last remaining freestanding psychiatric hospital
on July 31, 1994.
Effective August 1, 1994, Horizon and MHM formed the Horizon LLC.
Horizon signed a contract with the Horizon LLC to have it manage all of
Horizon's then existing management contracts for a 72.5% interest. Prior to
March 20, 1995, the remaining 27.5% interest in the Horizon LLC was held by MHM
which signed a contract with the Horizon LLC to have it manage all of MHM's
then existing 39 management contracts. Upon completion of its initial public
offering of common stock, Horizon became contractually obligated to acquire the
minority interest of MHM in the Horizon LLC. March 13, 1995 was the effective
date of the initial public offering. The acquisition of the minority interest
of MHM was effective March 20, 1995. As such, the Horizon LLC became a
wholly-owned subsidiary of Horizon. The Horizon LLC was consolidated with the
Company effective March 1, 1995. Effective September 1, 1995, the Horizon LLC
was dissolved and its operations combined with Horizon's.
Mental Health Outcomes, Inc. ("MHO, Inc."), a Delaware corporation, was
formed on August 10, 1995 and is engaged in the design and operation of outcome
measurement systems for psychiatric and chemical dependency providers. MHO,
Inc. is a wholly owned subsidiary of Horizon.
On July 31, 1996, Horizon acquired eighty percent (80%) of the
outstanding common stock of Florida Professional Psychological Services, Inc.,
also known as Professional Psychological Services, Inc. ("PPS"). PPS has been
consolidated with Horizon as of August 1, 1996. Horizon accounted for the
acquisition of PPS by the purchase method as required by generally accepted
accounting principles. Based in Clearwater, Florida, PPS specializes in full
risk, capitated managed behavioral health programs and employee assistance
programs. The purchase price is based primarily on a multiple of the 1996
pre-tax income of PPS. Horizon currently estimates the purchase price will be
between $2,225,000 and $2,900,000, of which $1,225,000 was paid on July 31,
1996. Horizon expects to pay an interim amount of $1,000,000 on or about March
31, 1997. The final reconciliation statement of income of PPS for the twelve
months ended December 31, 1996 is to be delivered on or before July 15, 1997,
and any remaining purchase price is to be paid within 30 days after
determination thereof. In addition, Horizon also obtained an option to acquire
the remaining twenty percent (20%) of the outstanding PPS common stock at a
future date. The sellers, constituting all the shareholders of PPS, also
obtained the right to put to Horizon such shares on certain dates. The option
and put prices for the remaining PPS shares are based on a multiple of the
pre-tax income of PPS in future years.
-16-
<PAGE> 17
Effective March 15, 1997, the Company purchased all of the outstanding
capital stock of Geriatric Medical Care, Inc., a Tennessee corporation
("Geriatric"). Geriatric is a contract manager of mental health services for
acute care hospitals. Geriatric had total revenues of approximately $5.7
million in 1996 and currently has 17 management contract locations, of which
two are not yet in operation at the date of this report. The cash purchase
price of approximately $4.3 million, which was paid at closing from existing
cash of the Company, included retiring essentially all of Geriatric's
outstanding debt. In connection with the stock purchase, the Company also
agreed to pay an additional $270,000 to the sellers in the event a qualifying
management contract is signed on or before August 17, 1997.
Effective March 15, 1997, the Company purchased all of the outstanding
capital stock of Clay Care, Inc., a Texas corporation ("CCI"). CCI is a
contract manager of mental health services for acute care hospitals. CCI
currently has management contracts with five hospitals of which four are in
operation and one is scheduled to open in April 1997. CCI had total revenues of
approximately $1.3 million in 1996. A total of $475,000 of the $975,000 cash
purchase price was paid at the closing from existing cash of the Company. The
remaining $500,000 of the total purchase price, which the Company also expects
to pay from available cash, is due ninety (90) days from the closing date,
subject to reduction under certain circumstances specified in the stock
purchase agreement.
Horizon, which had previously traded on the American Stock Exchange
under the symbol "HMH", began trading on the Nasdaq National Market on May 7,
1996, under the symbol "HMHM".
At February 28, 1997, the Company had management contracts with 119
general acute care hospitals located in 36 states, providing for the operation
of a total of 195 various treatment programs.
-17-
<PAGE> 18
SUMMARY STATISTICAL DATA
<TABLE>
<CAPTION>
August 31,
-------------------------------- November 30, February 28,
1994* 1995 1996 1996 1997
-------------------------------- ----------- ------------
NUMBER OF CONTRACT LOCATIONS:
<S> <C> <C> <C> <C> <C>
Contract locations in operation 99 100 107 104 109
Contract locations signed
and unopened 9 12 16 19 10
--- --- --- --- ---
Total contract locations 108 112 123 123 119
=== === === === ===
SERVICES COVERED BY CONTRACTS
IN OPERATION:
Inpatient (A) 89 91 97 94 97
Partial hospitalization (A) 45 55 71 73 73
Outpatient 7 8 11 10 12
Home health 1 1 12 13 13
CQI Plus (under contract) 20 45 64 66 75
TYPES OF TREATMENT PROGRAMS
IN OPERATION:
Geropsychiatric (A) 75 92 130 127 132
Adult psychiatric (A) 60 57 51 53 54
Substance abuse (A) 4 3 7 6 6
Other (A) 3 2 3 4 3
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
Year Ended August 31, --------------------------
------------------------------------- November 30, February 28,
1994* 1995 1996 1996 1997
------------------------------------- --------------------------
CHANGES IN NUMBER OF CONTRACTS:
<S> <C> <C> <C> <C> <C>
Beginning number of contracts 51 108 112 123 123
Contracts added 66* 28 30 8 4
Contracts ended 9 24 19 8 8
--- --- --- --- ---
Ending number of contracts 108 112 123 123 119
=== === === === ===
</TABLE>
* Reflects the assumption by the Horizon LLC of management responsibility
under the 39 MHM contracts effective August 1, 1994, of which 37
contracts had commenced operations at that date.
(A) Beginning with the quarter ended February 29, 1996 a new methodology
which redefined the statistical definition of an operating service or
program was implemented. To avoid duplicity, multiple services/treatment
programs within each category at one location are now being reported as a
single service/treatment program where the predominant treatment defines
the appropriate categories. As a result of this reporting change, prior
periods have been restated as estimates based on the new reporting
definition.
-18-
<PAGE> 19
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1997
The following table sets forth for the three month and six month periods ended
February 29, 1996 and February 28, 1997, the percentage relationship to total
net revenues of certain costs, expenses and income.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
February February
--------------------- ----------------------
1996 1997 1996 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Contract management revenues 99.3% 92.3% 99.3% 90.4%
Other revenues 0.7% 7.7% .7% 9.6%
------ ------ ------ ------
Net revenues 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
Operating costs and expenses
Salaries and benefits 55.9% 54.4% 55.2% 53.9%
Purchased services 14.2% 14.8% 14.6% 14.0%
Provision for bad debts 0.0% 1.5% .1% 1.2%
Depreciation and amortization 2.2% 2.0% 2.2% 2.1%
Other 13.4% 11.9% 13.9% 13.5%
------ ------ ------ ------
Total operating costs and expenses 85.7% 84.6% 86.0% 84.7%
------ ------ ------ ------
Income from operations 14.3% 15.4% 14.0% 15.3%
Interest (net of other income), and other losses 0.5% .9% 0.4% 0.8%
------ ------ ------ ------
Income before income taxes and minority interest 14.8% 16.3% 14.4% 16.1%
Income tax expense 5.9% 6.4% 5.7% 6.3%
Minority interest 0.0% 0.2% 0.0% 0.2%
Net income 8.9% 9.7% 8.7% 9.6%
====== ====== ====== ======
Number of contracts in operation, end of period 103 109 103 109
</TABLE>
-19-
<PAGE> 20
THREE MONTHS ENDED FEBRUARY 28, 1997 COMPARED TO THE THREE MONTHS ENDED
FEBRUARY 29, 1996
Net Revenues. Net revenues for the three months ended February 28,
1997 were $18.5 million, representing an increase of $3.4 million, or 22.5%, as
compared to net revenues of $15.1 million for the corresponding period in the
prior fiscal year. In part, this increase resulted from an increase in the
average number of contract locations in operation from 101.6 for the three
months ended February 29, 1996, to 109.5 for the three months ended February
28, 1997, an increase of 7.8%. In addition, revenues increased $1.3 million, or
8.6%, due to revenue recorded for Florida Professional Psychological Services,
Inc. ("PPS"). Horizon acquired 80% of the outstanding common stock of PPS on
July 31, 1996, and consolidated PPS with Horizon as of August 1, 1996. Revenues
increased $1.1 million, or 7.3%, at locations that have been under Horizon
management during all periods being reported. This was primarily the result of
an average rate increase of 2.5% and the addition of new programs including a
41.0% increase in CQI Plus fees, a 283% increase in Home Health fees and a 97%
increase in Outpatient fees between the periods.
Salaries and Benefits. Salaries and benefits for the three months
ended February 28, 1997 were $10.0 million, representing an increase of $1.6
million, or 19.0%, as compared to salaries and benefits of $8.4 million for the
three months ended February 29, 1996. This increase resulted from the increase
in full time equivalents from 606.0 for the three months ended February 29,
1996, to 689.0 for the three months ended February 28, 1997, an increase of
13.7%.
Full time equivalents increased between the periods as follows:
<TABLE>
<CAPTION>
February 29, February 28,
1996 1997 Increase % Increase
------ ------ ---- ----
<S> <C> <C> <C> <C>
National Support 69.1 80.3 11.2 16.2%
Regional Offices 44.3 39.8 (4.5) (10.2)%
PPS 0.0 47.6 47.6 N/A
Contract Locations 492.6 521.3 28.7 5.8%
------ ------ ---- -----
606.0 689.0 83.0 13.7%
</TABLE>
The increase in the National Support Center full time equivalents of
16.2% results from the expansion of the General and Administrative Department,
as well as the expansion of Mental Health Outcomes, Inc. The increase in
contract location full time equivalents of 5.8% results from an increase in the
average number of contract locations in operation from 101.6 for the three
months ended February 29, 1996, to 109.5 for the three months ended February
28, 1997, an increase of 7.8%. Additionally, Horizon acquired eighty percent
(80%) of the outstanding common stock of PPS on July 31, 1996. PPS's FTE's
averaged 47.6, with associated salary of $474,000, for the quarter ended
February 28, 1997. The Company's average annualized salaries per full time
equivalent for the three months ended February 28, 1997 were $50,015
representing an increase of $3,005, or 6.4%, as compared to average annualized
salaries per full time equivalent of $47,010 for the three months ended
February 29, 1996. Benefits for the three months ended February 28, 1997 were
$1.4 million, representing an increase of $100,000, or 7.7%, as compared to
benefits of $1.3 million for the three months ended February 29, 1996. This
increase resulted primarily from an increase of $77,000 between the periods in
relation to the acquisition of PPS on July 31, 1996.
Depreciation and Amortization. Depreciation and amortization expenses
for the three months ended February 28, 1997 were $367,000, representing an
increase of $43,000, or 13.3%, as compared to depreciation and amortization
expenses of $324,000 for the corresponding period in the prior fiscal year.
$11,000 of this increase is due to the amortization of goodwill of $1.8 million
resulting from the acquisition of Florida Professional Psychological Services,
Inc. The remainder of this increase results from the depreciation expense of
additional equipment purchased for the operation of its contract management
business.
-20-
<PAGE> 21
Other Operating Expenses (Including Purchased Services and Provision
for Bad Debts). Other operating expenses for the three months ended February
28, 1997, were $5.2 million, representing an increase of $1.0 million, or
23.8%, as compared to other operating expenses of $4.2 million for the
corresponding period in the prior fiscal year. The following components
identify the variances between the periods reported.
Purchased services included a $88,000 decrease in Medical Directors'
administrative fees for the three months ended February 28, 1997 as compared to
the same period in the prior fiscal year primarily as a result of certain
physician contracts having been renegotiated resulting in a general lowering of
compensatory fees. In addition, an increase occurred in purchased services due
to an increase of $389,000 in direct service fees related to PPS, which was
acquired by the Company on July 31, 1996. Consulting expense increased $188,000
for the three months ended February 28, 1997 as compared to the three months
ended February 29, 1996. $74,000 of this increase is related to a software
upgrade for the regional offices and the National Support Center, and $47,000
is related to fees for a marketing survey.
Bad debt expense was $278,000 for the three months ended February 28,
1997 as compared to no bad debt expense for the three months ended February 29,
1996. This increase was primarily due to the non-timely payment by contracted
hospitals.
$63,000 of the increase in other operating expenses was due to rent
expense related to PPS, which was acquired by the Company on July 31, 1996.
Interest and Other Income (Expense), Net. Interest income, net of
interest expense, and other income for the three months ended February 28, 1997
was $161,000, as compared to $67,000 in net interest income for the
corresponding period in the prior fiscal year. This change results primarily
from an increase in interest income of $89,000 due to the increase in cash from
$1.8 million to $8.7 million, when compared to the same period in the prior
fiscal year.
Income Tax Expense. For the three month period ended February 28,
1997, the Company recorded federal and state income taxes of $1,178,000
resulting in a combined tax rate of 39.3%. For the three month period ended
February 29, 1996, the Company recorded federal and state income taxes of
$891,000 resulting in a combined tax rate of 40.0%. For each period, the
benefit from utilization of available net operating loss carryforwards was
reflected through a change in deferred taxes rather than a benefit to income
tax expense.
-21-
<PAGE> 22
SIX MONTHS ENDED FEBRUARY 28, 1997 COMPARED TO THE SIX MONTHS ENDED
FEBRUARY 29, 1996
Net Revenues. Net revenues for the six months ended February 28, 1997
were $37.4 million, representing an increase of $7.7 million, or 25.9%, as
compared to net revenues of $29.7 million for the corresponding period in the
prior fiscal year. In part, this increase resulted from an increase in the
average number of contract locations in operation from 101.8 for the six months
ended February 29, 1996, to 108.5 for the six months ended February 28, 1997,
an increase of 6.6%. In addition, revenues increased $2.5 million, or 8.6%, due
to revenue recorded for Florida Professional Psychological Services, Inc.
("PPS"). Horizon acquired 80% of the outstanding common stock of PPS on July
31, 1996, and consolidated PPS with Horizon as of August 1, 1996. Revenues
increased $700,000, or 2.5%, due to a cost report adjustment for Mountain Crest
recorded in November 1996. In addition, revenues increased $2.6 million, or
8.9%, at locations that have been under Horizon management during all periods
being reported. This was primarily the result of an average rate increase of
2.6% and the addition of new programs including a 331% increase in Home Health
fees and a 54% increase in Outpatient fees between the periods.
Salaries and Benefits. Salaries and benefits for the six months ended
February 28, 1997 were $20.1 million, representing an increase of $3.7 million,
or 22.6%, as compared to salaries and benefits of $16.4 million for the six
months ended February 29, 1996. This increase resulted from the increase in
full time equivalents from 595.4 for the six months ended February 29, 1996, to
685.2 for the six months ended February 28, 1997, an increase of 15.1%. Full
time equivalents increased between the periods as follows:
<TABLE>
<CAPTION>
February 29, February 28,
1996 1997 Increase % Increase
------ ------ ---- ----
<S> <C> <C> <C> <C>
National Support 67.3 78.9 11.6 17.2%
Regional Offices 44.2 41.0 (3.2) (7.2)%
PPS 0.0 46.6 46.6 N/A
Contract Locations 483.9 518.7 34.8 7.2%
------ ------ ---- ----
595.4 685.2 89.8 15.1%
</TABLE>
The increase in the National Support Center full time equivalents of
17.2% results from the expansion of the General and Administrative Department,
as well as the expansion of Mental Health Outcomes, Inc. The increase in
contract location full time equivalents of 7.2% results from an increase in the
average number of contract locations in operation from 101.8 for the six months
ended February 29, 1996, to 108.5 for the six months ended February 28, 1997,
an increase of 6.6%. Additionally, Horizon acquired eighty percent (80%) of the
outstanding common stock of PPS on July 31, 1996. PPS's FTE's averaged 46.6,
with associated salary of $954,000, for the six months ended February 28, 1997.
The Company's average annualized salaries per full time equivalent for the six
months ended February 28, 1997 were $50,105 representing an increase of $2,712,
or 5.7%, as compared to average annualized salaries per full time equivalent of
$47,393 for the six months ended February 29, 1996. Benefits for the six months
ended February 28, 1997 were $3.0 million, representing an increase of
$700,000, or 30.4%, as compared to benefits of $2.3 million for the six months
ended February 29, 1996. This increase resulted primarily from an increase of
$308,000 in medical insurance premiums and employer payroll taxes paid between
the periods. In addition, benefits also increased due to an increase in the
amount accrued for the Company's 401K match from $104,000 for the six months
ended February 29, 1996, to $368,000 for the six months ended February 28,
1997, representing an increase of $264,000, or 254%. This is primarily
attributable to a retroactive increase to January 1, 1996, of the Company's
401K match as a result of an additional accrual of the potential employer match
totaling $237,000 based on employee 401K contributions for calendar 1996.
Benefits also increased $128,000 between the periods in relation to the
acquisition of PPS on July 31, 1996.
-22-
<PAGE> 23
Depreciation and Amortization. Depreciation and amortization expenses
for the six months ended February 28, 1997 were $799,000, representing an
increase of $157,000, or 24.5%, as compared to depreciation and amortization
expenses of $642,000 for the corresponding period in the prior fiscal year.
$22,000 of this increase is due to the amortization of goodwill of $1.8 million
resulting from the acquisition of Florida Professional Psychological Services,
Inc. In addition, the Company recorded $73,000 of additional depreciation
expense due to a change in the Company's definition of a capital expenditure.
The remainder of this increase results from the depreciation expense of
additional equipment purchased for the operation of its contract management
business. Cash expenditures used for the purchase of property and equipment
were $928,000 for the six months ended February 28, 1997, an increase of
$636,000, as compared to $292,000 for the six months ended February 29, 1996.
Other Operating Expenses (Including Purchased Services and Provision
for Bad Debts). Other operating expenses for the six months ended February 28,
1997, were $10.7 million, representing an increase of $2.2 million or 25.9%, as
compared to other operating expenses of $8.5 million for the corresponding
period in the prior fiscal year.
The following components identify the variances between the periods reported.
Purchased services included a $223,000 decrease in Medical Directors'
administrative fees for the six months ended February 28, 1997 as compared to
the same period in the prior fiscal year primarily as a result of successful
contract negotiations with physicians on a permanent basis to provide
administrative services which minimized the usage of Locum Tenens Physicians
(i.e., contracting with physicians/physician placement services to provide
qualified individuals to perform administrative duties on a temporary basis).
Additionally, certain physician contracts have been renegotiated resulting in a
general lowering of compensatory fees. In addition, an increase occurred in
purchased services due to an increase of $815,000 in direct service fees
related to PPS, which was acquired by the Company on July 31, 1996. Consulting
expense increased $120,000 for the six months ended February 28, 1997 as
compared to the six months ended February 29, 1996. $74,000 of this increase is
related to a software upgrade for the regional offices and the National Support
Center, and $47,000 is related to fees for a marketing survey.
Bad debt expense increased $462,000 for the six months ended February
28, 1997 as compared to the six months ended February 29, 1996. This increase
was primarily due to the non-timely payment by contracted hospitals.
Other operating expenses increased due to an increase of $238,000 in
telephone and rent expense for the six months ended February 28, 1997 as
compared to the six months ended February 29, 1996. $127,000 of this increase
is related to rent for PPS, which was acquired by the Company on July 31, 1996.
The remaining amount is primarily related to the increased capabilities of the
telephone systems installed in both the regional offices and the newly expanded
National Support Center, which includes the use of video teleconferencing in
each of these locations. The newly expanded National Support Center and the
addition of two outpatient practices resulted in the increase in rent expense.
Other operating expenses experienced an increase of $172,000 due to an increase
in legal settlements for the six months ended February 28, 1997, as compared to
the corresponding six months of the prior year. Additionally, other operating
expenses increased due to $380,000 in contract capital contributions (facility
renovations) for the six months ended February 28, 1997, as compared to no
contract capital contributions for the six months ended February 29, 1996.
Interest and Other Income (Expense), Net. Interest income, net of
interest expense, and other income for the six months ended February 28, 1997
was $301,000, as compared to $110,000 in net interest income for the
corresponding period in the prior fiscal year. This change results primarily
from a decrease in interest expense of $24,000 resulting from the retirement of
long-term debt on October 3, 1995 and an increase in interest income of
$165,000 due to the increase in cash from $1.8 million to $8.7 million, when
compared to the same period in the prior fiscal year.
-23-
<PAGE> 24
Income Tax Expense. For the six month period ended February 28, 1997,
the Company recorded federal and state income taxes of $2,368,000 resulting in
a combined tax rate of 39.5%. For the six month period ended February 29, 1996,
the Company recorded federal and state income taxes of $1,687,000 resulting in
a combined tax rate of 39.5%. For each period, the benefit from utilization of
available net operating loss carryforwards was reflected through a change in
deferred taxes rather than a benefit to income tax expense.
-24-
<PAGE> 25
LIQUIDITY AND CAPITAL RESOURCES
Effective September 29, 1995, the Company completed a transaction with
Texas Commerce Bank, N.A. for an $11 million revolving credit facility. The
purpose of the facility is to provide funds to be used for working capital
needs and future acquisitions. The facility is for a three year term with
extension provisions. As of February 28, 1997, the Company had $9.3 million
available under the revolving credit facility, of which the Company had
borrowed $0 as of February 28, 1997. Under the terms of the facility, the
principal outstanding thereunder to the Company from time to time cannot exceed
the lesser of (i) $11.0 million and (ii) the sum of 80% of the Company's
consolidated eligible accounts receivable, as defined, plus additional amounts
up to $3,372,450 based on specified time periods and the Company's debt
coverage ratio, as defined, less certain reserves. Principal outstanding under
the facility will bear interest at a "Floating Base Rate" and/or the "LIBOR
Rate plus Applicable LIBOR Margin", as selected by the Company in accordance
with the terms of the facility. See Note 4 to the Company's Consolidated
Financial Statements included herein. Accrued interest will be payable monthly
during the primary term of the facility, and quarterly thereafter if the term
of the facility is extended. Depending upon the Company's debt coverage ratio
at December 15, 1998, principal borrowed under the facility will either be due
in full on such date, or a portion of such principal will be due on such date,
and the remainder will be due in eight equal quarterly installments thereafter
ending December 15, 2000.
The Company is subject to certain covenants under the agreements
governing the credit facility, including prohibitions against (i) incurring
additional debt or liens, except permitted debt (defined to include purchase
money debt of $1.0 million in the aggregate) or specified permitted liens, (ii)
certain material acquisitions, other than permitted acquisitions as defined
(including acquisitions not exceeding $7.0 million per transaction), (iii)
certain mergers, consolidations, or asset dispositions by the Company, or
changes of control of the Company, (iv) certain management vacancies at the
Company, and (v) entering into any lines of business other than that in which
the Company is presently engaged. In addition, the terms of the facility
require the Company to satisfy certain ongoing financial covenants. The
facility is secured by all of the capital stock of the subsidiaries of the
Company and substantially all other assets of the Company.
The Company has agreed to purchase a leased building for approximately
$4.5 million at the end of the lease term if it is not sold to a third party,
or the Company does not extend its lease. (See Note 7 to the Company's
Consolidated Financial Statements included herein).
On July 31, 1996, Horizon acquired eighty percent (80%) of the
outstanding common stock of Florida Professional Psychological Services, Inc.
("PPS"). The purchase price is based primarily on a multiple of the 1996
pre-tax income of PPS. Horizon currently estimates the purchase price will be
between $2,225,000 and $2,900,000, of which $1,225,000 was paid on July 31,
1996. Horizon expects to pay an interim amount of $1,000,000 on or about March
31, 1997. The final reconciliation statement of income of PPS for the twelve
months ended December 31, 1996 is to be delivered on or before July 15, 1997,
and any remaining purchase price is to be paid within 30 days after
determination thereof.
Effective March 15, 1997, the Company purchased all of the outstanding
capital stock of Geriatric Medical Care, Inc., a Tennessee corporation
("Geriatric"). Geriatric is a contract manager of mental health services for
acute care hospitals. Geriatric had total revenues of approximately $5.7
million in 1996 and currently has 17 management contract locations, of which
two are not yet in operation at the date of this report. The cash purchase
price of approximately $4.3 million, which was paid at closing from existing
cash of the Company, included retiring essentially all of Geriatric's
outstanding debt. In connection with the stock purchase, the Company also
agreed to pay an additional $270,000 (which, if required, the Company also
expects to pay from its available cash) to the sellers in the event a
qualifying management contract is signed on or before August 17, 1997.
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<PAGE> 26
Effective March 15, 1997, the Company purchased all of the outstanding
capital stock of Clay Care, Inc., a Texas corporation ("CCI"). CCI is a
contract manager of mental health services for acute care hospitals. CCI
currently has management contracts with five hospitals of which four are in
operation and one is scheduled to open in April 1997. CCI had total revenues of
approximately $1.3 million in 1996. A total of $475,000 of the $975,000 cash
purchase price was paid at the closing from existing cash of the Company. The
remaining $500,000 of the total purchase price, which the Company also expects
to pay from available cash, is due ninety (90) days from the closing date,
subject to reduction under certain circumstances specified in the stock
purchase agreement.
The Company believes that its net working capital of $9.2 million at
February 28, 1997 (including cash of $8.7 million at that date) and the $9.3
million available under the revolving credit facility at that date will be
sufficient to cover all cash requirements over the next twelve months including
estimated capital expenditures of $750,000. The Company generated approximately
$1.3 million in net cash from operations during the six months ended February
28, 1997.
Statements contained herein and in various public presentations that
are based on future expectations rather than on historical facts are
forward-looking statements as defined under The Private Securities Litigation
Reform Act of 1995 that involve a number of risks and uncertainties. Factors
that could cause actual results to differ materially from those in any such
forward-looking statement include but are not limited to demand by general
hospitals for the Company's services, the Company's ability to retain existing
management contracts and to obtain additional contracts, changes in
reimbursement to general hospitals by Medicare or other third-party payors for
costs of providing mental health services, changes to other regulatory
provisions relating to mental health services, overall economic conditions and
various other risks as outlined in the Company's Securities and Exchange
Commission filings.
-26-
<PAGE> 27
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
In February 1997, (i) the Certificate of Incorporation,
as amended, of the Company was amended to increase the number of
authorized shares of Common Stock, $.01 par value per share, of the
Company from 10,000,000 shares to 40,000,000 shares, and (ii) the
Company entered into a Rights Agreement pursuant to which it
approved the distribution of one Common Stock purchase right for
each outstanding share of Common Stock of the Company. The amendment
and the Rights Agreement were approved by the stockholders of the
Company at the Annual Meeting of Stockholders held on January 29,
1997. See the descriptions in the second and third paragraphs of
Item 4 of this Part II of the amendment, the Rights Agreement and
related matters, which descriptions are incorporated into this
Item 2 by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was
held on January 29, 1997. At the meeting, James Ken Newman, James W.
McAtee, Jack R. Anderson, George E. Bello, William H. Longfield,
Keith B. Pitts and Donald E. Steen were re-elected to the Board of
Directors of the Company. A total of 3,101,284 votes were cast for
each of Messrs. Newman, McAtee, Anderson and Pitts, and a total of
700 votes were withheld with respect to each of such four director
nominees. A total of 3,101,384 votes were cast for each of Messrs.
Bello, Longfield and Steen, and a total of 600 votes were withheld
with respect to each of such three director nominees.
At the Annual Meeting of Stockholders, the stockholders
also approved an amendment to the Certificate of Incorporation, as
amended, of the Company to increase the number of authorized shares
of Common Stock, $.01 par value per share, of the Company from
10,000,000 shares to 40,000,000 shares. The terms of the amendment
were previously reported in the definitive Proxy Statement relating
to the Annual Meeting filed by the Company with the Securities and
Exchange Commission on December 19, 1996. A total of 2,346,558 votes
were cast for adoption of this amendment, a total of 704,926 votes
were cast against adoption of this amendment, a total of 200 shares
abstained from voting on this amendment, and there were a total of
50,300 broker non-votes with respect to this amendment.
At the Annual Meeting of Stockholders, the stockholders
also approved the Horizon Mental Health Management, Inc. Rights
Agreement. The terms of the Rights Agreement and rights distributed
pursuant thereto (prior to adjustments contemplated by the terms of
the Rights Agreement to reflect the stock split/dividend referred to
in Item 5 of this Part II) were previously reported in the
definitive Proxy Statement relating to the Annual Meeting filed by
the Company with the Securities and Exchange Commission on December
19, 1996. At the meeting, a total of 1,938,516 votes were cast for
adoption of the Rights Agreement, a total of 705,861 votes were cast
against adoption of the Rights Agreement, a total of 1,100 shares
abstained from voting on the Rights Agreement, and there were a
total of 456,507 broker non-votes with respect to the Rights
Agreement. After receiving stockholder approval of the Rights
Agreement at the Annual Meeting, the Board of Directors approved
execution of the Rights Agreement between the Company and American
Stock Transfer & Trust Company, as
-27-
<PAGE> 28
Rights Agent, and distribution of a dividend of one Common Stock
purchase right pursuant to the Rights Agreement for each outstanding
share of Common Stock. The Rights Agreement was entered into in
February 1997, and the dividend distribution of the rights was made
on March 4, 1997 to stockholders of record as of the close of
business on February 19, 1997. Under the current terms of the Rights
Agreement, rights will also be issued with respect to shares of
Common Stock of the Company issued in the future, including shares
of Common Stock issued upon exercise of stock options granted under
the Company's stock option plans.
At the Annual Meeting of Stockholders, the stockholders
also ratified the appointment of Price Waterhouse LLP as the
independent accountants for the Company for the fiscal year ending
August 31, 1997. At the meeting, a total of 3,099,884 votes were
cast for this proposal, a total of 1,400 votes were cast against
this proposal, and a total of 700 shares abstained from voting on
this proposal. There were no broker non- votes with respect to this
proposal.
ITEM 5. OTHER INFORMATION
The Board of Directors of the Company approved a
three-for-two stock split effected in the form of a 50% stock
dividend, pursuant to which one additional share of Common Stock of
the Company was issued on January 31, 1997 for every two shares of
Common Stock held by stockholders of record at the close of business
on January 22, 1997.
See the sixth and seventh paragraphs of Note 1 to the
Consolidated Financial Statements in Item 1 of Part I of this
report for descriptions of the Company's purchases in March 1997 of
all outstanding capital stock of Geriatric Medical Care, Inc. and
Clay Care, Inc., which two paragraphs are incorporated by reference
into this Item 5.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following documents are filed as part of this report:
3.1 Certificate of Incorporation of the Company, as amended
(filed herewith).
3.2 Amended and Restated Bylaws of the Company, as amended
(incorporated herein by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (Registration
Number 33-88314) as filed with the Commission on February
16, 1995).
4.1 Rights Agreement dated February 6, 1997, between Horizon
Mental Health Management, Inc. and American Stock Transfer &
Trust Company, as Rights Agent (incorporated herein by
reference to Exhibit 4.1 to the Company's Registration
Statement on Form 8-A (Registration Number 000-22123) as
filed with the Commission on February 7, 1997).
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<PAGE> 29
10.1 Stock Purchase Agreement dated as of February 24, 1997,
among Horizon Mental Health Management, Inc., and Geriatric
Medical Care, Inc. and its stockholders, as amended (filed
herewith).
10.2 Amendment dated February 10, 1997 between Horizon Mental
Health Management, Inc. and the stockholders of Florida
Professional Psychological Services, Inc. (filed herewith).
11.1 Statement Regarding Computation of Per Share Earnings (filed
herewith).
27.1 Financial Data Schedule (filed herewith).
(b) Reports
No reports on Form 8-K were filed by the Company during the quarter
ended February 28, 1997.
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<PAGE> 30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HORIZON MENTAL HEALTH MANAGEMENT, INC.
Date: March 31, 1997 /s/ JAMES W. McATEE
-------------- --------------------------------------
By: James W. McAtee
Executive Vice President, Finance
& Administration
(Principal Financial and Chief
Accounting Officer)
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<PAGE> 31
INDEX TO EXHIBITS
EXHIBIT NO.
-----------
3.1 Certificate of Incorporation of the Company, as amended
(filed herewith).
3.2 Amended and Restated Bylaws of the Company, as amended
(incorporated herein by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S - 1
(Registration Number 33-88314) as filed with the
Commission on February 16, 1995).
4.1 Rights Agreement dated February 6, 1997, between
Horizon Mental Health Management, Inc. and American
Stock Transfer & Trust Company, as Rights Agent
(incorporated herein by reference to Exhibit 4.1 to the
Company's Registration Statement on Form 8-A
(Registration Number 000-22123) as filed with the
Commission on February 7, 1997).
10.1 Stock Purchase Agreement dated as of February 24, 1997,
among Horizon Mental Health Management, Inc., and
Geriatric Medical Care, Inc. and its stockholders, as
amended (filed herewith).
10.2 Amendment dated February 10, 1997 between Horizon
Mental Health Management, Inc. and the stockholders of
Florida Professional Psychological Services, Inc.
(filed herewith).
11.1 Statement Regarding Computation of Per Share Earnings
(filed herewith).
27.1 Financial Data Schedule (filed herewith).
-31-
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
HORIZON HEALTH GROUP, INC.
I, the undersigned natural person of the age of eighteen (18) years or
more, acting as incorporator of a corporation under the General Corporation Law
of the State of Delaware, do hereby adopt the following Certificate of
Incorporation for such corporation.
ARTICLE I
The name of the corporation is Horizon Health Group, Inc. (the
"Corporation").
ARTICLE II
The address of the registered office of the Corporation in the State
of Delaware is Corporation Trust Center, 1209 Orange Street, Wilmington, New
Castle County, Delaware 19801, and the name of its registered agent at such
address is The Corporation Trust Company.
ARTICLE III
The nature of the business or purposes to be conducted or promoted by
the Corporation is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of the State of
Delaware.
ARTICLE IV
The Corporation is authorized to issue two classes of capital stock to
be designated "Common Stock" and "Preferred Stock", respectively. The
aggregate number of shares of all classes of capital stock which the
Corporation shall have authority to issue is 20,500,000 shares, consisting of
500,000 shares of Preferred Stock, $.10 par value per share, and 20,000,000
shares of Common Stock, $.01 par value per share.
COMMON STOCK
(a) Each share of Common Stock of the Corporation shall have
identical rights and privileges in every respect. The holders
of shares of Common Stock shall be entitled to vote upon all
matters submitted to a vote of the shareholders of the
Corporation and shall be entitled to one vote for each share
of Common Stock held.
<PAGE> 2
(b) Subject to the prior rights and preferences, if any,
applicable to shares of the Preferred Stock or any series
thereof, the holders of shares of the Common Stock shall be
entitled to receive such dividends (payable in cash, stock, or
otherwise) as may be declared by the board of directors at any
time or from time to time out of any funds legally available
therefor.
(c) In the event of any voluntary or involuntary liquidation,
dissolution, or winding up of the Corporation, after
distribution in full of the preferential amounts, if any, to
be distributed to the holders of shares of the Preferred Stock
or any series thereof, the holders of shares of the Common
Stock shall be entitled to receive all of the remaining assets
of the Corporation available for distribution to its
shareholders, ratably in proportion to the number of shares of
the Common Stock held by them. A liquidation, dissolution or
winding up of the Corporation, as such terms are used in this
Paragraph (c), shall not be deemed to be occasioned by or to
include any consolidation or merger of the Corporation with or
into any other corporation or corporations or a sale, lease,
exchange or conveyance of all or a part of the assets of the
Corporation.
PREFERRED STOCK
The Board of Directors of the Corporation is expressly authorized to
cause the Preferred Stock to be issued from time to time, in one or more
series, and in connection with each such series to determine and fix by the
resolution or resolutions providing for the issuance of such shares of
Preferred Stock the number and designation thereof, the powers, designations,
preferences, and relative, participating, optional or other rights, if any, or
the qualifications, limitations or restrictions thereof, if any, including but
not limited to with respect to the matters set forth below:
(a) The number of shares which shall constitute each such series
and the distinctive designation thereof;
(b) The voting powers, full, limited or contingent, if any, to
which holders of shares of each such series shall be entitled;
(c) The dividend rate or rates, if any, the terms, conditions and
dates upon which any such dividend or dividends shall be
payable, the relation which such dividend or dividends shall
bear to the dividends payable on any other class or classes or
series of capital stock, and whether such dividend or
dividends shall be cumulative or non-cumulative, in whole or
in part, participating or non- participating;
- 2 -
<PAGE> 3
(d) Whether or not the shares of such series shall be redeemable
and, if redeemable, the redemption price or prices and the
terms and conditions thereof;
(e) The terms and amount of any sinking fund provided for the
purchase or redemption of shares of such series, if any;
(f) The amount or amounts which shall be paid to the holders of
shares of such series in case of liquidation, dissolution or
winding up of the Corporation, whether voluntary or
involuntary, and the priority in which such payments shall be
made in relation to other series or classes of capital stock
of the Corporation;
(g) Whether or not the shares of such series shall be convertible
into, or exchangeable for, shares of any other class or
classes or of any other series of the same or any other class
of capital stock of the Corporation and, if convertible or
exchangeable, the conversion price or prices or rate or rates
of conversion or exchange and such other terms and conditions
of conversion or exchange as shall be stated in said
resolution or resolutions;
(h) The terms, conditions and amounts of any obligations of the
Corporation to repurchase the shares of such series, subject
to any applicable limitations imposed by law; and
(i) Such other designations, powers, preferences, rights,
qualifications, limitations, or restrictions thereof as it may
deem advisable, as permitted by law, and as shall be stated in
said resolution or resolutions.
(j) The shares of each class or series of the Preferred Stock may
vary from the shares of any other class or series thereof in
any or all of the foregoing respects. The board of directors
of the Corporation may increase the number of shares of the
Preferred Stock designated for any existing class or series by
a resolution adding to such class or series authorized and
unissued shares of the Preferred Stock not designated for any
other class or series. The board of directors of the
Corporation may decrease the number of shares of the Preferred
Stock designated for any existing class or series by a
resolution subtracting from such class or series authorized
and unissued shares of the Preferred Stock designated for such
existing class or series, and the shares so subtracted shall
become authorized, unissued and undesignated shares of the
Preferred Stock.
Except as otherwise required by law or by a resolution or resolutions
of the Board of Directors adopted pursuant to this Article IV, the holders of
the Preferred Stock shall not be entitled to vote at any meeting of
stockholders or otherwise to participate in any action taken by the Corporation
or its stockholders.
- 3 -
<PAGE> 4
GENERAL
(a) Subject to the foregoing provisions of this Certificate of
Incorporation, the Corporation may issue shares of its
Preferred Stock and Common Stock from time to time for such
consideration (not less than the par value thereof) as may be
fixed by the board of directors of the Corporation, which is
expressly authorized to fix the same in its absolute and
uncontrolled discretion subject to the foregoing conditions.
Shares so issued for which the consideration shall have been
paid or delivered to the Corporation shall be deemed fully
paid stock and shall not be liable to any further call or
assessment thereon, and the holders of such shares shall not
be liable for any further payments in respect of such shares.
(b) The Corporation shall have authority to create and issue
rights and options entitling their holders to purchase shares
of the Corporation's capital stock of any class or series or
other securities of the Corporation, as such rights and
options shall be evidenced by instrument(s) approved by the
board of directors of the Corporation. The board of directors
of the Corporation shall be empowered to set the exercise
price, duration, times for exercise, and other terms of such
options or rights; provided, however, that the consideration
to be received for any shares of capital stock subject thereto
shall not be less than the par value thereof.
ARTICLE V
The business and affairs of the Corporation shall be managed by or
under the direction of a Board of Directors. The number of directors
constituting the Board of Directors shall be one or more as established from
time to time in the manner provided in the Bylaws of the Corporation. Each
director shall continue to hold office until the expiration of his or her term
or, if earlier, his or her removal, resignation or death.
The name and mailing address of the persons who are to serve as the
directors of the Corporation until the first annual meeting of the
stockholders, or until their respective successors are elected and qualified
are:
<TABLE>
<CAPTION>
NAME ADDRESS
---- -------
<S> <C>
James Ken Newman 700 El Paseo
Denton, Texas 76205
Bryan P. Marsal 15303 Dallas Parkway, Suite 1400
Dallas, Texas 75248
David T. Vandewater 15303 Dallas Parkway, Suite 1400
Dallas, Texas 75248
</TABLE>
- 4 -
<PAGE> 5
ARTICLE VI
The period of duration of the Corporation is perpetual.
ARTICLE VII
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors of the Corporation is expressly authorized to
adopt, alter, amend or repeal the Bylaws of the Corporation except as otherwise
provided in the Bylaws.
ARTICLE VIII
Elections of Directors need not be by written ballot.
ARTICLE IX
To the full extent permitted by Delaware law, no director of the
Corporation shall be liable to the Corporation or its shareholders for monetary
damages for an act or omission in such director's capacity as a director of the
Corporation. Specifically, a director of the Corporation shall not be
personally liable to the Corporation or its shareholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the directors' duty of loyalty to the Corporation or its
shareholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or knowing violation of law, (iii) under Section 174 of
the Delaware General Corporation Law, or (iv) for any transaction from which
the director derived an improper personal benefit. The foregoing elimination
of liability to the Corporation or its shareholders for monetary damages is not
exclusive of any other rights or limitations of liability or indemnity to which
a director may be entitled under any other provision of the Certificate of
Incorporation or Bylaws of the Corporation, contract or agreement, vote of
shareholders and/or disinterested directors, or otherwise.
ARTICLE X
Meetings of the stockholders of the Corporation may be held within or
without the State of Delaware, as the Bylaws may provide. Unless otherwise
required by applicable law, the books and records of the Corporation may be
kept either within or outside the State of Delaware at such place or places as
may be designated from time to time by the Board of Directors or in the Bylaws
of the Corporation.
ARTICLE XI
No contract or transaction between the Corporation and one or more of
its directors, officer, or shareholders or between the Corporation and any
person (as used herein "person" means other corporation, partnership,
association, firm, trust, joint venture, political subdivision, or
instrumentality) or other organization in which one or more of its directors,
officers, or shareholders are directors, officers, or shareholders or have a
financial interest, shall be void or voidable solely for this reason, or solely
because the director or officer is present at or participates in the meeting of
the board or committee which authorizes the contract or
- 5 -
<PAGE> 6
transaction, or solely because his, her or their votes are counted for such
purpose, if: (i) the material facts as to his or her relationship or interest
and as to the contract or transaction are disclosed or are known to the board
of directors or the committee, and the board of directors or the committee in
good faith authorizes the contract or transaction by the affirmative votes of a
majority of the disinterested directors, even though the disinterested
directors be less than a quorum; or (ii) the material facts as to his or her
relationship or interest and as to the contract or transaction are disclosed or
are known to the shareholders entitled to vote thereon, and the contract or
transaction is specifically approved in good faith by vote of the
shareholders); or (iii) the contract or transaction is fair as to the
Corporation as of the time it is authorized, approved or ratified by the board
of directors, a committee thereof, or the shareholders. Common or interested
directors may be counted in determining the presence of a quorum at a meeting
of the board of directors or of a committee which authorizes the contract or
transaction.
ARTICLE XII
The Corporation shall indemnify any person who was, is, or is
threatened to be made a part to a proceeding (as hereinafter defined) by reason
of the fact that he or she (i) is or was a director or officer of the
Corporation or (ii) while a director or officer of the Corporation, is or was
serving at the request of the Corporation as a director, officer, partner,
venturer, proprietor, trustee, employee, agent, or similar functionary of
another foreign or domestic corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan, or other enterprise, to the
fullest extent permitted under the Delaware General Corporation Law, as the
same exists or may hereafter be amended. Such right shall be a contract right
and as such shall run to the benefit of any director who is elected and accepts
the position of director of the Corporation or elects to continue to serve as a
director of the Corporation while this Article XII is in effect. Any repeal or
amendment of this Article XII shall be prospective only and shall not limit the
rights of any such director or the obligations of the Corporation with respect
to any claim arising from or related to the services of such director in any of
the foregoing capacities prior to any such repeal or amendment to this Article
XII. Such right shall include the right to be paid by the Corporation expenses
incurred in defending any such proceeding in advance of its final disposition
to the maximum extent permitted under the Delaware General Corporation Law, as
the same exists or may hereafter be amended. If a claim for indemnification or
advancement of expenses hereunder is not paid in full by the Corporation within
sixty (60) days after a written claim has been received by the Corporation, the
claimant may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim, and if successful in whole or in part,
the claimant shall also be entitled to be paid the expenses of prosecuting such
claim. It shall be a defense to any such action that such indemnification or
advancement of costs of defense are not permitted under the Delaware General
Corporation Law, but the burden of proving such defense shall be on the
Corporation. Neither the failure of the Corporation (including its board of
directors or any committee thereof, independent legal counsel, or shareholders)
to have made its determination prior to the commencement of such action that
indemnification of, or advancement of costs of defense to, the claimant is
permissible in the circumstances nor an actual determination by the Corporation
(including its board of directors or any committee thereof, independent legal
counsel, or shareholders) that such indemnification or advancement is not
permissible shall be a defense to the action or create a presumption that
- 6 -
<PAGE> 7
such indemnification or advancement is not permissible. ln the event of the
death of any person having a right of indemnification under the foregoing
provisions, such right shall inure to the benefit of his or her heirs,
executors, administrators, and personal representatives. The rights conferred
above shall not be exclusive of any other right which any person may have or
hereafter acquire under any statute, bylaw, resolution of shareholders or
directors, agreement or otherwise.
The Corporation may additionally indemnify any employee or agent of
the Corporation to the fullest extent permitted by law.
As used herein, the term "proceeding" means any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative,
arbitrative or investigative, any appeal in such an action, suit or proceeding,
and any inquiry or investigation that could lease to such an action, suit or
proceeding.
ARTICLE XIII
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to such reservation.
ARTICLE XIV
The name and address of the incorporator is:
<TABLE>
<CAPTION>
NAME ADDRESS
---- -------
<S> <C>
David K. Meyercord 4300 NCNB Plaza
901 Main Street
Dallas, Texas 75202
</TABLE>
The undersigned, being the incorporator herein before named, for the
purpose of forming a corporation pursuant to the General Corporation Law of the
State of Delaware, does make this Certificate hereby declaring and certifying
that this is my act and deed and the facts stated herein are true, and
accordingly I have hereunto set my hand this 6th day of July, 1989.
/s/ David K. Meyercord
----------------------------------
David K. Meyercord
- 7 -
<PAGE> 8
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
HORIZON HEALTH GROUP, INC.
Horizon Health Group, Inc., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"),
DOES HEREBY CERTIFY THAT:
FIRST: The Board of Directors of the Corporation duly adopted
resolutions setting forth a proposed amendment to the Certificate of
Incorporation of the Corporation which amends the first paragraph of Article IV
thereof to decrease the number of shares of authorized Common Stock, declaring
said amendment to be advisable and calling for the same to be submitted to the
stockholders of the Corporation for consideration. The resolution setting
forth the proposed amendment is as follows:
RESOLVED, that the Certificate of Incorporation of the
Corporation be amended by changing the first paragraph of Article IV
thereof to reduce the authorized number of shares of Common Stock from
20,000,000 shares to 2,000,000 shares so that, as hereby amended, the
first paragraph of said Article IV shall be and read in its entirety
as follows:
"The Corporation is authorized to issue two
classes of capital stock to be designated "Common
Stock" and "Preferred Stock," respectively. The
aggregate number of shares of all classes of capital
stock which the Corporation shall have authority to
issue is 2,500,000 shares, consisting of 500,000
shares of Preferred Stock, $.10 par value per share,
and 2,000,000 shares of Common Stock, $.01 par value
per share.
SECOND: Thereafter, pursuant to Section 228 of the General
Corporation Law of the State of Delaware, the holders of all outstanding shares
of capital stock of all classes of the Corporation executed a written consent
adopting and approving the aforesaid amendment.
THIRD: Said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
- 1 -
<PAGE> 9
FOURTH: The capital of the Corporation shall not be reduced or
increased under or by reason of said amendments.
IN WITNESS WHEREOF, said Horizon Health Group, Inc. has caused this
Certificate to be signed by James Ken Newman, its President, and attested to by
James H. Johnson, its Assistant Secretary, this 14th day of August, 1989.
HORIZON HEALTH GROUP, INC.
By:/s/ James Ken Newman
--------------------------------
James Ken Newman, President
ATTEST:
/s/ James H. Johnson
- ---------------------------
James H. Johnson,
Assistant Secretary
STATE OF TEXAS )
) SS
COUNTY OF DALLAS )
On this 24th day of August, 1989, before me, Paula Lagergren, a Notary
Public in and for said State, personally appeared James Ken Newman, the
President of Horizon Health Group, Inc., known to me to be the person who
executed the within Certificate of Amendment to Certificate of Incorporation of
Horizon Health Group, Inc. on behalf of said corporation and acknowledged to me
that he executed said Certificate of Amendment as the act and deed of said
corporation for the purposes and in the capacity therein stated and that the
facts stated therein are true.
/s/ Paula Lagergren
-------------------------------
NOTARY PUBLIC
STATE OF TEXAS
My Commission Expires:
6/22/92
-------------------------------
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<PAGE> 10
CERTIFICATE OF CHANGE OF LOCATION OF REGISTERED OFFICE
AND OF REGISTERED AGENT
It is hereby certified that:
(a) The name of the corporation (hereinafter called the "corporation") is
Horizon Health Group, Inc.
(b) The registered office of the corporation within the State of Delaware
is hereby changed to 32 Loockerman Square, Suite L-100, Dover, DE
19901
(c) The registered agent of the corporation within the State of Delaware
is hereby changed to The Prentice-Hall Corporation System, Inc., the
business office of which is identical with the registered office of
the corporation as hereby changed.
(d) The corporation has authorized the changes hereinbefore set forth by
resolution of its Board of Directors.
Signed on May 10, 1990.
/s/ James H. Johnson
----------------------------------
James H. Johnson,
Vice President
Attest:
/s/ David P. Gamble
- -----------------------------------
David P. Gamble, Asst. Secretary
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<PAGE> 11
CERTIFICATE OF CHANGE OF REGISTERED AGENT
AND REGISTERED OFFICE
* * * * *
HORIZON HEALTH GROUP, INC., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware, DOES
HEREBY CERTIFY:
The present registered agent of the corporation is The Prentice-Hall
Corporation System, Inc. and the present registered office of the corporation
is in the county of Kent
The Board of Directors of Horizon Health Group, Inc. adopted the
following resolution on the 30 day of October, 1990.
Resolved, that the registered office of
in the state of Delaware be and it hereby is changed to
Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle, and the authorization of the
present registered agent of this corporation be and the same
is hereby withdrawn, and THE CORPORATION TRUST COMPANY, shall
be and is hereby constituted and appointed the registered
agent of this corporation at the address of its registered
office.
IN WITNESS WHEREOF, HORIZON HEALTH GROUP, INC. has caused this
statement to be signed by JAMES KEN NEWMAN, its President and attested by JERRY
G. BROWDER, its Secretary this 30 day of October, 1990.
By:/s/ James Ken Newman
-------------------------------
President
ATTEST:
/s/ Jerry G. Browder
- -------------------------------
Secretary
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<PAGE> 12
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION OF
HORIZON HEALTH GROUP, INC.
Horizon Health Group, Inc., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware (the
"Company"), DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of the Company, at a meeting duly
held, adopted resolutions proposing and declaring advisable the following
amendment to the Certificate of Incorporation of the Company, and submitted
such amendment to the Stockholders of the Company for consideration thereof:
RESOLVED, that the name of the Company be changed to "Horizon
Mental Health Services, Inc." and that the Certificate of
Incorporation of the Company previously filed with the Secretary of
State of Delaware be amended as follows:
Article I is hereby amended in its entirety to read as
follows:
"The name of the corporation is Horizon Mental Health Services, Inc."
SECOND: That thereafter, the Stockholders of the Company entitled to
vote thereon approved and adopted the amendment by unanimous written consent in
accordance with sections 228 and 242 of the General Corporation Law of the
State of Delaware.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, said Horizon Health Group, Inc. has caused its
corporate seal to be hereunto affixed and this certificate to be signed by
James Ken Newman, its President, and James W. McAtee, its Secretary, this 6th
day of February, 1992.
HORIZON HEALTH GROUP, INC.
By:/s/ James Ken Newman
[SEAL] ---------------------------------
James Ken Newman, President
Attest:
By:/s/ James W. McAtee
---------------------------------
James W. McAtee, Secretary
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<PAGE> 13
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
HORIZON MENTAL HEALTH SERVICES, INC.
Horizon Mental Health Services, Inc., a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware (the "Company"),
DOES HEREBY CERTIFY THAT:
FIRST: The Board of Directors of the Company duly adopted a
resolution setting forth a proposed amendment to the Certificate of
Incorporation which amends the first paragraph of Article IV thereof to
increase the number of shares of authorized Common Stock, declaring said
amendment to be advisable and calling for the same to be submitted to the
stockholders of the Company for consideration. The resolution setting forth
the proposed amendment is as follows:
RESOLVED, that the Certificate of Incorporation of the Company be
amended by changing the first paragraph of Article IV thereof to
increase the authorized number of shares of Common Stock from
2,000,000 shares to 4,000,000 shares so that, as hereby amended, the
first paragraph of said Article IV shall be and read in its entirety
as follows:
"The Corporation is authorized to issue two classes of capital
stock to be designated `Common Stock' and `Preferred Stock,'
respectively. The aggregate number of shares of all classes
of capital stock which the Corporation shall have the
authority to issue is 4,500,000 shares, consisting of 500,000
shares of Preferred Stock, $.10 par value per share, and
4,000,000 shares of Common Stock, $.01 par value per share.
SECOND: That thereafter, the Stockholders of the Company entitled to
vote thereon approved and adopted the amendment by unanimous written consent in
accordance with Sections 228 and 242 of the General Corporation Law of the
State of Delaware.
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<PAGE> 14
THIRD: Said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
FOURTH: The capital of the Corporation shall not be reduced or
increased under or by reason of said amendments.
IN WITNESS WHEREOF, Horizon Mental Health Services, Inc. has caused
this certificate to be signed by James Ken Newman, its President, and attested
by James W. McAtee, its Secretary, this 4th day of April, 1994.
HORIZON MENTAL HEALTH SERVICES, INC.
By:/s/ James Ken Newman
---------------------------------
James Ken Newman, President
Attest:
By:/s/ James W. McAtee
---------------------------------
James W. McAtee, Secretary
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<PAGE> 15
HORIZON MENTAL HEALTH SERVICES, INC.
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION
The undersigned officers of Horizon Mental Health Services, Inc., a
corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware (the "Corporation"), do hereby certify
as follows:
(e) That the Board of Directors of the Corporation at a regularly
scheduled Board of Directors Meeting on August 25, 1994, and in accordance with
Sections 141 (f) and 242 of the General Corporation Law of the State of
Delaware, unanimously adopted resolutions proposing that ARTICLE I of the
Certificate of Incorporation of the Corporation, be amended as set forth in
Exhibit A attached hereto (the "Amendment") and directed that the Amendment be
submitted to the stockholders of the Corporation entitled to vote thereon for
its consideration and approval.
(f) That the stockholders of the Corporation entitled to vote
thereon approved and adopted the Amendment by written consent in accordance
with Sections 228 and 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, the undersigned offices of the Corporation do
hereby certify under penalties of perjury that this Certificate of Amendment is
the act and deed of the Corporation and the facts stated herein are true and
accordingly have hereto set our hands this 16th day of September, 1994.
HORIZON MENTAL HEALTH SERVICES, INC.
By:/s/ James Ken Newman
[SEAL] ---------------------------------
James Ken Newman, President
Attest:
By:/s/ James W. McAtee
---------------------------------
James W. McAtee, Secretary
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<PAGE> 16
EXHIBIT A
RESOLVED, that the Certificate of Incorporation of the Company,
previously filed with the Delaware Secretary of State, be amended as follows:
Article I of the Certificate of Incorporation is hereby amended in its
entirety to read as follows:
The name of the corporation is Horizon Mental Health Management, Inc.
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<PAGE> 17
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
HORIZON MENTAL HEALTH MANAGEMENT, INC.
Horizon Mental Health Management, Inc., a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware (the "Corporation"),
DOES HEREBY CERTIFY THAT:
FIRST: The Board of Directors of the Corporation duly adopted a
resolution setting forth a proposed amendment to the Certificate of
Incorporation of the Corporation which amends the first paragraph of Article IV
thereof to increase the number of shares of authorized Common Stock, declaring
said amendment to be advisable and calling for the same to be submitted to the
stockholders of the Corporation for consideration. The resolution setting
forth the proposed amendment is as follows:
RESOLVED, that the Certificate of Incorporation of the Corporation be
amended by changing the first paragraph of Article IV thereof to
increase the number of authorized shares of Common Stock from
4,000,000 shares to 10,000,000 shares so that, as hereby amended, the
first paragraph of said Article IV shall be and read in its entirety
as follows:
The Corporation is authorized to issue two classes of capital
stock to be designated "Common Stock" and "Preferred Stock,"
respectively. The aggregate number of shares of all classes
of capital stock which the Corporation shall have the
authority to issue is 10,500,000 shares, consisting of 500,000
shares of Preferred Stock, $.10 par value per share, and
10,000,000 shares of Common Stock, $.01 par value per share.
SECOND: Thereafter, the stockholders of the Corporation entitled to
vote thereon approved and adopted the foregoing amendment by written consent in
accordance with Section 228 of the General Corporation Law of the State of
Delaware, and any written notice required by Section 228 of the General
Corporation Law of the State of Delaware was duly given as provided in said
Section 228.
- 1 -
<PAGE> 18
THIRD: Said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
FOURTH: The capital of the Corporation shall not be reduced or
increased under or by reason of said amendments.
IN WITNESS WHEREOF, Horizon Mental Health Management, Inc. has caused
this certificate to be signed by James Ken Newman, its President, this 31st day
of January, 1995.
HORIZON MENTAL HEALTH MANAGEMENT, INC.
By:/s/ James Ken Newman
---------------------------------
James Ken Newman, President
- 2 -
<PAGE> 19
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
HORIZON MENTAL HEALTH MANAGEMENT, INC.
Horizon Mental Health Management, Inc., a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware (the "Corporation"),
DOES HEREBY CERTIFY THAT:
FIRST: The Board of Directors of the Corporation duly adopted a
resolution setting forth a proposed amendment to the Certificate of
Incorporation of the Corporation which amends the first paragraph of Article IV
thereof to increase the number of shares of authorized Common Stock, declaring
said amendment to be advisable and calling for the same to be submitted to the
stockholders of the Corporation for consideration. The resolution setting
forth the proposed amendment is as follows:
RESOLVED, that the Certificate of Incorporation of Horizon Mental
Health Management, Inc., as heretofore amended, be further amended by
changing the first paragraph of Article IV thereof to increase the
number of authorized shares of Common Stock from 10,000,000 shares to
40,000,000 shares so that, as hereby amended, the first paragraph of
said Article IV shall be and read in its entirety as follows:
The Corporation is authorized to issue two classes of capital
stock to be designated "Common Stock" and "Preferred Stock,"
respectively. The aggregate number of shares of all classes
of capital stock which the Corporation shall have the
authority to issue is 40,500,000 shares, consisting of 500,000
shares of Preferred Stock, $.10 par value per share, and
40,000,000 shares of Common Stock, $.01 par value per share.
SECOND: Thereafter, the stockholders of the Corporation entitled to
vote thereon approved and duly adopted the foregoing amendment in accordance
with Section 242 of the General Corporation Law of the State of Delaware at the
Annual Meeting of Stockholders of the Corporation held on January 29, 1997.
THIRD: The capital of the Corporation shall not be reduced or
increased under or by reason of said amendment.
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<PAGE> 20
IN WITNESS WHEREOF, Horizon Mental Health Management, Inc. has caused
this certificate to be signed by James Ken Newman, its President, this 4th day
of February, 1997.
HORIZON MENTAL HEALTH MANAGEMENT, INC.
By:/s/ James Ken Newman
---------------------------------
James Ken Newman, President
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<PAGE> 1
EXHIBIT 10.1
STOCK PURCHASE AGREEMENT
AMONG
HORIZON MENTAL HEALTH MANAGEMENT, INC.
AS PURCHASER,
JAMES A. GREENE, M.D.,
DIANE R. BURKETT,
E. WILLIAM LINAM, AND
THE CENTER FOR HEALTH & CREATIVE
AGING, P.C. PROFIT SHARING PLAN
AS SELLERS,
AND
GERIATRIC MEDICAL CARE, INC.
AS OF
FEBRUARY 24, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE 1 DEFINED TERMS/SCHEDULES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
(a) General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
(b) Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE 2 PURCHASE AND SALE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.1 Agreement to Sell and Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.2 Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.3 Allocation of Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.4 Contract Review Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.5 Joinder of Other Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.6 Disputed Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF EACH SELLER . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.1 Authority Relative to This Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.2 Title to Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.3 Absence of Breach; No Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF SELLERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.1 Due Organization of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.2 Subsidiaries/Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.3 Due Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.4 Capitalization of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.5 Licenses/Compliance with Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.6 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.7 No Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.8 No Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.9 Title to and Condition of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.10 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.11 Real Property Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.12 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.13 Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
(a) Material Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
(b) Copies/Status of Material Contracts . . . . . . . . . . . . . . . . . . . . . . . . . 12
(c) Partial Hospitalization Management Contracts . . . . . . . . . . . . . . . . . . . . . 12
4.14 Employees, Et Cetera . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.15 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
4.16 Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.17 Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.18 Broker's and Finder's Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.19 Labor Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.20 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.21 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.22 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.23 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.24 Transactions With Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.25 Improper Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF PURCHASER . . . . . . . . . . . . . . . . . . . . . . . . . . 18
5.1 Due Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
5.2 Corporate Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
5.3 Absence of Breach; No Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
5.4 Investment Representations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
5.5 Broker's or Finder's Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
5.6 Access to Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ARTICLE 6 COVENANTS OF THE SELLERS AND THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.1 Affirmative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.2 Access and Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.3 No Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.4 Conduct of Business Prior to Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
6.5 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.6 Publicity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.7 Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.8 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.9 Breach of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.10 No Transfer of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.11 Updating of Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.12 No Employment or Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ARTICLE 7 COVENANTS OF PURCHASER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
7.1 Affirmative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
7.2 Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
7.3 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
7.4 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
7.5 Publicity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
7.6 No Employment or Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
</TABLE>
ii
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<TABLE>
<S> <C> <C>
ARTICLE 8 CONDITIONS TO OBLIGATIONS OF SELLERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
8.1 Conditions to Obligations of Sellers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ARTICLE 9 CONDITIONS TO OBLIGATIONS OF PURCHASER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
9.1 Conditions To Obligations of Purchaser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
ARTICLE 10 CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
10.1 Date of Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
10.2 Actions by Sellers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
(a) Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
(b) Consulting/Release Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
(c) Post-Closing Escrow Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
(d) Other Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
10.3 Actions by Purchaser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
(a) Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
(b) Consulting Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
(c) Post-Closing Escrow Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
(d) Other Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
10.4 Post-Closing Escrow Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
(a) Escrow Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
(b) Limited Power of Attorney. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
(c) Additional Provisions of Limited Power of Attorney . . . . . . . . . . . . . . . . . . 32
10.5 Funding of Certain Company Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
ARTICLE 11 SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNITY; POST-CLOSING MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
11.1 Representations and Warranties to Survive . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
(a) Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
(b) Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
11.2 Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
(a) Sellers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
(b) Purchaser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
11.3 Indemnity Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
11.4 Limitations on Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
(a) General Threshold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
(b) Specific Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
(c) Time Limits for Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
(d) Certain Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
11.5 Remedies; Default; Notice and Cure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
11.6 Severance Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
11.7 Certain Post-Closing Management Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
</TABLE>
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ARTICLE 12 NON-COMPETITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
12.1 Covenant Not to Compete; Non-Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
12.2 Non-Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
12.3 Nondisparagement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
12.4 Reasonableness; Reformation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
12.5 Remedies for Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
(a) Specific Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
(b) Suit for Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
ARTICLE 13 TERMINATION; WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
13.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
(a) Mutual Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
(b) By Purchaser or Sellers: Condition Precedent . . . . . . . . . . . . . . . . . . . . . 40
(c) By Purchaser or Sellers: Representations, Warranties and Covenants . . . . . . . . . . 40
13.2 Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
ARTICLE 14 CERTAIN DEFINED TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
14.1 Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
14.2 Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
14.3 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
14.4 Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
14.5 Closing Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
14.6 Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
14.7 Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
14.8 Counsel to Sellers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
14.9 Counsel to Purchaser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
14.10 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
14.11 GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
14.12 Knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
14.13 Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
14.14 Multiemployer Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
14.15 Payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
14.16 PBGC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
14.17 Pension Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
14.18 Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
14.19 Welfare Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
ARTICLE 15 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
15.1 Further Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
15.2 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
</TABLE>
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15.3 Entire Agreement; Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
15.4 Binding Effect/Assignability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
15.5 Exhibits/Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
15.6 Invalid Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
15.7 Headings/Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
15.8 Waiver; Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
15.9 Attorney's Fees and Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
15.10 Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
15.11 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
15.12 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
LIST OF EXHIBITS
Exhibit A - Share Ownership of Company Capital Stock
Exhibit B - Signature Page and Joinder Agreement
Exhibit C - Form of Opinion of Counsel to Purchaser
Exhibit D - Consulting Agreement
Exhibit E - Form of Opinion of Counsel to Sellers
Exhibit F - Form of Release
Exhibit G - Post-Closing Escrow Agreement
LIST OF SCHEDULES
Schedule 3.2 - Unpaid Stock Subscriptions
Schedule 4.1 - States Where Company Qualified
Schedule 4.3 - Consents
Schedule 4.4 - Capitalization
Schedule 4.5 - Licenses, Etc.
Schedule 4.6 - Financial Statements
Schedule 4.7 - Adverse Changes
Schedule 4.8 - Undisclosed Liabilities
Schedule 4.9 - Assets
Schedule 4.10 - Litigation
Schedule 4.11 - Real Property Leases
Schedule 4.12 - Intellectual Property
Schedule 4.13 - Material Contracts
Schedule 4.14 - Employees, Etc.
Schedule 4.15 - Employee Benefit Plans
Schedule 4.16 - Receivables
Schedule 4.17 - Payables
Schedule 4.20 - Insurance
Schedule 4.22 - Environmental Matters
Schedule 4.23 - Taxes
Schedule 4.24 - Transactions with Affiliates
Schedule 6.4 - Certain Pre-Closing Matters
Schedule 8.1(h) - Greene Indebtedness
Schedule 11.7 - List of Hospital Locations
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STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (this "Agreement") is made as of the
24th day of February, 1997 (the "Effective Date") by and among Horizon Mental
Health Management, Inc., a Delaware corporation ("Purchaser"), James A. Greene,
M.D., Diane R. Burkett, E. William Linam and The Center for Health & Creative
Aging, P.C. Profit Sharing Plan (collectively referred to herein as the
"Sellers" and individually as a "Seller") and Geriatric Medical Care, Inc., a
Tennessee corporation (referred to herein as the "Company").
WHEREAS, the Sellers each own the respective number of shares of
Common Stock and Preferred Stock of the Company set forth in Exhibit A (all of
such shares being collectively referred to herein as the "Shares"); and
WHEREAS, the Shares represent the percentage of the total issued and
outstanding shares of capital stock of the Company set forth in Exhibit A; and
WHEREAS, all the other shareholders of the Company will be provided
the opportunity to, and may, join as a party to this Agreement and become a
Seller hereunder; and
WHEREAS, subject to the terms and conditions hereinafter set forth,
the Sellers desire to sell to the Purchaser, and the Purchaser desires to
purchase from the Sellers, the Shares;
NOW, THEREFORE, in consideration of the premises and the mutual terms
and conditions herein contained, the parties hereby agree as follows:
ARTICLE 1
DEFINED TERMS/SCHEDULES
1.1 Defined Terms. As used in this Agreement, capitalized terms
shall have the meanings expressly set forth herein for such terms, and variants
and derivatives of such defined terms shall have correlative meanings. To the
extent that certain of the defined terms set forth herein express agreements
between or among parties to this Agreement, the parties agree to the same by
execution of this Agreement. The term "Sellers" shall include other
shareholders of the Company that join as a party to this Agreement in addition
to the shareholders specifically named in the introductory paragraph of this
Agreement.
1.2 Schedules.
(a) General. References to a Schedule shall include any
applicable disclosure expressly set forth on the face of any other Schedule
even if not specifically cross-referenced to such other Schedule. It is
specifically acknowledged by the parties hereto that certain agreements and
documents listed on the Schedules are not to be delivered herewith, but were
previously or will be delivered or made available to Purchaser or its
representatives in
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connection with the due diligence investigation of the Company conducted by
Purchaser and its representatives prior to Closing (hereinafter defined). All
such agreements and documents made available or delivered to Purchaser by the
Company and the Sellers shall be originals or true and correct copies of the
originals of all such agreements and documents. Each Schedule and the
agreements and documents expressly listed in each Schedule shall be considered
a part hereof as if set forth herein in full; provided, however, that the
representations and warranties of Sellers set forth in this Agreement shall not
be affected or deemed modified, waived or limited in any respect by the
information contained in any agreement or document listed or referenced in the
Schedules unless and only to the extent that any qualification, modification,
exception or limitation to any representation and warranty of the Sellers is
expressly set forth on the face of a Schedule or unless and only to the extent
that Purchaser has actual knowledge of the information contained in any
agreement or document listed or referenced in the Schedules as provided and
defined in Section 11.1(b) of this Agreement.
(b) Delivery. It is specifically acknowledged by the
parties hereto that, on the Effective Date, the Sellers had not delivered to
the Purchaser the Schedules to this Agreement. The Sellers have agreed to
deliver the Schedules to this Agreement to Purchaser on or before the
expiration of the Contract Review Period (as defined in Section 2.4 below).
Upon delivery of the Schedules, the Purchaser in its sole discretion shall have
the right to accept or reject the Schedules as delivered by Sellers. In the
event that the Purchaser accepts the Schedules, then this Agreement shall
remain in full force and effect and the Schedules as so delivered by Sellers
will become the Schedules to this Agreement. If Purchaser rejects the
Schedules, then Purchaser shall have the right to terminate this Agreement by
written notice to the Sellers and the Company. Purchaser shall also have the
right to terminate this Agreement if Sellers fail to deliver the Schedules on
or before the expiration of the Contract Review Period.
ARTICLE 2
PURCHASE AND SALE
2.1 Agreement to Sell and Purchase. Subject to the terms and
conditions of this Agreement and in reliance on the representations, warranties
and covenants herein set forth, at the Closing the Sellers shall sell to
Purchaser, and Purchaser shall purchase from the Sellers, the Shares, free and
clear of any and all liens, claims, options, charges, pledges, security
interests, voting agreements or trusts, encumbrances or other restrictions or
interests of any kind or nature whatsoever (collectively, "Claims").
2.2 Purchase Price. Subject to the terms and conditions of this
Agreement and in reliance on the representations, warranties and covenants
herein set forth, the Purchaser shall pay at the Closing, by certified or
cashier's check, as consideration for the Shares, an aggregate purchase price
in an amount equal to the respective percentage of total equity ownership of
the Company owned by the Sellers, determined on a fully converted basis
assuming the exercise of all outstanding warrants, options or rights to acquire
capital stock of the Company and the conversion of all outstanding securities
convertible into capital stock of the Company as shown on Exhibit A and
Schedule 4.4, times an amount equal to Five Million One Hundred Thousand
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<PAGE> 9
Dollars ($5,100,000) less the reduction to such amount applicable pursuant to
the provisions of Section 8.1(h) of this Agreement and less the further
reduction to such amount pursuant to the provisions of Section 9.1(j) of this
Agreement but plus the increase to such amount pursuant to the provisions of
Section 9.1(k) of this Agreement (as so adjusted, the "Purchase Price").
2.3 Allocation of Purchase Price. The portion of the Purchase
Price allocated and payable to each Seller shall be determined on the basis
that the respective amount of the total equity ownership of the Company owned
by each Seller represents of the aggregate total equity ownership of the
Company owned by all Sellers.
2.4 Contract Review Period. Notwithstanding any provision of this
Agreement to the contrary, this Agreement shall be subject to and contingent
upon the Purchaser determining during the period commencing on the Effective
Date and continuing through and including twenty-one (21) days after the
Effective Date (the "Contract Review Period") that the management contracts
between the Company and hospitals for whom the Company is providing management
services (the "Management Contracts") are satisfactory to the Purchaser in its
sole discretion. During such Contract Review Period, Purchaser shall make such
review of the Management Contracts and may make such contacts with the
hospitals which are parties to the Management Contracts as Purchaser deems
necessary or appropriate to confirm the terms of the Management Contracts, to
confirm that the Management Contracts are not in default, and to confirm such
other matters pertaining to the Management Contracts as Purchaser may deem
appropriate; provided, however, that Purchaser shall not contact any hospital
(in person or by telephone) concerning any Management Contracts or any other
matter relating to the Company's business relationship with any such hospital
unless a designated representative of the Company participates in any such
meeting or conversation. Sellers and the Company covenant and agree that the
Company shall cooperate in good faith to make designated representatives
available for such purposes in order that Purchaser may complete such review of
all the Management Contracts within the Contract Review Period.
At any time during the Contract Review Period, the Purchaser shall have
the right to terminate this Agreement by written notice to Sellers and to the
Company if Purchaser determines in its sole discretion that the Management
Contracts are not satisfactory to it. If Purchaser fails to terminate this
Agreement on or before the expiration of the Contract Review Period, then
Purchaser shall be deemed to have waived such right of termination. In the
event Purchaser terminates this Agreement under the terms of this Section 2.4,
then neither Sellers, Purchaser nor the Company shall have any further rights
or obligations under this Agreement of any kind whatsoever except solely for
the provisions of Sections 6.12, 7.4 and 7.6 which shall survive such
termination.
2.5 Joinder of Other Shareholders. Promptly after execution and
delivery of this Agreement, the Purchaser shall offer to all other shareholders
of the Company the right to join as a party to this Agreement. The Sellers and
the Company shall cooperate and assist Purchaser in communicating such offer to
the other shareholders. Each other shareholder of the Company who elects to
join as a party to this Agreement shall be required to execute and deliver a
Signature Page and Joinder Agreement in the form of Exhibit B attached hereto.
Each
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shareholder of the Company that so joins as a party to this Agreement shall
become a "Seller" hereunder.
2.6 Disputed Instruments. The parties acknowledge that the
Purchase Price to be paid to the Sellers under this Agreement will be
determined based on a fully-converted basis assuming the exercise of all
outstanding warrants, options or rights to acquire capital stock of the Company
and the conversion of all outstanding securities convertible into capital stock
of the Company. Set forth in Schedule 4.4 is a warrant held by Ramsay
Healthcare (the "Ramsay Warrant") and certain outstanding convertible notes of
the Company (the "Convertible Notes"). Schedule 4.4 also sets forth the
percentage amount of the total equity ownership of the Company on a
fully-converted basis which was attributed to the Ramsay Warrant and the
Convertible Notes for the purposes of calculating the Purchase Price payable to
the Sellers under this Agreement.
Sellers and the Company contend that:
(a) The Ramsay Warrant is subject to an obligation of
Ramsay to comply with the terms of that certain agreement, dated August 22,
1994, between Ramsay and the Company, as amended by amendment dated January 26,
1996, which contemplates the continuation of two certain management agreements
through the expiration of their respective initial terms and it is the position
of the Company that the failure of Ramsay to satisfy such contractual
obligation will cause the Ramsay Warrant to be void and of no effect; and
(b) It is the position of the Company that certain of the
holders of the Convertible Notes have waived their right to convert their
respective Convertible Notes into capital stock of the Company by electing
certain accelerated prepayments of the Convertible Notes.
Purchaser shall have the right to calculate the Purchase Price payable
to the Sellers taking into account the equity ownership of the Company on a
fully-converted basis represented by the Ramsay Warrant and the Convertible
Notes and the total equity ownership of each Seller reflected in Exhibit A has
been calculated on such fully-converted basis. However, in the event that the
Convertible Notes are paid in full and not converted or there is a final and
binding determination by agreement of the parties or by a court of competent
jurisdiction that some or all of such Convertible Notes are not convertible,
then Purchaser shall promptly pay to Sellers that amount of the Purchase Price
which otherwise would have been payable to Sellers if the Convertible Notes had
not been outstanding on the date of Closing.
In the event that there is a final and binding determination by
agreement of the parties or by a court of competent jurisdiction within one (1)
year from the date of the Closing (or such later date as a final order may be
entered in the event litigation concerning such matter is pending at the end of
such year) that the Ramsay Warrant is void and of no effect, then the Purchaser
shall promptly pay to the Sellers that amount of the Purchase Price which
otherwise would have been payable to the Sellers if the Ramsay Warrant had not
been outstanding on the date of the Closing. If there has been no final and
binding determination that the Ramsay
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Warrant is void and of no effect within one (1) year (or such later date as a
final order may be entered in the event litigation concerning such matter is
pending at the end of such year), then the Purchaser shall have no obligation
to the Sellers of any kind whatsoever.
It is expressly understood that in the event the holders of the
Convertible Notes convert such Convertible Notes at or prior to the Closing or
the holder of the Ramsay Warrant exercises such Ramsay Warrant at or prior to
the Closing, then such holders may join as a party to their Agreement by the
execution and delivery of the Signature Page and Joinder Agreement as
contemplated by Section 2.5 above.
The Sellers shall have the right, at their own expense, to bring an
action to resolve the validity of the Ramsay Warrant and the convertibility of
the Convertible Notes described above. In the event that the Ramsay contracts
are terminated early by Ramsay, then Purchaser shall have the right to bring an
action to declare the Ramsay Warrant void and of no effect if the Sellers
decline to do so. In such event, if the Ramsay Warrant is declared void in
such proceeding, then the amount payable to the Sellers shall be reduced by the
aggregate amount of the costs and expenses of Purchaser in prosecuting such
declaratory judgment action. In the event that the Ramsay Warrant is not
declared void in such proceeding, the Purchaser shall be paid the aggregate
amount of such costs and expenses out of the post-closing escrow account
described in Section 10.4 of this Agreement.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF EACH SELLER
Each Seller, severally and not jointly, represents and warrants to
Purchaser that, as of the Effective Date and as of the Closing Date:
3.1 Authority Relative to This Agreement. This Agreement has been
duly and validly executed and delivered by the Seller and constitutes a valid
and binding agreement of the Seller enforceable in accordance with its terms.
The other agreements to be executed and delivered by the Seller pursuant to
this Agreement will be valid and binding agreements of the Seller enforceable
in accordance with their respective terms when so executed and delivered by the
Seller. With respect to each Seller that is an entity and not an individual,
each entity has all requisite power and authority to enter into this Agreement
and the execution, delivery and performance of this Agreement by such entity
has been duly authorized by all requisite action on the part of such entity.
3.2 Title to Stock. Except as set forth in Schedule 3.2 attached
hereto, each Seller is the unconditional sole legal, beneficial, record and
equitable owner of the Shares, free and clear of any and all Claims. Schedule
3.2 set forth certain unpaid subscriptions for certain shares of the
outstanding capital stock of the Company which shall be paid on or prior to
Closing so that, on the date of Closing, all of such shares shall be fully paid
and nonassessable. At the Closing, each Seller will convey to Purchaser valid
and marketable title to the Shares owned by each Seller as set forth on Exhibit
A, free and clear of any and all Claims.
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3.3 Absence of Breach; No Consent. The execution, delivery, and
performance of this Agreement and the other agreements to be executed and
delivered pursuant to this Agreement by the Seller does not and will not: (i)
contravene any order, writ, judgment, injunction, decree, determination, or
award of any court or other authority which affects or binds the Seller or the
Shares owned by such Seller, (ii) conflict with or result in a breach of or
default under any indenture, loan or credit agreement or any other agreement or
instrument to which the Seller is a party or by which the Seller or the Shares
are bound, or (iii) require the authorization, consent, approval or license of
any third party or entity.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF SELLERS
In addition to the representations and warranties made in Article 3, the
Sellers, jointly and severally, represent and warrant to Purchaser that, as of
the Effective Date and as of the Closing Date:
4.1 Due Organization of the Company. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Tennessee with all requisite corporate power and authority to conduct
its business operations as being conducted on the Effective Date. Except as
set forth in Schedule 4.1 attached hereto, the Company is duly qualified and in
good standing as a foreign corporation authorized to do business in each
jurisdiction where the failure to be so authorized would have a material
adverse effect on the business or operations of the Company. Schedule 4.1 is a
complete and accurate list of all jurisdictions in which the Company is so
authorized. The Company shall cure all exceptions noted on Schedule 4.1 on or
prior to the Closing. Sellers have delivered to Purchaser complete and correct
copies of the articles of incorporation and bylaws of the Company as amended to
and in effect on the Effective Date. The Company is not in violation of any
term or provision of its articles of incorporation or bylaws.
4.2 Subsidiaries/Investments. The Company has no subsidiaries,
whether direct or indirect. The Company has no equity interest or investment
in, and does not possesses any other right or obligation to purchase any equity
or other investment in, and is not a partner of or joint venturer with, any
other person or entity.
4.3 Due Authorization. Except for the consents reflected on
Schedule 4.3, the execution and delivery of this Agreement and the performance
of the transactions contemplated by this Agreement and all other instruments,
agreements, certificates and documents contemplated hereby to which either the
Sellers and the Company are or will be a party does not, on the date hereof,
and will not, on the Closing Date, (i) violate any decree or judgment of any
court or governmental authority which may be applicable to the Company; (ii) to
the knowledge of the Sellers, violate any law, rule or regulation, or any
decree or judgment of any court or governmental authority binding on the
Company; (iii) violate or conflict with, or result in a breach of, or
constitute a default (or an event which, with or without notice or lapse of
time or both, would constitute a default) under, or permit cancellation of, or
result in the creation of
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any encumbrance upon, any of the Shares or any of the assets of the Company
under any of the terms, conditions, or provisions of any contract, lease, sales
order, purchase order, indenture, mortgage, note, bond, instrument, license or
other agreement to which the Company is a party, or by which the Company or its
assets is bound; (iv) permit the acceleration of the maturity of any
indebtedness of the Company; (v) violate or conflict with any provision of the
articles of incorporation or bylaws of the Company and (vi) has been duly
authorized by all requisite corporate action of the Company.
4.4 Capitalization of the Company. The authorized capital stock
of the Company consists of One Million (1,000,000) shares of Common Stock,
$0.01 par value per share, of which 168,722 shares are validly issued and
outstanding and Five Hundred Thousand (500,000) shares of Preferred Stock,
$0.01 par value per share, of which 10,671 shares are validly issued and
outstanding. Except as set forth in Schedule 4.4 attached hereto, all such
outstanding shares of capital stock are fully paid and nonassessable and, on
the date of Closing, all of the outstanding shares of capital stock will be
fully paid and nonassessable. All of the outstanding shares of Common Stock
and Preferred Stock of the Company are owned beneficially and of record as set
forth on Exhibit A. Each Seller owns beneficially and of record the shares of
capital stock of the Company set opposite the name of such Seller in Exhibit A.
The Company has provided to the Purchaser a correct and complete copy of the
stock registry of the Company listing all stockholders of the Company and the
outstanding share certificates and total number of shares issued to each
stockholder of the Company. The Company has no other capital stock authorized
for issuance and has no treasury shares. The Company has not purchased any
shares of its capital stock from a shareholder within the two (2) year period
prior to the Effective Date. Except as set forth in Schedule 4.4, there are no
outstanding options, warrants, convertible instruments, or other rights,
agreements, or commitments to issue or acquire any shares of common stock or
any other security constituting, or convertible or exchangeable into, capital
stock of the Company. Except as set forth in Schedule 4.4, since the date of
the Company Balance Sheet (as defined in Section 4.6 below), no shares of the
Company's capital stock, no options, warrants, or other rights, agreements, or
commitments (contingent or otherwise) obligating the Company to issue shares of
capital stock, and no other securities or instruments convertible or
exchangeable into shares of capital stock, have been executed or issued by the
Company. Except as set forth in the articles of incorporation of the Company,
the Company has not granted and is not a party to any agreement granting
preemptive rights, rights of first refusal, or registration rights with respect
to its outstanding capital stock or any capital stock of the Company to be
issued in the future. The Company is not bound by any exclusive agency or
indemnity agreement applicable to the issuance of shares of its capital stock
after the Effective Date.
4.5 Licenses/Compliance with Law. The Company has the lawful
authority and all federal, state or local governmental authorizations,
certificates of authority, licenses or permits necessary for or required to
conduct its respective business as such is presently being conducted. Schedule
4.5 contains a list and description of all authorizations, certificates of
authority, licenses and permits, including those granted or derived from
governmental sources, issued or granted to the Company. For the proper
conduct of its business, the Company is not required to obtain any additional
certificates of authority, permits, licenses or similar authorizations from
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<PAGE> 14
any governmental authority other than it has already obtained as listed on
Schedule 4.5. There are no pending or, to the knowledge of the Sellers,
threatened legal, administrative, arbitration or other actions, notices, or
proceedings nor any pending or, to the knowledge of the Sellers, threatened
governmental investigations by any federal, state or local government or any
subdivision thereof or by any public or private group which assert or allege
any violation of or non-compliance with any governmental requirements or which
would have the effect of limiting, prohibiting or changing the business
operations of the Company as conducted by the Company. The Company has made
all filings with governmental agencies required for the conduct of its business
operations. There are no judgments against the Company, and no orders, rules,
consent decrees or injunctions of any court, governmental department,
commission, agency or instrumentality by which the Company is bound or to which
the Company is subject. The Company has not entered into or is subject to any
judgment, consent decree, compliance order or administrative order or received
any request for information, notice, demand letter, administrative inquiry or
formal or informal complaint or claim. Neither the Company's operations nor
any of the assets owned, leased, occupied or used by the Company in the
operation of its business materially violates or fails to comply in any
material respect with any applicable federal, state or local codes, laws, rules
or regulation.
4.6 Financial Statements. The Company has delivered to Purchaser
a copy of (i) the audited financial statements of the Company as of September
30, 1994, 1995 and 1996 consisting in each case of a balance sheet at such
respective dates, and the related statements of income, changes in
stockholders' equity and cash flows for the applicable twelve (12) month period
then ended and (ii) unaudited financial statements of the Company as of
December 31, 1996 (the "Balance Sheet Date") consisting of a consolidated
balance sheet of the Company at such date (the "Company Balance Sheet") and the
related statements of income for the applicable month and year-to-date period
then ended. Complete and accurate copies of all such financial statements are
attached hereto as Schedule 4.6 (the "Financial Statements"). The Financial
Statements present fairly in all material respects the financial position of
the Company, and the results of the operations, changes in stockholders' equity
and cash flows of the Company, as of the respective dates thereof and for the
respective periods covered thereby, in conformity with generally accepted
accounting principles ("GAAP"). Except as set forth in the Company Balance
Sheet included in the Financial Statements, as of the Balance Sheet Date, there
were no liabilities, debts, claims or obligations, whether accrued, absolute,
contingent or otherwise, whether due or to become due, which are required by
GAAP to be set forth in a balance sheet of the Company which have not been so
set forth in the Company Balance Sheet. Except as set forth on Schedule 4.6,
no dividends or distributions with respect to the capital stock of the Company
had been declared but not paid prior to the Balance Sheet Date. The Financial
Statements were prepared from the books and records of the Company. At the
Balance Sheet Date, the Company owned each of the assets included in the
Company Balance Sheet. From the date hereof through the Closing Date, the
Company will continue to prepare monthly and year-to-date unaudited financial
statements on the same basis as the Financial Statements and will promptly
deliver the same to Purchaser. The foregoing representations will be
applicable to all such monthly unaudited financial statements so prepared and
delivered; provided, however, that such unaudited financial statements shall be
subject to normal year-end adjustments, none of which will be material.
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<PAGE> 15
4.7 No Adverse Change. Except as set forth on Schedule 4.7, since
the Balance Sheet Date, the business of the Company has been conducted only in
the ordinary course and there has not been (i) any material adverse change in
the financial condition, business, properties, assets, or results of operations
of the Company (financial or otherwise) exclusive of any general economic
factors affecting the health care industry in general; (ii) any material loss
or damage (whether or not covered by insurance) to any of the assets of the
Company which materially affects or impairs the ability of the Company to
conduct its business as previously conducted or any other event or condition of
any character which has materially and adversely affected the business or
operations of the Company; (iii) the attaching, placing or granting of, or the
agreement to attach, place or grant, any encumbrance on any of the assets of
the Company; (iv) any sale or transfer of any material portion of the assets of
the Company; (v) any material changes in the terms of or defaults under, any
material contract of the Company; (vi) any material change in the accounting
systems, policies or practices of the Company; (vii) any waiver by or on behalf
of the Company of any rights which have any material value; (viii) no taking
under condemnation or right of eminent domain of any of the assets of the
Company; (ix) any entry into or termination of any management contract or any
other material commitment, contract, agreement, or transaction (including,
without limitation, any material borrowing or capital expenditure or sale or
other disposition of any material assets) by the Company; (x) any redemption,
repurchase, or other acquisition of any of its capital stock by the Company, or
any issuance of capital stock of the Company or of securities convertible into
or rights to acquire any such capital stock; (xi) any dividend or distribution
declared, set aside or paid on capital stock of the Company; (xii) any transfer
or right granted by the Company of or under any material lease, license,
agreement, patent, trademark, trade name, service mark or copyright; (xiii) any
sale or other disposition of any material asset of the Company, or any
mortgage, pledge, or imposition of any lien or other encumbrance on any
material asset of the Company, or any agreement relating to or contemplating
any of the foregoing not in the ordinary and usual course of business; or (xiv)
any default or breach by the Company in any material respect under any material
contract, license, or permit. Since the Balance Sheet Date, the Company has
conducted its business only in the ordinary and usual course of business and,
without limiting the foregoing, no changes have been made in (i) employee
compensation levels, (ii) the manner in which employees of the Company are
compensated, or (iii) supplemental benefits provided to any employees.
4.8 No Undisclosed Liabilities. True and correct copies of all
notes, agreements or other documents evidencing the outstanding debt (as such
term is determined pursuant to GAAP of the Company, as amended to and in effect
on the Effective Date, have been delivered to Purchaser by the Company. The
Company has no debt (as such term is determined pursuant to GAAP) or other
liabilities which are not adequately disclosed and reflected or reserved
against on the face of the Company Balance Sheet, except liabilities incurred
since the Balance Sheet Date in the ordinary course of business consistent with
past practice which, in the aggregate, would not have a material adverse effect
on the condition (financial or otherwise), assets or business of the Company.
Schedule 4.8 hereto sets forth each liability of the Company in an amount in
excess of $10,000 and each person to whom the aggregate amount of liabilities
owed to such person by the Company exceeds $10,000.
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<PAGE> 16
4.9 Title to and Condition of Properties. Except as set forth in
Schedule 4.9, the Company has good, marketable, and insurable title, or valid,
effective and continuing leasehold rights in the case of leased property, to
all of the assets reflected on the Company Balance Sheet and all personal
property owned or leased by it or used by it in the conduct of its business in
such a manner as to create the appearance or reasonable expectation that the
same is owned or leased by it, free and clear of all liens, security interests,
restrictions, claims, encumbrances, and charges of any kind whatsoever. The
Sellers do not know of any potential action or assertion of rights, including
condemnation, by any party, governmental or other, and no proceedings with
respect thereto have been instituted of which any Seller or the Company has
notice, that would materially affect the ability of the Company to utilize each
of such assets in its business. The Company has not received any notices of
default or other violations from any landlord regarding any properties leased
by the Company. Schedule 4.9 hereto contains a detailed listing of all
material assets of the Company. The assets now owned by the Company constitute
all assets reasonably necessary to enable Purchaser to conduct the business and
operations of the Company on substantially the same terms as such business has
been conducted historically and is being conducted on the Effective Date.
Except as expressly set forth in this Agreement, no other representations or
warranties have been made by Sellers or the Company as to the condition or
suitability for any particular purpose of the assets of the Company. To the
knowledge of the Sellers, none of the assets owned, leased or used by the
Company in the operation of its business materially violates or fails to comply
in any material respect with any applicable federal, state or local health,
fire, environmental, safety, zoning, building or other codes, laws, rules or
regulations and the Company has not received any notice of an alleged violation
thereof.
4.10 Litigation. Except as set forth on Schedule 4.10 hereto, (i)
no material investigation or review by any governmental entity with respect to
the Company is pending or, to the knowledge of the Sellers, threatened, nor has
any governmental entity indicated to the Company an intention to conduct the
same; and (ii) there is no action, suit, or administrative, condemnation,
arbitration or other proceeding (including proceedings concerning labor
disputes or grievances or union recognition) pending or, to the knowledge of
the Sellers, threatened against or affecting the Company to which the Company
is a party, at law or in equity, before any federal, state, or municipal court
or other governmental department, commission, board, bureau, agency, or
instrumentality. The Company is not now, and has not been, a party to any
injunction, order or decree restricting the method of the conduct of its
business or the marketing of any of its products or services.
4.11 Real Property Leases . Schedule 4.11 lists all leases of real
property to which the Company is a party (the "Real Property Leases").
Accurate and complete copies of the Real Property Leases, as amended to the
Effective Date, have been delivered to Purchaser. Except as disclosed on
Schedule 4.11, neither the Sellers nor the Company has received any notices
that the land, buildings, facilities and other structures and improvements
subject to the Real Property Leases are not in compliance with any applicable
zoning, environmental or health laws and regulations or any other similar law,
statute, regulation or ordinance. The Company is the lessee and in peaceful
and undisturbed possession of the property subject to the Real Property Leases.
To the knowledge of the Sellers, all covenants or other restrictions (if any)
to which
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<PAGE> 17
any of the property leased to the Company pursuant to the Real Property Leases
are being properly performed and observed in all material respects by the
Company, and the Company has not received any notice of violation (or claimed
violation) thereof which has not been resolved. The Company has delivered to
Purchaser true, correct and complete copies of all reports or audits of any
engineers, environmental consultants or other consultants in the possession of
the Company relating to any of premises subject to the Real Property Leases.
There is no pending proceeding or governmental action, and the Sellers have not
received notice of any threatened proceeding or governmental action, to condemn
or take by the power of eminent domain (or to purchase in lieu thereof) all or
any part of the property subject to the Real Property Leases which is material
to the operations of the Company as presently conducted. The Company does not
own any real property.
4.12 Intellectual Property. Schedule 4.12 is an accurate and
complete list of all copyrights, trade names that the Company uses in its
business operations. Except as disclosed on Schedule 4.12 the Company has no
United States and foreign patents, patent applications, patent licenses,
trademarks, and service mark registrations (and applications therefor), and has
no copyrights and copyright registrations (and applications therefor), trade
secrets, inventions, processes, designs, know-how and formula which are owned
or licensed for use by the Company and utilized by the Company in the business
operations of the Company as presently conducted. There is no adverse claim
against the Company, or to the knowledge of the Sellers, any threatened
litigation or claim of infringement. Except for the license to use the
trademark owned by The Center for Health & Creative Aging, P.C. set forth in
Schedule 4.12, to the knowledge of the Sellers, the Company does not utilize
any intellectual property or proprietary trade secret information which
infringes any trademark, trade name, service mark, copyright or patent of
another, and the Company has not received any notice contesting its right to
use any trade name, intellectual property or proprietary trade secret
information now used by it in connection with its business operations. The
Company has not granted any license to a third party in respect of any of its
intellectual property except as set forth in Schedule 4.12. As of the date of
Closing, the Company will have a license to use the trademark currently used in
its business operations for a period of one (1) year after the Closing at no
fees, costs or other expense to the Company.
4.13 Contracts.
(a) Material Contracts. Schedule 4.13 lists all material
contracts or agreements of the following types to which the Company is a party
or by which the Company is bound:
(i) any management or other contract pursuant to which
the Company owns, manages, develops or operates mental health treatment
units or programs on behalf of general acute care hospitals or any other
person or entity (the "Management Contracts");
(ii) any contract or agreement with a physician,
psychiatrist, psychologist or other health provider or any partnership
or professional association or corporation owned by physicians,
psychiatrists, psychologists or other health providers;
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<PAGE> 18
(iii) any contract or agreement which is not terminable
upon thirty (30) days or less notice or which obligates the Company to
the payment of more than $10,000 including, without limitation, loan
agreements;
(iv) any contract or agreement for the maintenance,
purchase or sale of equipment or capital assets having a value in excess
of $10,000;
(v) any power of attorney (other than routine powers
given to governmental officials authorizing service of process);
(vi) any lease of personal property;
(vii) any guaranty, suretyship agreement or other agreement
relating to any contingent liability.
(viii) any contract with an independent agent or broker
acting on behalf of the Company;
(ix) any contract or agreement with an independent
consultant;
(x) any contract or agreement restricting the method by
which the Company conducts its business or the marketing of any of its
products or services; and
(x) any contract or agreement between the Company and any
of the shareholders or other affiliates of the Company including,
without limitation, affiliates of the shareholders of the Company.
(b) Copies/Status of Material Contracts. True, complete
and correct copies of all contracts are included as a part of Schedule 4.13
and, except to the extent disclosed on Schedule 4.13 and Schedule 4.7 (i) all
of the contracts listed on such Schedule 4.13 are in full force and effect,
(ii) the Company has not received any notice of cancellation with respect to
any such contract or been advised that the other party thereto intends to
cancel any such agreement, (iii) there are no material outstanding disputes
under such contracts, (iv) each such contract is with an unrelated third party
entered into on an arms-length basis in the ordinary course of business, (v)
there are no material defaults under any of such contracts, (vi) there are no
verbal amendments, modifications or other understandings relating to such
contracts, (vii) the Company has no obligation that has accrued to refund all
or any portion of the fees that have been paid under the Management Contracts.
(c) Partial Hospitalization Management Contracts. With
respect to the Management Contracts that relate to partial hospitalization
(outpatient) treatment programs, (a) no hospital that is the contracting party
to such Management Contract has or will have the right to terminate such
Management Contract or to assert a breach or violation of such Management
Contract and (b) the Company shall have no obligation or liability to refund
any fees paid under such Management Contract, in either case as a result of the
denial of third party
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<PAGE> 19
reimbursement to such hospital of the fees charged to patients of such partial
hospitalization programs relating to treatment provided on or prior to the date
of Closing.
4.14 Employees, Et Cetera. Schedule 4.14 hereto lists in accurate
and complete detail all employees of the Company as of the Effective Date,
their job titles, annual rates of compensation, accrued vacation, holiday and
sick leave as of the most recent regular payroll date of the Company
immediately preceding the Effective Date, other fringe benefits, if any, a
description of any severance pay arrangements, if any, and the amounts payable
with respect to such accrued vacation, holiday and sick leave as of the most
recent payroll date of the Company immediately preceding the Effective Date and
the rate at which such vacation, holiday and sick leave will accrue after the
Effective Date. Except as shown on Schedule 4.14, the Company is not bound by
any written contract of employment with any of its employees and all oral
employment contracts are terminable at will, subject to applicable law, or by
any consulting or similar agreements. Except as set forth in Schedule 4.14 and
except as contemplated by the provisions of Section 11.6 of this Agreement, the
Company is not a party to any employment or other agreement, whether written or
oral, pursuant to which the Company has agreed to make a loan to, or guarantee
any loan of, any employee or relating to any bonus, deferred compensation,
severance pay or similar plan, agreement, arrangement or understanding. Except
as listed on Schedule 4.14 or Schedule 4.15 hereof, the Company has no Welfare
Plan, no Pension Plan, nor any other type of pension, profit sharing, deferred
compensation, retirement, stock option, bonus, severance, medical, dental, life
insurance, accident, or other employee benefit or compensation plan, agreement,
arrangement, practice or policy with respect to employees. The Company has
complied with all requirements of Sections 6001 through 6008 of the ERISA and
Section 4980B of the Code with respect to itself and its employees. The
Company is not bound, and following the Closing will not be bound, by any
express or implied contract or agreement to employ, directly or as a consultant
or otherwise, any person for any specific period of time or until any specific
age except as specified in the written agreements identified in Schedule 4.14.
4.15 Employee Benefit Plans. Except as disclosed in Schedule 4.15:
(a) The Company does not maintain or contribute to, and
has not in the past maintained or contributed to, any Pension Plan or Welfare
Plan, nor is the Company presently, or has it ever been, a participating
employer in any Multiemployer Plan.
(b) With respect to each Pension Plan and each Welfare
Plan listed on Schedule 4.15, to the knowledge of the Sellers: (i) there is no
fact, including, without limitation, any reportable event, that exists that
would constitute grounds for termination of such plan by the PBGC or for the
appointment by the appropriate United States District Court of a trustee to
administer such plan, in each case as contemplated by ERISA; (ii) neither the
Company nor any subsidiary nor any fiduciary, trustee, or administrator of any
such Pension Plan or Welfare Plan, has engaged in a prohibited transaction that
would subject the Company to any material tax or any material penalty imposed
by ERISA or the Code; (iii) the Company has not incurred any material liability
to the PBGC (other than for payment of premiums); (iv) the Company has
contributed all amounts thereto it is required to contribute under the terms
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<PAGE> 20
of the plan in question and applicable law, and there is no accumulated funding
deficiency with respect to any such Pension Plan, whether or not waived, other
than routine, non-contested claims for benefits. There is not pending or, to
the knowledge of the Sellers, threatened any claim by or on behalf of or
against any Pension Plan or Welfare Plan, by any employee or former employee
covered or previously covered under any Pension Plan or Welfare Plan, or
otherwise involving any Pension Plan or Welfare Plan.
(c) There has been no termination of any Pension Plan or
Welfare Plan by the Company during the five-year period ending on the Effective
Date.
(d) The Company has no knowledge of any material
liability being incurred under Title IV of ERISA by the Company with respect to
any Pension Plan maintained by a trade or business (whether or not
incorporated) which is under common control with, or part of a controlled group
of corporations with, the Company, within the meaning of Sections 414(b) or (c)
of the Code.
(e) No Welfare Plan listed on Schedule 4.15 is funded
with a trust or other funding vehicle, other than insurance policies.
(f) Each Welfare Plan, Pension Plan, and any other type
of pension, profit sharing, deferred compensation, retirement, stock option,
bonus, severance, medical, dental, life insurance, accident, or other employee
benefit or compensation plan, agreement, arrangement, practice, or policy with
respect to employees maintained by or contributed to by the Company is
maintained, administered, and operated in accordance with all applicable laws,
including but not limited to, ERISA and the Code.
(g) Each Pension Plan listed on Schedule 4.15 which is
intended to be qualified under Section 401(a) of the Code, has received a
favorable determination letter from the Internal Revenue Service as to the
qualification under the Code of each such Pension Plan as amended to comply
with the Tax Reform Act of 1986 and all applicable, subsequent legislation,
and, to the knowledge of the Sellers, no event has occurred since the date of
such favorable determination letter that would adversely affect such
qualification.
(h) Except as expressly contemplated by this Agreement,
no bonus, severance pay, or any other employee benefit under any Welfare Plan,
Pension Plan, or any other type of pension, profit sharing, deferred
compensation, retirement, stock option, bonus, severance, or other employee
benefit or compensation plan, agreement, arrangement, practice, or policy with
respect to employees maintained by or contributed to by the Company is payable
or exercisable as a result of the transaction contemplated by this Agreement,
and the payment, exercise, or vesting of any such bonus, severance pay, or
employee benefit will not be accelerated or otherwise enhanced by such
transaction.
True, correct and complete copies of each Pension Plan and Welfare Plan listed
on Schedule 4.15 as amended to and in effect on the date hereof; any agreements
entered into in connection with each such Pension Plan and Welfare Plan; the
most recent annual report filed
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<PAGE> 21
with the Internal Revenue Service for each such Pension Plan and Welfare Plan;
the most recent actuarial report, if any, for each such Pension Plan and
Welfare Plan; the most recent summary plan description, together with each
summary of material modifications; and any other communication generally
disseminated to employees or former employees of the Company and describing
benefits provided under each such Pension Plan and Welfare Plan, have been
delivered to Purchaser by the Company.
4.16 Receivables. To the knowledge of the Sellers, all Receivables
of the Company whether or not reflected in the Company Balance Sheet, represent
transactions in the ordinary course of business, and, except as disclosed on
Schedule 4.16, are current and collectible net of any reserves therefor shown
on the Company Balance Sheet (which reserves are adequate and were calculated
consistent with past practice). Schedule 4.16 consists of an aged accounts
receivable report of the Company as of December 31, 1996.
4.17 Accounts Payable. The accounts payable reflected on the
Company Balance Sheet and those reflected on the books of the Company at the
time of the Closing will reflect all material amounts owed by the Company in
respect of trade accounts due and other Payables as required by GAAP to be
identified on such Company Balance Sheet or in the books of the Company.
Except as set forth on Schedule 4.17, to the knowledge of the Sellers, no
account payable of the Company is past due or otherwise in default by the
Company.
4.18 Broker's and Finder's Fees. No agent, broker, employee,
officer, stockholder or other person or entity acting on behalf of, or under
the authority of, the Sellers or the Company is or will be entitled to any
commission or broker's or finder's fee from any of the parties hereto in
connection with this Agreement or any of the transactions contemplated hereby.
4.19 Labor Practices. The Company has no collective bargaining or
other labor union agreements. There is no unfair labor practice complaint
against the Company pending before the National Labor Relations Board, there is
no pending or, to the knowledge of the Sellers, threatened labor dispute,
strike or work stoppage affecting the Company's business, nor has there been
any of the same or any labor union organizing activity relating to the Company
within the last three (3) years.
4.20 Insurance. Schedule 4.20 lists all insurance policies and
coverages maintained by or for the Company including but not limited to real
and personal property insurance, comprehensive liability insurance, automobile
liability insurance, workers' compensation insurance, medical malpractice
insurance and professional liability insurance. Schedule 4.20 lists all
insurance claims submitted in connection with property damage or in connection
with liability, medical or professional malpractice claims involving the
Company or any of its employees for the latest three (3) years.
4.21 Consents. Except as set forth in Schedule 4.3 hereto, to the
knowledge of the Sellers, no consents, approvals, or authorizations of any
person, entity or governmental agency are required in connection with the sale
of the Shares and the consummation of the transactions contemplated by this
Agreement. The Sellers agree to cause Company to assist the Purchaser
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<PAGE> 22
in obtaining any consents, approvals or authorizations required to consummate
the transactions contemplated by this Agreement.
4.22 Environmental Matters. Except as disclosed on Schedule 4.22,
(a) the Company has not received any notice from any governmental authority or
private person or entity advising it that the operation of the Company's
business is in violation of any environmental law or any applicable
environmental permit or that it is responsible (or potentially responsible) for
the cleanup of any pollutants, contaminants, hazardous or toxic wastes,
substances or materials at, on or beneath the property subject to the Real
Property Leases; and (b) to the knowledge of the Sellers, the Company is not
the subject of federal, state, local or private litigation or proceedings
involving a demand for damages or other potential liability with respect to
violations of environmental laws.
4.23 Taxes. Except as set forth in Schedule 4.23, all federal,
state, local and other tax returns and reports of the Company required by law
to be filed have been prepared and properly filed or valid extensions obtained,
and, except as set forth in Schedule 4.23, all taxes, charges, fees, duties,
levies or other assessments which are imposed by the United States, or any
federal, state, local or foreign government or subdivision or agency thereof,
including any interest, penalties or additions ("Taxes") imposed upon the
Company or any of its properties, assets or income which are due and payable or
claimed by any taxing authority to be due and payable have been paid or
reserved for. The liability for accrued taxes as shown in the Company Balance
Sheet (net of amounts reserved for deferred taxes) is sufficient for the
payment of all unpaid Taxes of the Company accrued for or applicable to the
periods prior to the Balance Sheet Date and all years and periods prior thereto
and for which the Company may at that date have been liable in its own right or
by reason of its being a member of any group of corporations filing
consolidated tax returns (including any such amounts payable as a result of an
audit of any tax return for any such period). The Company utilizes the accrual
method of accounting for tax purposes.
Except as set forth on Schedule 4.23, there are no claims for Taxes
pending against the Company, and the Sellers do not know of any threatened
claim for tax deficiencies or any basis for such claims, and there are not now
in force any waivers or agreements by the Company for the extension of time for
the assessment of any tax, nor has any such waiver or agreement been requested
by the Internal Revenue Service (the "Service") or any other taxing authority.
Except as set forth on Schedule 4.23, the Federal income tax returns of
the Company have not been examined or audited by the Service. Except as set
forth on Schedule 4.23, no material issues have been raised in any examination
by any taxing authority with respect to the businesses and operations of the
Company which, by application of similar principles, could be expected to
result in a proposed adjustment to the liability of the Company for taxes for
any other period not so examined.
The Company has not filed a consent under Section 341(f) of the Internal
Revenue Code of 1986, as amended (the "Code") concerning collapsible
corporations. Except as disclosed in Schedule 4.23, the Company has not made
any payments, is not obligated to make any
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<PAGE> 23
payments, and is not a party to any agreement that under certain circumstances
could obligate it to make any payments that will not be deductible under
Section 280G of the Code. The Company has not been a United States real
property holding corporation within the meaning of Section 897(c)(2) of the
Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the
Code. The Company has disclosed on its federal income tax returns all
positions taken therein that could give rise to a substantial understatement of
federal income tax within the meaning of Section 6662 of the Code. The Company
is not a party to any tax allocation or sharing agreement. The Company (a) has
not been a member of an affiliated group filing a consolidated federal income
tax return and (b) has no liability for the taxes of any person (other than
any of the Company) under Treas. Reg. Section 1.1502-6 (or any similar
provision of state, local, or foreign law), as a transferee or successor, by
contract, or otherwise. The Company has not agreed, nor is it required to
make, any adjustment under Code Section 481(a) by reason of a change in
accounting method or otherwise.
The Company has paid or is withholding and has or will pay when due to
the proper taxing authorities all withholding amounts and taxes required to be
withheld or paid for all income, unemployment, social security, medicare or
other similar Taxes, programs or benefits with respect to wages, salary and
other compensation of directors, officers and employees of the Company.
The Company has at all times of its existence been taxed as a "C
Corporation" and at no time has elected to be taxed, or filed tax returns as an
"S Corporation," as such terms are commonly used under the Code.
4.24 Transactions With Affiliates. Except as set forth in Schedule
4.24, there are no loans, leases, agreements, contracts or other transactions
between the Company and any present or former stockholder, director or officer
of the Company, or any member of such stockholder's, director's or officer's
immediate family. Except as set forth in Schedule 4.24, no stockholder,
director or officer of the Company nor any of their respective spouses or
family members owns directly or indirectly on an individual or joint basis any
material interest in, or serves as an officer or director of, or in any similar
capacity for, any competitor, customer, provider or supplier of the Company or
any organization which has a material contract or arrangement with the Company.
4.25 Improper Payments. To the knowledge of the Sellers, neither
the Company, nor any shareholder, director, officer, employee or agent of the
Company has made any improper bribes, kickbacks or other payments on behalf of
the Company to, or received any such payments from, customers, vendors,
suppliers or other persons contracting with the Company.
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ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF PURCHASER
The Purchaser represents and warrants to the Sellers as follows:
5.1 Due Incorporation. Purchaser is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware, with all requisite corporate power and authority to own, lease and
operate its properties and to carry on its business as now being conducted.
5.2 Corporate Authority. Purchaser has all requisite corporate
power and authority to enter into this Agreement and to carry out its
obligations under this Agreement. The execution, delivery and performance of
this Agreement by Purchaser has been duly authorized by all necessary corporate
action on the part of Purchaser. This Agreement has been duly executed and
delivered by Purchaser and constitutes the legal, valid and binding obligation
of Purchaser, enforceable in accordance with its terms.
5.3 Absence of Breach; No Consents. The execution and delivery of
this Agreement by the Purchaser, and the performance by Purchaser of its
obligations hereunder, do not (i) conflict with, and will not result in a
breach of, any of the provisions of the certificate of incorporation or bylaws
of Purchaser; (ii) contravene any law, rule, or regulation of any State or
Commonwealth or of the United States, or of any applicable foreign
jurisdiction, or any order, writ, judgment, injunction, decree, determination,
or award affecting or binding upon Purchaser; (iii) conflict with or result in
a material breach of or default under any material indenture or loan or credit
agreement or any other material agreement or instrument to which Purchaser is a
party or by which it or any of its material properties may be affected or
bound; or (iv) except as reflected on Schedule 4.3, require the authorization,
consent, approval, or license of any third party.
5.4 Investment Representations. Purchaser will acquire the Shares
for its own account for investment and not with a view to the resale or
distribution thereof. Purchaser will not transfer or otherwise dispose of the
Shares, or any interest therein, in such manner as to violate any provisions of
the Securities Act of 1933, as amended, and the rules and regulations
thereunder (collectively, the "Securities Act"), or of any applicable state
securities laws regulating the disposition thereof. Purchaser agrees that the
certificates representing the Shares may bear legends to the effect that such
shares have not been registered under the Securities Act or such other state
securities laws, and that no interest therein may be transferred or otherwise
disposed of in violation of the provisions thereof or of any rules and
regulations issued thereunder.
5.5 Broker's or Finder's Fees. No agent, broker, employee,
officer, stockholder or other person or firm acting on behalf of, or under the
authority of, Purchaser is or will be entitled to any commission or broker's or
finder's fee from any of the parties hereto in connection with any of the
transactions contemplated herein.
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5.6 Access to Information. Purchaser represents that it has had
the full and complete opportunity to inspect the books and records of the
Company and to make such inquiry of officers and representatives of the Company
as it deems necessary or appropriate to make its decision to purchase the
Shares. The Purchaser further represents that it relied only on
representations made in this Agreement and not on any outside or oral
representations made by the Sellers, the Company or others and that the
information Purchaser has received is sufficient to make its decision
concerning the purchase of the shares. Purchaser understands and has taken
cognizance of all risk factors related to the purchase of the Shares and its
knowledge and experience in financial and business matters is such that
Purchaser is capable of evaluating the business, financial or otherwise, of the
Company and hereby represents and warrants that its financial situation is such
that it can bear the economic risk in connection with its purchase of the
Shares and that it can afford to suffer the complete loss of its investment in
the Shares.
ARTICLE 6
COVENANTS OF THE SELLERS AND THE COMPANY
Pending the Closing, Sellers and the Company shall do the following:
6.1 Affirmative Covenants. Subject to the terms and conditions
stated herein, Sellers will take, and cause the Company to take, and the
Company will take, every action reasonably required of the Sellers and the
Company to satisfy the conditions to Closing set forth in this Agreement on or
before the Closing Date and otherwise to ensure the prompt and expedient
consummation of the transactions substantially as contemplated by this
Agreement, and will exert all reasonable efforts to cause the transactions
contemplated by this Agreement to be consummated.
6.2 Access and Information. Sellers shall cause the Company to
afford, and the Company shall afford, to Purchaser and its representatives
reasonable access during reasonable hours throughout the period prior to the
Closing to all properties, books, contracts, commitments, computer programs and
data, reports, manuals and records (including, but not limited to, tax
returns), and to all personnel of the Company and the Subsidiaries and, during
such period, shall promptly furnish to Purchaser all other information
concerning such business, properties, and personnel as Purchaser may reasonably
request. Purchaser shall maintain the confidentiality of all such information
as required by Section 7.4 hereof.
6.3 No Solicitation. From the date of this Agreement until the
Closing or the termination of this Agreement pursuant to its terms, the Company
and the Sellers, and those acting on behalf of any of them, will not, and the
Company and Sellers will use its and their best efforts to cause its and their
officers, employees, agents, and representatives (including any investment
banker) not, directly or indirectly, to solicit, encourage, or initiate any
discussion with, or negotiate or otherwise deal with, or provide any
information to, any person or entity other than Purchaser and its
representatives concerning any merger, sale of assets, or similar transaction
involving the Company, or sale of any capital stock of the Company, or any
interest therein. Sellers will, or will cause the Company to, notify Purchaser
immediately upon receipt
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of any offer or proposal relating to any of the foregoing and such notice shall
describe in detail the terms thereof and identify the party or parties thereto.
From the date of this Agreement, until the Closing or the termination of this
Agreement pursuant to its terms, neither the Company nor any of the Sellers
will furnish, without the prior written consent of Purchaser, to any person or
entity (other than Purchaser) any non-public information concerning the Company
or its businesses, financial affairs or prospects for the purpose of or with
the intent of permitting such person or entity to evaluate a possible
acquisition of any capital stock or (other than in the ordinary course of
business) assets of the Company.
6.4 Conduct of Business Prior to Closing. Sellers and the Company
covenant and agree that, from and after the Effective Date to and including the
date of the Closing under this Agreement or to the date of termination of this
Agreement pursuant to its terms, unless Purchaser shall otherwise consent in
writing, and except as otherwise contemplated by this Agreement, each of the
following shall be complied with:
(a) The business of the Company shall be conducted only
in the ordinary and usual course and the Company shall use reasonable efforts
to keep intact its business organization and good will, to keep available the
services of its officers and employees and to maintain a good relationship with
suppliers, lenders, creditors, distributors, employees, customers, and others
having business or financial relationship with it, and the Sellers or the
Company shall immediately notify Purchaser of any event or occurrence or
emergency material to, and not in the ordinary and usual course of business of,
the Company.
(b) The Company shall not (i) amend its articles of
incorporation or bylaws or (ii) split, combine, or reclassify any of its
outstanding securities, or (iii) declare, set aside, or pay any dividend or
other distribution on, or make, agree or commit to make any exchange for or
redemption of, any of its outstanding securities whether payable in cash, stock
or property;
(c) Except as set forth in Schedule 4.4, the Company
shall not (i) issue or agree to issue any additional shares of, or rights of
any kind to acquire any shares of, its capital stock of any class; or (ii)
enter into any contract, agreement, commitment, or arrangement with respect to
any of the foregoing;
(d) The Company shall not create, incur, or assume any
long-term or short-term indebtedness for money borrowed or make any capital
expenditures or commitment for capital expenditures in excess of $10,000
individually or $50,000 in the aggregate, without the prior written consent of
Purchaser;
(e) The Company shall not (i) adopt, enter into, or amend
any bonus, profit sharing, compensation, stock option, warrant, pension,
retirement, deferred compensation, employment, severance, termination, or other
employee benefit plan, agreement, trust fund, or arrangement for the benefit or
welfare of any officer, director, or employee of the Company or (ii) agree to
any increase in the compensation payable or to become payable to, or any
increase in the contractual term of employment of, any officer, director or
employee of the Company;
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provided, however, that the Company may (i) make usual and customary employee
salary adjustments not in excess of 5% for any individual employee, excluding,
however, the Sellers and (ii) may terminate and employ non-management employees
as needed to operate the business of the Company, in each case consistent with
past practices;
(f) The Company shall not sell, lease, mortgage,
encumber, or otherwise dispose of or grant any interest in any of its assets or
properties except for liens for taxes not yet due or liens or encumbrances that
are not material in amount or effect and do not impair the use of the property,
or as specifically provided for or permitted in this Agreement;
(g) Except as set forth in Schedule 6.4, the Company
shall not enter into, or terminate, any material contract, agreement,
commitment, or understanding other than agreements entered into with
unaffiliated third parties, on an arms-length basis and in the ordinary course
of business constituting either (i) management contracts at rates and for terms
comparable to its most recent management contracts and (ii) marketing
affiliation and sales agreements on terms comparable with its existing
agreements of such nature;
(h) The Company shall not incur or modify any contingent
liability as a guarantor or otherwise with respect to the obligations of third
parties except in the ordinary course of business consistent with past practice
or as required by law;
(i) Except as set forth in Schedule 6.4 the Company shall
not prepay any loans, including, without limitation, loans from its
stockholders, officers, directors or employees, and shall not make any
principal payments on any outstanding loan due to a Seller and shall not,
except in the ordinary course of business consistent with past practice, make
any change in its borrowing arrangements or modify or amend or terminate any
material contract or release or assign any material rights or claims;
(j) In connection with any filings to be made by the
Purchaser under the Securities Act of 1933, as amended, the Company shall (i)
provide for inclusion therein the financial and other information and documents
pertaining to the Company required by applicable SEC rules and regulations to
be included therein, (ii) use commercially reasonable efforts to cause the
accountants for the Company to deliver such consents, reports and comfort
letters in connection therewith as the Purchaser may reasonably request and
(iii) generally cooperate with the Purchaser in connection therewith; provided,
however, that all expenses relating to such consents, reports, comfort letters
and cooperation shall be paid directly and promptly by the Purchaser (except
for expenses that the Company would have incurred in any event, such as the
expense of an annual audit);
(k) The Company will continue properly and promptly to
file when due all federal, state and local, foreign, and other tax returns,
reports, and declarations required to be filed by it, and will pay, or make
full and adequate provision for the payment of, all taxes and governmental
charges due from or payable by it;
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(l) The Company will comply with all laws and regulations
applicable to it and its operations;
(m) The Company will maintain in full force and effect
insurance coverage of a type and amount customary in its business, but not less
than that presently in effect;
(n) The Company will not knowingly take any action (or
omit to take any action) which would cause any representation or warranty
contained in Article 3 or Article 4 of this Agreement to be untrue at any time
prior to Closing as if such representation or warranty were made at and as of
such time;
(o) The Company will not make any change in any method of
reporting income or expenses for federal income tax purposes; and
(p) The Company shall not knowingly take any action which
would prevent compliance with any of the conditions in Articles 8 or 9 of this
Agreement.
6.5 Consents and Approvals. The Company shall use commercially
reasonable efforts to obtain all necessary consents and approvals required for
its performance of this Agreement and the transactions contemplated hereby,
including, without limitation, the consents listed on Schedule 4.3. The
Company shall make all filings, applications, statements and reports to all
governmental authorities which are required to be made prior to the Closing
Date by or on behalf of it pursuant to any applicable statute, rule or
regulation in connection with this Agreement and the transactions contemplated
hereby. As required in connection with the performance of this Agreement by
the Company, the Company will promptly provide such other information and
communications to governmental and regulatory authorities as such regulatory
authorities or Purchaser may reasonably request. Between the date hereof and
the Closing Date, the Company shall promptly provide Purchaser with copies of
all correspondence and filings to or from all governmental and regulatory
bodies and officials relating to the Company.
6.6 Publicity. Prior to the Closing, any public statement or
announcement by the Sellers or Company, including but not limited to any
written news releases, pertaining to this Agreement or the transactions
contemplated thereby shall be submitted to Purchaser for review and approval
prior to the release by the Company, and shall be released only in a form
approved by Purchaser, provided, however, that (i) such approval shall not be
unreasonably withheld and (ii) such review and approval shall not be required
of statements and announcements if prior review and approval would prevent the
timely and accurate dissemination of such statements and announcements as
required to comply, in the judgement of counsel, with any applicable
governmental law, rule or regulation. Sellers and Purchaser shall issue a
press release regarding the execution of this Agreement within one day of the
date hereof or such other time as Sellers and Purchaser may mutually agree.
6.7 Financial Information. Sellers will cause the Company to, and
the Company will, deliver as soon as reasonably practicable to Purchaser
unaudited financial statements of the
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Company for each month from and after the date hereof as and when such
financial statements become available in the usual course of business.
6.8 Expenses. All fees and expenses of Counsel to Sellers and all
other advisors or financial consultants to the Sellers or engaged by the
Company on behalf of the Sellers incurred in connection with this Agreement and
the consummation of the transactions contemplated hereby shall be paid by
Sellers and none of such costs and expenses shall be paid by the Company.
Payment of any such fees or expenses of the Sellers paid or incurred by the
Company will be paid at Closing by the Sellers out of the Purchase Price paid
to Sellers on a pro rata basis. Nothing contained herein shall be deemed or
construed to prevent the Company from paying any such fees or expenses in the
event this Agreement is terminated.
6.9 Breach of Representations and Warranties. Promptly upon any
Seller or the Company becoming aware of any breach of any of the
representations and warranties of the Sellers contained in this Agreement, or
any event which would cause the Sellers to be unable to deliver the
certificates contemplated by Section 9.1(e) hereof, the Sellers shall give
detailed written notice thereof to the Purchaser and shall use all commercially
reasonable efforts to prevent or promptly remedy the same.
6.10 No Transfer of Shares. Unless and until this Agreement is
terminated, each Seller shall not, directly or indirectly, exchange, transfer,
assign, pledge or encumber any of the Shares owned by the Seller, nor shall a
Seller grant, directly or indirectly, any right to acquire, dispose of, vote or
otherwise control in any manner such Shares.
6.11 Updating of Schedules. Sellers shall notify Purchaser of any
changes, additions, or events which may cause any change in or addition to the
Schedules delivered by them under this Agreement promptly after the occurrence
of the same and again at the Closing by delivery of appropriate updates to all
such Schedules. No notification of a change or addition to a Schedule made
pursuant to this Section shall be deemed to cure any breach of any
representation or warranty resulting from such change or addition unless
Purchaser specifically agrees thereto in writing, nor shall any such
notification be considered to constitute or give rise to a waiver by Purchaser
of any condition set forth in this Agreement, unless Purchaser specifically
agrees thereto in writing. Nothing contained herein shall be deemed to create
or impose on Purchaser any duty to examine or investigate any matter or thing
for the purposes of verifying the representations and warranties made by
Sellers herein.
6.12 No Employment or Solicitation. In the event this Agreement is
terminated for any reason, neither the Sellers nor the Company shall hire or
attempt to hire any person who is then an officer or other employee of the
Purchaser or any of its direct or indirect subsidiaries or encourage any such
officer or employee to terminate his or her relationship with the Purchaser or
any of its direct or indirect subsidiaries during the period of six (6) months
after the date of such termination.
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ARTICLE 7
COVENANTS OF PURCHASER
Purchaser agrees that from the date hereof through the Closing Date:
7.1 Affirmative Covenants. Subject to the terms and conditions
stated herein, Purchaser will take every action reasonably required of it in
order to satisfy the conditions to Closing set forth in this Agreement and
otherwise to ensure the prompt and expedient consummation of the transactions
substantially as contemplated hereby, and will exert all reasonable efforts to
cause the Agreement promptly to be consummated.
7.2 Cooperation. Purchaser shall cooperate with Sellers and
Counsel to Sellers, their accountants and agents in carrying out the
transaction, and in delivering all documents and instruments deemed reasonably
necessary or useful by Counsel to Sellers.
7.3 Expenses. Except as otherwise expressly provided herein,
whether or not this Agreement is consummated, all costs and expenses incurred
by Purchaser in connection with this Agreement and the transactions
contemplated hereby shall be paid by Purchaser.
7.4 Confidentiality. Prior to Closing, unless otherwise required
by law, Purchaser will hold in confidence all confidential information that has
been disclosed by the Sellers and the Company and will not use any such
confidential information except in connection with the transaction, until such
time as such information is otherwise publicly available; provided, however,
that this sentence will not apply to any information that becomes generally
available to the public, was available on a non-confidential basis to Purchaser
prior to its disclosure pursuant hereto, or becomes available on a
non-confidential basis from a third party who is not bound to keep such
information confidential. In the event of the termination of this Agreement,
Purchaser will, and will cause its representatives to, deliver to the Company
all documents and other written materials, and all copies thereof, obtained by
Purchaser or on its behalf from the Sellers or the Company as a result of this
Agreement or in connection herewith, whether so obtained before or after the
execution hereof. Purchaser agrees that the Company shall have standing and
may avail itself of any remedy at law or in equity, including an action for
injunctive relief, in the event of a breach or threatened breach by Purchaser
of any of the provisions of this Section 7.4. The obligations of Purchaser
under this Section 7.4 shall survive termination of this Agreement for any
reason whatsoever and shall remain in effect until two (2) years from the
Effective Date of this Agreement.
7.5 Publicity. Prior to the Closing, any public statement or
announcement by the Purchaser, including but not limited to any written news
releases by the Purchaser, pertaining to this Agreement or the transactions
contemplated hereby shall be submitted to the Company for review and approval
prior to the release by the Purchaser, and shall be released only in a form
reasonably approved by the Company provided however, that (i) such approval
shall not be unreasonably withheld and (ii) such review and approval shall not
be required of statements and announcements by the Purchaser if prior review
and approval would prevent the timely and accurate dissemination of such
statements and announcements as requested to comply, in the
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judgment of counsel, with any applicable law, rule or policy. Sellers and
Purchasers shall issue a press release regarding the execution and delivery of
this Agreement within one day after the date hereof or such other time as
Sellers and Purchaser may mutually agree.
7.6 No Employment or Solicitation.
(a) In the event this Agreement is terminated for any
reason, Purchaser shall not hire or attempt to hire any person who is then an
officer or other employee of the Company or encourage any such officer or
employee to terminate his or her relationship with the Company or any of its
direct or indirect subsidiaries during the period of six months after the date
of such termination; provided, however, that nothing contained herein shall be
deemed or construed to prevent Purchaser from employing, either before or after
the Effective Date, Betty Moore, an employee of the Company that made inquiry
of employment to Purchaser on an unsolicited basis prior to the Effective Date;
and
(b) In the event this Agreement is terminated for any
reason, the Purchaser shall not solicit, directly or indirectly, any management
contracts with client hospitals of Company on the Effective Date, during the
period of one year after the date of such termination.
ARTICLE 8
CONDITIONS TO OBLIGATIONS OF SELLERS
8.1 Conditions to Obligations of Sellers. The obligations of
Sellers to effect the transactions contemplated by this Agreement shall be
subject to the fulfillment at or prior to the Closing of the following
conditions, unless Sellers shall waive such fulfillment in whole or in part in
writing:
(a) This Agreement and the transactions contemplated
hereby shall have received all approvals, consents, authorizations, and waivers
from governmental and other regulatory agencies and other third parties
(including lenders, holders of debt securities, and lessors) required by law or
contract to consummate this Agreement and required to keep all agreements and
licenses held by the Company in full force and effect after the Closing
including, without limitation, the consents listed on Schedule 4.3;
(b) There shall not be in effect a restraining order, a
preliminary or permanent injunction or other order by any federal or state
authority which prohibits the consummation of this Agreement and no action or
proceeding shall have been instituted and remain pending before any court
seeking such relief or seeking damages in respect to this Agreement or the
consummation of the transactions contemplated by this Agreement;
(c) Purchaser shall have performed in all material
respects its agreements, covenants and obligations contained in this Agreement
required to be performed at or prior to the Closing;
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(d) The representations and warranties of Purchaser set
forth in this Agreement shall be true in all material respects as of the
Effective Date and as of the Closing Date as if made as of such time;
(e) Sellers shall have received from Purchaser an
officers' certificate, executed by an authorized officer of Purchaser (in his
capacity as such), dated the Closing Date, as to the satisfaction of the
conditions stated in Sections 8.1(c) and (d) above (to the best knowledge of
such officer where appropriate);
(f) Sellers shall have received, on and as of the Closing
Date, an opinion of Counsel to Purchaser, substantially in the form of opinion
set forth in Exhibit B attached hereto and such other closing documents and
instruments as Sellers shall reasonably require, in each case reasonably
satisfactory in form and substance to Counsel to Sellers.
(g) At or prior to the Closing, Purchaser shall enter
into a Consulting Agreement in the form of Exhibit C attached hereto, between
Purchaser and James A. Greene, M.D. (the "Greene Consulting Agreement");
provided, however, that the execution and delivery of the Greene Consulting
Agreement shall be at the sole election of James A. Greene, M.D. and, in the
event he elects not to execute such Consulting Agreement, then the execution
and delivery of the Greene Consulting Agreement by Purchaser shall not
constitute a condition to the obligations of the Sellers under this agreement.
(h) At or prior to the Closing, the Company shall pay in
full those certain monetary obligations owed by the Company to James A. Greene,
M.D. described in Schedule 8.1(h) which monetary obligations are also reflected
on the Company Balance Sheet. The amount of all payments required to fully
satisfy such monetary obligations shall be credited against and reduce the
$5,100,000 amount for the purpose of determining the Purchase Price as
specified in Section 2.2 of this Agreement.
(i) At or prior to the Closing, Purchaser shall perform
the respective obligations of and the actions to be taken by Purchaser at the
Closing as described in Section 10.3 of this Agreement.
(j) On or prior to the Closing, the Company and Ramsay
Healthcare, Inc. shall have renewed and extended on terms and conditions
satisfactory to Purchaser in its sole discretion those two certain Management
Contracts relating to mental health treatment units and programs in hospitals
located in Mesa, Arizona and Nevada, Missouri listed on Schedule 4.13. In the
event that either or both of such contracts cannot be renewed to the
satisfaction of the Purchaser and Seller is unable to provide one or more
replacement contracts acceptable to Purchaser in its sole discretion prior to
Closing, then Purchaser shall have the right to (i) terminate the Agreement,
(ii) waive the condition to provide renewals or replacement contracts for the
Ramsay contracts without a reduction in the Purchase Price or (iii) propose a
reduction in the Purchase Price equal to not more than $300,000 for each Ramsay
contract which is not renewed or replaced. If Purchaser proposes a reduction
in the Purchase Price of any amount due to the Ramsay contracts not being
renewed or replaced, the Seller shall have the
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<PAGE> 33
right to either accept the proposed reduction in the Purchase Price or to
terminate this agreement on written notice to Purchaser. In the event of such
termination by either the Sellers or Purchaser, neither party shall have any
further rights or obligations hereunder except for confidentiality provisions
of Section 7.4 and the no solicitation provisions of Section 6.12 and 7.6 of
this Agreement which provisions shall continue for the time periods specified
in such Sections.
(k) Prior to the Closing, the execution, delivery and
performance of this Agreement by the Company shall have been approved by the
Board of Directors of the Company.
ARTICLE 9
CONDITIONS TO OBLIGATIONS OF PURCHASER
9.1 Conditions To Obligations of Purchaser. The obligations of
Purchaser to effect the transactions contemplated by this Agreement shall be
subject to the fulfillment at or prior to the Closing of the following
conditions, unless Purchaser shall waive such fulfillment in whole or in part
in writing:
(a) This Agreement and the transactions contemplated
hereby shall have received all approvals, consents, authorizations, and waivers
from governmental and other regulatory agencies and other third parties
(including lenders, holders of debt securities, and lessors) required by law or
contract to consummate this Agreement and required to keep all agreements and
licenses held by the Company in full force and effect after the Closing; and no
material adverse change in the business, operations and condition (financial or
otherwise) of the Company shall have occurred or will occur in the future as a
result of any requirement or condition made to or as a part of such approvals,
consents, authorizations and waivers.
(b) There shall not be in effect a restraining order, a
preliminary or permanent injunction or other order by any federal or state
authority which prohibits the consummation of this Agreement and no action or
proceeding shall have been instituted or remain pending seeking such relief or
seeking damages in respect of this Agreement or the consummation of the
transactions contemplated by the Agreement;
(c) Sellers shall have performed in all material respects
each of their agreements, covenants and obligations contained in this Agreement
and required to be performed on or prior to the Closing and shall have complied
with all material requirements, rules, and regulations of all regulatory
authorities having jurisdiction relating to the transactions contemplated
herein;
(d) The representations and warranties of Sellers set
forth in this Agreement shall be true in all material respects as of the date
of this Agreement and, except in such respects as do not materially and
adversely affect the business, condition (financial or otherwise), operations,
or prospects of the Company as of the Closing Date as if made as of such date;
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(e) Purchaser shall have received from Sellers a
certificate, dated the Closing Date, executed by Sellers, and an officer's
certificate, executed by a duly authorized officer of the Company (in such
capacity), dated the Closing Date, as to the satisfaction of the conditions in
subsections (c) and (d) of this Section 9.1 to the best knowledge of Sellers
where appropriate;
(f) Purchaser shall have received, on and as of the
Closing Date, an opinion of Counsel to Sellers substantially in the form of
opinion set forth in Exhibit E attached hereto and such other closing documents
and instruments as Purchaser shall reasonably request, in each case reasonably
satisfactory in form and substance to Counsel to Purchaser;
(g) Since the date of this Agreement, there shall not
have occurred any material adverse change in, or other event or condition of
any character which in any one case or in the aggregate has materially
adversely affected, or can be reasonably expected in any one case or in the
aggregate to materially adversely affect in the future, the condition
(financial or otherwise), assets, liability, results of operations, business or
prospects of the Company; including, without limitation, any of the following
which shall be considered a material adverse change, to- wit:
(i) The sale, assignment, transfer, termination or
cancellation of any of the management contracts listed in Schedule 4.13
or any material modification or amendment to any such contracts;
(ii) Any default under or breach of any material provision
of any of the management contracts listed in Schedule 4.13 whether such
default is by the Company or any other party thereto;
(iii) The termination of, or default under or breach of,
any contract or agreement between the Company and any medical director
of the mental health treatment programs or units operated by the
Company;
(iv) The termination of the employment of any of the
program directors of the mental health treatment units or programs
managed by the Company on the Effective Date;
(v) a casualty loss which is not covered by insurance in
excess of $10,000;
(vi) litigation or the assertion of a claim against the
Company which is reasonably expected not to have potential liability to
the Company, including costs and expenses of defense, in an amount more
than $10,000.00 (including attorneys' fees for defending such claim) in
excess of insurance coverage maintained by the Company which would be
applicable to such claim; provided, however, that, in the event that the
parties cannot mutually agree as to whether any such litigation or claim
is reasonably expected to have such potential liability to the Company,
then the parties shall seek the opinion of a mutually selected third
party qualified to make such assessment and the opinion of such third
party as to such potential liability shall be binding upon the parties
for the purposes hereof; and
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(h) At or prior to Closing, the Company shall have
received (and delivered copies thereof to Purchaser) duly executed resignation
letters from all directors and officers of the Company designated by Purchaser
pursuant to which such individuals resign as directors and officers of the
Company. Each such resignation shall be effective on or prior to the Closing
Date and shall acknowledge that there are no obligations, liabilities or
amounts due from the Company to such respective individuals except for accrued
salary and other benefits or otherwise as expressly set forth in this
Agreement.
(i) At the Closing, James A. Green, M.D. and any other
Seller that is a director or officer of the Company shall execute and deliver a
release of any and all claims of any kind against the Company in favor of
Purchaser and the Company in the form and substance satisfactory to Counsel to
Purchaser (the "Releases"). Such release shall be in the form of Exhibit F
attached hereto.
(j) On or prior to the Closing, the Company and Ramsay
Healthcare, Inc. shall have renewed and extended on terms and conditions
satisfactory to Purchaser in its sole discretion those two certain Management
Contracts relating to mental health treatment units and programs in hospitals
located in Mesa, Arizona and Nevada, Missouri listed on Schedule 4.13. In the
event that either or both of such contracts cannot be renewed to the
satisfaction of the Purchaser and Seller is unable to provide one or more
replacement contracts acceptable to Purchaser in its sole discretion prior to
Closing, then Purchaser shall have the right to (i) terminate the Agreement,
(ii) waive the condition to provide renewals or replacement contracts for the
Ramsay contracts without a reduction in the Purchase Price or (iii) propose a
reduction in the Purchase Price of not more than $300,000. If Purchaser
proposes a reduction in the Purchase Price of any amount due to the Ramsay
contracts not being renewed or replaced, the Sellers shall have the right to
either accept the proposed reduction in the Purchase Price or to terminate this
agreement on written notice to Purchaser. In the event that the Sellers accept
the proposed reduction in the Purchase Price, then the provisions of Section
11.7 of this Agreement shall apply and continue for the time period specified
in such Section. In the event of such termination by either the Sellers or
Purchaser, neither party shall have any further rights or obligations hereunder
except for confidentiality provisions of Section 7.4 and the no solicitation
provisions of Section 6.12 and 7.6 of this Agreement which provisions shall
continue for the time periods specified in such Sections.
(k) On or prior to the Closing, all unpaid subscriptions
for outstanding shares of capital stock of the Company set forth in Schedule
3.2 shall have been paid in full so that all outstanding shares of capital
stock of the Company shall be fully paid and nonassessable on the date of
Closing. The amount of all such subscriptions actually paid to the Company in
good funds shall increase the $5,100,000 amount for the purposes of determining
the Purchase Price as so specified in Section 2.2 of this Agreement.
(l) At the Closing, all the Sellers shall perform his or
her or its respective obligations of and actions to be taken by all the Sellers
at the Closing as described in Section 10.2 of this Agreement such that, at the
Closing, Purchaser will acquire not less than ninety-five percent (95%) of the
issued and outstanding capital stock of the Company determined
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on a fully converted basis with respect to all outstanding warrants, options,
convertible securities or other rights to acquire capital stock of the Company.
(m) At the Closing, the Sellers shall provide in a
written certificate a representation and warranty as to the Net Worth of the
Company on the date of Closing. For the purposes hereof, "Net Worth" shall be
defined and calculated in accordance with GAAP. Such representation and
warranty of the Sellers as to the Net Worth of the Company provided at the
Closing shall constitute a representation and warranty under Article 4 of this
Agreement for the purposes of Article 11 of this Agreement. In the event that
the Net Worth of the Company on the date of Closing is less than the Net Worth
of the Company reflected in the Company Balance Sheet (i.e. a negative Net
Worth of $686,419), then Purchaser shall have the right to terminate this
Agreement.
(n) The Sellers shall have delivered the Schedules to
this Agreement to Purchaser and Purchaser shall have accepted the Schedules as
delivered by the Sellers as contemplated by Section 1.2(b) of this Agreement.
In the event that the conditions to the obligations of the Purchaser set forth
in Sections 9.1(a), (b), (g), (j), (k), (m) or (n) above are not satisfied,
then the sole right of Purchaser shall be to terminate this Agreement and
Purchaser shall have no right to seek to recover damages or other relief from
Sellers as a result of such condition not being satisfied so long as such did
not result from an intentional or fraudulent act of the Sellers.
ARTICLE 10
CLOSING
10.1 Date of Closing. The Closing shall take place at the offices
of Counsel to Sellers in Knoxville, Tennessee, or at such other location as
Purchaser and Sellers may mutually agree, within ten (10) business days after
the date on which all third party consents necessary for the consummation of
the transactions contemplated by this Agreement, if any, are obtained and all
other conditions to Closing are satisfied but in no event later than April 30,
1997 unless extended by the mutual agreement of the Purchasers and the Sellers,
subject to earlier termination pursuant to the provisions of this Agreement.
In the event that the Closing does not timely occur as stated above, then a
party not in default may immediately terminate this Agreement upon written
notice to the other parties in accordance with Section 13.1 below.
10.2 Actions by Sellers. At the Closing:
(a) Stock. Each Seller shall deliver to Purchaser the
original certificates representing the Shares owned by such Seller duly
endorsed for transfer or with appropriate stock powers with respect thereto
duly endorsed in blank by such Seller.
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(b) Consulting/Release Agreements. James A. Greene, M.D.
shall execute and deliver the Greene Consulting Agreement and James A. Greene,
M.D. and any other Sellers that are a director or officer of the Company shall
execute and deliver the Releases.
(c) Post-Closing Escrow Agreement. James A. Greene shall
execute and deliver a Post-Closing Escrow Agreement (herein so called) in the
form of Exhibit G attached hereto and the Sellers shall deposit the sum of
$600,000 in the aggregate out of the Purchase Price paid to the Sellers at the
Closing with the escrow agent under the Post- Closing Escrow Agreement.
(d) Other Agreements. Perform or shall have performed
all of the covenants and agreements contained in this Agreement to be performed
or complied with by such Seller at or prior to the Closing hereunder.
10.3 Actions by Purchaser. At the Closing, Purchaser shall:
(a) Payment. Pay the Purchase Price to the Sellers by
certified or cashier's check mailed to the Seller at such Seller's respective
address.
(b) Consulting Agreement. Execute and deliver the
Greene Consulting Agreement.
(c) Post-Closing Escrow Agreement. Execute and deliver
the Post-Closing Escrow Agreement with the Sellers.
(d) Other Agreements. Perform or shall have performed
all of the covenants and agreements contained in this Agreement to be performed
or complied with by Purchaser at or prior to the Closing hereunder.
10.4 Post-Closing Escrow Account.
(a) Escrow Money. The Sellers expressly agree that the
total amount of Six Hundred Thousand Dollars ($600,000) shall be retained out
of the Purchase Price paid to the Sellers and such $600,000 shall be deposited
in an escrow account to be maintained pursuant to the Post-Closing Escrow
Agreement. The portion of such $600,000 to be withheld out of the Purchase
Price paid to each Seller shall be determined on a pro rata basis as to each
Seller based on the percentage of the total equity ownership of the Company
that the shares of capital stock of the Company owned by such Seller represents
of the aggregate total equity ownership of the Company that the shares of
capital stock of the Company owned by all Sellers. The funds in Post-Closing
Escrow Account shall be used solely for the satisfaction of the liabilities of
the Sellers as specified under Article 11 of this Agreement.
(b) Limited Power of Attorney. Each Seller, jointly and
severally, makes, constitutes and appoints James A. Greene, M.D., (referred to
herein as "Sellers Agent"), as agent and attorney-in-fact, with full power of
substitution, in his, her or its name, place and
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stead to (i) retain and engage an escrow or trust company and escrow agent or
trustee in connection with the Post- Closing Escrow Account, (ii) retain and
engage counsel and other professional consultants which, in the sole opinion of
Sellers Agent, are required in connection with the establishment, maintenance
and operation of the Post-Closing Escrow Account, or required to defend any
real, actual, threatened or pending claim, demand or action brought by
Purchaser or any other person in connection with the satisfaction of
liabilities of the Sellers under Article 11 of this Agreement ("Post-Closing
Claims"), (iii) pay all fees, costs and expenses incurred in association with
the establishment, management and operation of the Post-Closing Escrow Account,
(iv) pay all fees, costs, expenses, judgments, damages and awards incurred in
connection with any Post-Closing Claims, (v) make, execute, sign, acknowledge,
swear to, record and file on each Seller's behalf (a) any escrow or trust
instructions in connection with the establishment, management and operation of
the Post-Closing Escrow Account, (b) all instruments that effect an amendment
or modification of the Post- Closing Escrow Account instructions, (c) any
documents, instruments or filings required to explain, protect against, defend
or resolve any Post-Closing Claims, and (vi) take such other actions, execute
such instruments and incur and pay such fees, costs and expenses as are
necessary to effect the purpose and intent of this Section 10.4. Any
instructions delivered to the escrow agent may vary the terms and provisions of
this Section 10.4 as Sellers Agent reasonably determines necessary to meet any
requirements of the escrow agent or trustee, provided the purpose, intent and
effect of this Section 10.4 shall be at all times maintained.
(c) Additional Provisions of Limited Power of Attorney.
The foregoing limited power of attorney:
(i) is coupled with an interest and shall be irrevocable
and survive the death or incapacity of each Seller;
(ii) may be exercised either by signing separately as
attorney-in-fact for each Seller or, after listing all of the Sellers
executing an instrument, by a single signature of the person acting as
attorney-in- fact for all of them; and
(iii) shall survive the delivery of an assignment by a
Seller of the whole or any portion of a Seller's interest;
10.5 Funding of Certain Company Obligations. It is understood that
the Company will not have sufficient cash on the date of Closing to pay the
monetary obligations owed by the Company to James A. Greene, M.D. described in
Schedule 8.1(h). Purchaser covenants and agrees that, since such payments
constitute a deduction to the Purchase Price, it shall loan or otherwise
advance such funds to the Company on the date of Closing so that the Company
may satisfy the condition to the obligations of the Sellers set forth in
Section 8.1(h).
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ARTICLE 11
SURVIVAL OF REPRESENTATIONS
AND WARRANTIES; INDEMNITY; POST-CLOSING MATTERS
11.1 Representations and Warranties to Survive.
(a) Survival. All statements contained in any agreement,
certificate, instrument, schedule, or document delivered by or on behalf of any
of the parties pursuant to this Agreement and the transactions contemplated
hereby shall be deemed representations and warranties by the delivering party
hereunder. All representations, warranties, covenants and agreements made by
the parties each to the other in this Agreement shall be true at the Closing
and shall survive the consummation of this Agreement and the Closing hereunder
for a period of one year, ending at midnight on the first anniversary of the
Closing Date; provided, however, that if, prior to the expiration of such one
year period, a state of facts shall have become known which threatens to give
rise to a liability against which any party hereto would be entitled to
indemnification hereunder and the indemnified party shall have given notice of
such facts to the indemnifying party, then the rights of the indemnified party
to indemnification with respect to such liability shall continue until such
liability shall have been finally determined and disposed of (including
disposition by the expiration of the applicable statute of limitations with
respect to such liability); provided further, however, that if a claim for
indemnification is made pursuant to this Article 11, then such claim for
indemnification or any claim arising out of the wrongful failure to comply with
the provisions of this Article 11 shall survive until the expiration of the
applicable period of limitations with respect to such claim for
indemnification; and provided further, however, that such one year limitation
specified above shall not apply to the matters described in Section 11.4(d)
below. With respect to the representations and warranties of the parties, such
representations and warranties shall be true as of and at the date of the
Closing but nothing contained herein shall be deemed to require or imply that
the accuracy of such representations and warranties shall apply on a continuing
basis as to facts existing after the date of the Closing. Except to the extent
set forth in sub-paragraph (b) below, no investigation or examination made by
any party hereto shall constitute a waiver of any representation or warranty
and no representation or warranty shall be merged into the Closing hereunder.
(b) Waiver. Purchaser shall be deemed to have waived any
misrepresentation or breach of warranty by the Sellers or any failure to
fulfill any agreement or covenant of the Sellers to be performed on or prior to
the Closing of which the Purchaser had actual knowledge at or prior to the
Closing. For the purposes hereof, "actual knowledge of the Purchaser" shall
mean the actual knowledge of either James Ken Newman, President of Purchaser,
or James W. McAtee, Executive Vice President of Purchaser, of the specific
misrepresentation, breach of warranty or unfulfilled agreement or covenant.
11.2 Indemnity. Subject to the limitations set forth in Section
11.4 below,
(a) Sellers. Each Seller, jointly and severally (except
as to the representations and warranties contained in Article 3 which shall be
several and not joint), agrees to indemnify and hold harmless the Company,
Purchaser and the subsidiaries, shareholders, partners,
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directors, officers, employees and agents of Purchaser, from, against, and in
respect of, any loss, liability, claim, demand, or expense, including but not
limited to attorney, investigation and consultant fees and costs, and of any
other kind whatsoever arising out of or resulting from any of the following:
(i) Any misrepresentation, breach of warranty, or failure
to fulfill any agreement or covenant of the Sellers and the Company
under this Agreement or under any other agreement or document delivered
by the Sellers at Closing hereunder; and
(ii) Any and all actions, suits, proceedings, demands,
assessments, judgments, costs and legal and other expenses incident to
any of the foregoing.
(b) Purchaser. Purchaser shall indemnify and hold each
Seller harmless from, against, and in respect of, any loss, liability, claim,
demand, or expense, including but not limited to attorney's fees and costs, of
any kind whatsoever, arising out of or resulting from any of the following:
(i) Any misrepresentation, breach of warranty, or failure
to fulfill any agreement or covenant of Purchaser under this Agreement
or under any other agreement or document delivered by Purchaser to
Sellers at Closing hereunder; and
(ii) Any and all actions, suits, proceedings, demands,
assessments, judgments, costs, and legal and other expenses incident to
any of the foregoing.
11.3 Indemnity Procedures. In case any claim, demand or action
shall be brought by any third party including, without limitation, any
governmental authority, against a party entitled to indemnity under Section
11.2(a) or 11.2(b) above, such party shall promptly notify the other party or
parties, as the case may be, from whom indemnity is or may validly be sought in
writing and the indemnifying party or parties shall assume the defense thereof,
including the employment of counsel. In addition, in case a party hereto shall
become aware of any facts which might result in any such claim, demand or
action, such party shall promptly notify the other party or parties who would
be obligated to provide indemnity hereunder with respect to such claim, demand
or action, and such other party or parties shall have the right to take such
action as it or they may deem appropriate to resolve such matter. The
indemnified party or parties shall have the right to employ separate counsel
in any such action and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such indemnified party or
parties, unless the employment of such counsel has been specifically authorized
by the indemnifying party or parties. Any settlement of any action subject to
indemnity hereunder shall require the consent of the indemnified and the
indemnifying party which consent shall not be unreasonably withheld and shall
be given within five (5) days following the giving of notice thereof. The
indemnifying party or parties shall not be liable for any settlement of any
action effected without its or their consent, but if settled with the consent
of the indemnifying party or parties or if there be a final judgment for the
plaintiff in any such action, the indemnifying party or parties shall indemnify
and hold harmless the indemnified party from and against any loss or liability
by reason of such settlement or judgment. If requested by
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the indemnifying party, the indemnified party shall cooperate with the
indemnifying party and its counsel and use its best efforts in contesting any
such claim or, if appropriate, in making any counter-claim or cross-complaint
against the party asserting the claim, provided that the indemnifying party
will reimburse the indemnified party for reasonable expenses incurred in so
cooperating upon presentation of receipts or other evidence of such expense.
The indemnifying party and its representatives shall have full and complete
access during reasonable hours to all books, records and files of the
indemnified party expressly related to the defense of any claim for
indemnification undertaken by the indemnifying party pursuant to this Article
11, or for any other purpose in connection therewith; provided that the
indemnifying party shall safeguard and maintain the confidentiality of all such
books, records and files.
11.4 Limitations on Indemnification.
(a) General Threshold. Neither the Sellers nor the
Purchaser shall be obligated to indemnify the other party except to the extent
that the cumulative amount of all indemnifiable losses exceeds Ten Thousand
Dollars ($10,000.00) (the "Threshold"), which excess amount shall be
recoverable in accordance with the terms hereof; provided, however, that such
limitation set forth in this Section 11.4(a) shall not apply to the matters
described in Section 11.4(d) and provided further, however, that such
limitation set forth in this Section 11.4(a) shall not apply to matters arising
out of a breach of a representation or warranty of a Seller contained in
Article 3 of this Agreement.
(b) Specific Limitations. The following specific
limitations shall apply to the obligations of the Sellers to indemnify the
Purchaser, to-wit:
(i) The obligations of all Sellers under this Article 11
with respect to the representations and warranties of a Seller in
Article 3 of this Agreement shall be limited to the Purchase Price paid
to such Seller for the shares owned by such Seller paid by Purchaser;
(ii) The obligations of each Seller, other than James A.
Greene, M.D., under this Article 11 with respect to the representations
and warranties of the Sellers under Article 4 of this Agreement or the
failure to perform any agreement or covenant of the Sellers under
Article 6 of this Agreement shall be limited to the portion of the
Purchase Price paid to such Seller deposited into the Post-Closing
Escrow Account by such Seller.
(iii) The obligations of James A. Greene, M.D. under this
Article 11 with respect to the representations and warranties of the
Sellers contained in Article 4 of this Agreement or the failure to
perform any agreement or covenant of the Sellers under Article 6 of this
Agreement shall be limited to the funds deposited in the Post-Closing
Escrow Account by James A. Greene, M.D. plus in the case of all such
Article 4 representations and warranties except and excluding
representations and warranties contained in Section 4.13(c), $400,000;
provided, however, that in the event that the funds deposited in the
Post-Closing Escrow Account are used to satisfy liabilities of the
Sellers arising out of the representations and warranties of the Sellers
under Article 4, other than
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the representations and warranties contained in Section 4.13(c) of this
Agreement, then the obligations of James A. Greene, M.D. under this
Article 11 with respect to the representations and warranties of the
Sellers contained in Article 4.13(c) of this Agreement shall be limited
to the funds deposited in the Post-Closing Escrow Account by James A.
Greene, M.D. plus an amount equal to the funds deposited in the
Post-Closing Escrow Account by all Sellers (including James A. Greene,
M.D.) used to satisfy the obligation of the Sellers under this Article
11 with respect to the representation and warranties of the Sellers
contained in Article 4, other than Section 4.13(c), up to a maximum of
$400,000;
(iv) In the event any liability arises under this Article
11 for which Purchaser is entitled to indemnification, then Purchaser
shall first seek and apply the funds deposited in the Post-Closing
Escrow Account before seeking recourse directly against James A. Greene,
M.D.; provided; however, that in the event that such liability arises
out of a breach of a representation or warranty under Article 3, then
Purchaser shall only have recourse to the funds deposited in the
Post-Closing Escrow Account by such Seller but shall not be limited to
only such funds in its recourse against such Seller; and
(v) With respect to the breach of a representation and
warranty contained in Article 4.13(c) of this Agreement, the Sellers
shall not be obligated to indemnify the Purchaser unless and until the
Company becomes liable for a payment arising out of (1) a final court
judgment from a legal proceeding, (2) a settlement of a legal proceeding
to which the Sellers have agreed, or (3) a settlement of threatened
legal proceedings to which the Sellers have agreed.
(c) Time Limits for Claims. No claim for indemnification
may be made by any indemnified party in respect of indemnifiable losses unless
written notice thereof shall have been received by the indemnifying party on or
prior to one year after the date hereof; provided, however, that the one-year
limitation set forth in Section 11.1 and this Section 11.4(c) shall not apply
to the matters described in Section 11.4(d) as to which the indemnification
obligations hereunder shall expire six (6) months after the termination of the
applicable statute of limitations relating to the subject matter covered by
such provisions; and provided further, however, that in each case if, prior to
the applicable date of expiration, a specific state of facts shall have become
known which is reasonably likely to constitute or give rise to any
indemnifiable loss as to which indemnity may be payable and the indemnified
party shall have given notice of such facts to the indemnifying party and made
a claim for indemnification within such one-year period, then the right to
indemnification with respect thereto shall remain in effect until such matter
shall have been finally determined and disposed of and any indemnification due
in respect thereof shall have been paid.
(d) Certain Matters. The following are the matters
referred to in Section 11.4(a) and Section 11.4(c):
(i) Losses arising from fraud or an intentional
misrepresentation on the part of any Seller; and
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(ii) Losses arising from the intentional breach of any
covenant or agreement by a Seller contained in this Agreement.
11.5 Remedies; Default; Notice and Cure. In the event of a breach
of this Agreement prior to the Closing, the non-breaching party shall have all
rights and remedies available at law, in equity or under the terms of the
Agreement. If the Closing occurs, indemnification pursuant to this Article 11
is the sole and exclusive remedy of the parties after the Closing for matters
arising out of the representations, warranties, covenants and agreements of the
Sellers and the Purchaser set forth in this Agreement (without limiting the
rights of the parties under any other agreement), except as otherwise expressly
provided in this Agreement. No party shall be deemed in breach of its
obligations hereunder unless it has received written notice from the other
party of noncompliance with a term or provision of this Agreement and has
failed to cure such noncompliance within ten (10) days after receipt of such
notice.
11.6 Severance Benefits. On or prior to the Closing, Purchaser and
the Company shall determine which corporate level employees of the Company will
be terminated on the Closing Date. Purchaser agrees that, as to all such
employees, there shall be a fund established by the Company in an aggregate
amount equal to the total of the amount of six months base salary on the
Effective Date for each such employee up to a maximum aggregate amount of
$225,000 and that, from such fund, severance benefits in amounts determined by
James A. Greene, M.D. up to a maximum amount equal to six months base salary
for the employee shall be paid by the Company to such employees; provided,
however, that each such employee shall receive a severance payment equal to not
less than one month base salary. Severance pay shall be in addition to all
accrued but unused vacation leave and any other vested accrued benefits due as
a result of termination to such employee.
11.7 Certain Post-Closing Management Contracts. In the event that
the Purchase Price to the Sellers is determined by taking into account the
$300,000 reduction as contemplated by Section 9.1(j), then the Purchaser
further covenants and agrees that, in the event the Company or the Purchaser or
any subsidiary of the Purchaser enters into a management contract relating to
the operation of a mental health treatment unit and programs at any of the
hospitals listed on Schedule 11.7 after the Closing but on or before August 17,
1997, then Purchaser agrees that, as soon as reasonably practicable after the
execution of such management contract but in no event more than thirty (30)
days thereafter, it shall pay to the Sellers an amount equal to the amount
which the Sellers would have been entitled to receive at the Closing if such
$300,000 reduction had not been made in the calculation of the Purchase Price.
No payment shall be due and the provisions of this Section 11.7 shall not apply
in the event such $300,000 reduction is not made at the Closing. Additionally,
no payment shall be due and the provisions of this Section 11.7 shall not apply
with respect to any such management contract executed after August 17, 1997 or
with respect to any other management contract with a hospital not listed in
Schedule 11.7. In the event Purchaser enters into more than one management
contract with any of the hospitals listed on Schedule 11.7, Purchaser shall
nevertheless not be required to make any further payments to the Sellers beyond
the payment specified above applicable in the event any one management contract
is executed with any of such hospitals.
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ARTICLE 12
NON-COMPETITION
12.1 Covenant Not to Compete; Non-Solicitation. For and in
consideration of the purchase by the Purchaser of the Shares pursuant to this
Agreement, and the payments payable by the Purchaser pursuant to this
Agreement, James A. Greene, M.D., the principal shareholder and chief
executive officer of the Company, covenants and agrees that he shall not,
directly or indirectly, as an employer, consultant, creditor, investor, owner,
agent, principal, partner, shareholder, or through any other kind of ownership
(other than ownership of securities of any publicly held entity in which
Greene, directly or indirectly, in the aggregate beneficially owns less than
two percent (2%) of any class of outstanding securities), or in any other
representative or individual capacity, do any of the following:
(i) for a period until the later of the expiration of two
(2) years from the date of this Agreement or one (1) year after the
termination date of the Greene Consulting Agreement, engage in the
operation or management of a mental health treatment unit or program
operated in or in association with a general acute care hospital (the
"Business") in the continental United States (the "Restricted Area");
(ii) for a period until the later of the expiration of two
(2) years from the date of this Agreement or one (1) year after the
termination date of the Greene Consulting Agreement, engage in any
business which calls upon, solicits, diverts or takes away any customer
or customers of Purchaser or the Company in the Restricted Area for the
purpose of selling or attempting to sell to any of said customers any
products or services similar to any products or services heretofore sold
or provided to any of such customers by Purchaser or the Company; and
(iii) for a period until the later of the expiration of six
(6) months from the date of this Agreement or six (6) months after the
termination date of the Greene Consulting Agreement, engage in any
business which solicits any present or future employee of Purchaser or
the Company or initiates discussions with any such employee regarding
his or her termination or resignation from employment with the Purchaser
or the Company, so that such employee may accept employment with, or
engagement as a partner, investor, shareholder, employee, agent or
consultant with Greene, directly or indirectly, as specified above;
provided, however, that Greene shall not be prohibited by this Agreement
from employing or soliciting the employment of Diane R. Burkett or the
employment of any other employee that the Purchaser or the Company
terminates so long as such employment or solicitation of employment
occurs after the date of such termination.
12.2 Non-Disclosure. Greene further covenants and agrees that all
information concerning the Company, including without limitation (i)
information regarding prices or premiums charged for products and services,
(ii) the assets, liabilities and financial condition of the Company, (iii) the
names and identities of customers and analyses of the amount and types of
products and services purchased by each such customer, (iv) the suppliers
utilized by the Company and its subsidiaries and the financial arrangements
with such providers, and (v) the
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<PAGE> 45
amount of compensation to employees, constitute trade secrets and confidential,
proprietary business information which is the property of the Company and that,
unless otherwise required by law, from and after the date of this Agreement:
(a) Greene shall use his best efforts and exercise utmost
diligence to protect and safeguard all of such trade secrets and
confidential, proprietary information;
(b) Greene shall not, directly or indirectly, use, sell,
license, publish, disclose or otherwise transfer or make available to
others any of such trade secrets or confidential, proprietary
information;
(c) Without the prior written consent of the Company,
Greene shall not, directly or indirectly, disclose any of such trade
secrets or confidential, proprietary information; and
(d) Greene shall not, directly or indirectly, use for his
own benefit or for the benefit of another, any of such trade secrets or
confidential, proprietary information.
It is expressly understood, however, that the foregoing shall not apply to any
information that was generally available to the public on a non-confidential
basis prior to the date of this Agreement or was or becomes generally available
to the public on a non-confidential basis from a third party who is not bound
to keep such information confidential.
12.3 Nondisparagement. For a period until the later of the
expiration of two (2) years and after the date of this Agreement or one (1)
year after the termination date of the Greene Consulting Agreement, Greene
further agrees that he shall not make or publish any statement, written or
oral, disparaging the reputation of Purchaser or the Company or their
respective subsidiaries, executive officers of the Purchaser or any of the
business services or products of the Purchaser or the Company or solicit or
encourage any hospital having a management contract with the Purchaser, its
subsidiaries or the Company to terminate such management contract.
12.4 Reasonableness; Reformation. Greene acknowledges and agrees
that (i) the provisions of this Article 12 are ancillary to the transaction
pursuant to which Greene sold and the Purchaser acquired the Shares, (ii) the
provisions of this Agreement contain reasonable limitations as to time,
geographical area and scope of activities to be restrained and do not impose a
greater restraint than is necessary to protect goodwill and other business
interests of the Company and its subsidiaries, (iii) if any portion of the
covenants and agreements set forth in this Agreement are held to be invalid,
unreasonable, arbitrary or against public policy, then such portion of such
covenants shall be considered divisible as to time, scope of activities
covered, and geographical area, and (iv) if any court of competent jurisdiction
determines the specified time period, scope of activities covered, or the
specified geographical area applicable to any provision of this Agreement to be
invalid, unreasonable, arbitrary or against public policy, a lesser time
period, scope of activities covered, and/or geographical area which is
determined to be reasonable, non-arbitrary and not against public policy may be
enforced against Greene.
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<PAGE> 46
12.5 Remedies for Breach. If Greene has failed to satisfactorily
cure any breach or threatened breach of any covenant or agreement contained
herein within ten (10) days after written notice of such breach or threatened
breach given by the Purchaser to Greene, any one or more of the following
remedies, as selected by the Purchaser in its sole discretion, shall be
available to the Purchaser in the event of a breach of this Agreement by Greene
hereunder:
(a) Specific Performance. In the event of a breach or
threatened breach of any covenant or agreement of Greene in this
Agreement, remedies at law will not adequately compensate the
Purchaser for its injuries incurred as a result thereof.
Accordingly, injunctive and/or equitable relief shall be available to
the Purchaser to specifically enforce this Agreement and prevent such
breach and any continued breach of any covenant and agreement herein.
(b) Suit for Damages. In addition to the remedies stated
in Section 12.5(a) above, in the event of any breach of any covenant
or agreement of Greene herein, Purchaser may sue for damages arising
out of such breach and otherwise enforce this Agreement and obtain all
other remedies available to the Seller under applicable law.
ARTICLE 13
TERMINATION; WAIVER
13.1 Termination. This Agreement may be terminated, and the
transaction may be abandoned, at any time prior to the Closing, as follows and
in no other manner:
(a) Mutual Consent. By the mutual consent of Purchaser
and the Sellers;
(b) By Purchaser or Sellers: Condition Precedent. By
Purchaser or Sellers, upon written notice to the other, if the conditions to
the obligations of such canceling party or parties to consummate the
transaction, in the case of the Sellers, as provided in Article 8 or, in the
case of Purchaser, as provided in Article 9, were not, or cannot reasonably be,
satisfied on or before April 30, 1997 unless the failure of the condition is
the result of the material breach of this Agreement by the party seeking to
terminate.
(c) By Purchaser or Sellers: Representations, Warranties
and Covenants. By Purchaser, on the one hand, or Sellers, on the other, if (i)
any representation or warranty of the other hereunder shall not have been true
and correct in all material respects at the time at which made, or (ii) default
shall be made by the other in the due and timely observance or performance of
any of its covenants and agreements herein contained, but in such event only if
such representation or warranty cannot be made true and correct or such default
cannot be cured on or prior to the earlier of (x) sixty (60) days after the
non-defaulting or non-breaching party notifies the other in writing of such
default or breach, specifying the nature thereof or (y) April 30, 1997, unless
such date is extended by mutual agreement of Purchaser and Sellers.
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<PAGE> 47
No termination of this Agreement shall affect the liability of any party hereto
for any breach hereof arising at, prior to or out of such termination. Any
public announcement of the termination of this Agreement shall be made only by
means of a press release issued jointly by Purchaser and the Company.
13.2 Waiver. At any time at or prior to the Closing, Purchaser, on
the one hand, or Sellers, on the other, may (i) extend the time for the
performance of any of the obligations or other acts of the other party hereto,
(ii) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto, or (iii) waive compliance
with any of the agreements or conditions contained herein. Any agreement on
the part of a party hereto to any such extension or waiver shall be valid only
if set forth in an instrument in writing signed on behalf of such party.
ARTICLE 14
CERTAIN DEFINED TERMS
14.1 Affiliate. When used with respect to a person, an "Affiliate"
of such person is a person controlling, controlled by, or under common control
with such person.
14.2 Agreement. This Stock Purchase Agreement, including all
Schedules and Exhibits hereto, and all other documents specifically referred to
in this Agreement that have been or, are to be delivered by a party to this
Agreement to another such party in connection with this Agreement, and
including all duly adopted amendments, modifications, and supplements to or of
this Agreement and such Schedules, Exhibits, and other documents.
14.3 Closing. The completion of the transaction to take place as
described in Article 10.
14.4 Closing Date. The date on which the Closing actually occurs.
14.5 Closing Time. The time at which the Closing actually occurs.
All events that are to occur at the Closing Time shall, for all purposes, be
deemed to occur simultaneously, except to the extent, if at all, that a
specific order of occurrence is otherwise described.
14.6 Code. The Internal Revenue Code of 1986, as amended and in
effect on the date of this Agreement.
14.7 Control. Generally, the power to direct the management or
affairs of an entity.
14.8 Counsel to Sellers. Baker, Donaldson, Bearman & Caldwell,
2200 Riverview Tower, 900 South Gay Street, Knoxville, Tennessee 37901,
telephone number (423) 549-7000, facsimile number (423) 525-8569.
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<PAGE> 48
14.9 Counsel to Purchaser. Strasburger & Price, L.L.P., 901 Main
Street, Suite 4300, Dallas, Texas 75202, telephone number (214) 651-4300,
facsimile number (214) 651-4330.
14.10 ERISA. The Employee Retirement Income Security Act of 1974,
as amended and in effect on the date of this Agreement.
14.11 GAAP. Generally accepted accounting principles, as in effect
on the date of any statement, report, or determination that purports to be, or
is required to be, prepared or made in accordance with GAAP. All references
herein to financial statements prepared in accordance with GAAP shall mean in
accordance with GAAP consistently applied throughout the periods to which
reference is made.
14.12 Knowledge. As used in this Agreement, the term "knowledge" or
the phrase "to the knowledge of" or "known to" shall mean the existence of
actual or constructive knowledge by such party; provided, however, that no
party shall be deemed to have been performed, or be obligated to perform, an
independent investigation or inquiry with respect to the matter to which such
knowledge pertains.
14.13 Liabilities. At any point in time (the "Determination Time"),
the obligations of a person or entity, whether known or unknown, accrued,
absolute or contingent, or recorded on its books or not, arising or resulting
in any way from facts, events agreement, obligations, or occurrences that
existed or transpired at a prior time, or resulted from the passage of time to
the Determination Time, but not including obligations accruing or payable after
the Determination Time to the extent (but only to the extent) that such
obligations (i) arise under previously existing agreements for services,
benefits, or other considerations, and (ii) accrue or become payable with
respect to services, benefits or other considerations received by the person or
entity after the Determination Time.
14.14 Multiemployer Plan. A "multiemployer plan," as defined in
ERISA Section 3(37) or Section 414(f) of the Code, or, in either case,
successor provisions to such provisions adopted by amendments to ERISA or the
Code, as the case may be, and including, in each case, other provisions of
ERISA, of the Code, or of other law, and regulations adopted under ERISA or the
Code or such other law, modifying, amending, interpreting, or otherwise
affecting the application of such provisions, either in general or as applied
to the nature or circumstances of a particular entity that is a party to, or is
affected by or is involved in, the Agreement and with respect to which entity
the use of the term in this Agreement, or in particular location in this
Agreement, is relevant.
14.15 Payables. Liabilities of a party arising from the borrowing
of money or the incurring of obligations for merchandise, goods or services
purchased appearing as liabilities on the books of the Company or any
Subsidiary, or customarily required to be reflected as liabilities in the
balance sheets of the Company or any Subsidiary prepared in accordance with
GAAP, indicating monies owed by the Company or such Subsidiary.
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<PAGE> 49
14.16 PBGC. The Pension Benefit Guaranty Corporation.
14.17 Pension Plan. A "pension plan" or "employee pension benefit
plan," as defined in Section 3(2) of ERISA or successor provisions to such
provision adopted by amendments to ERISA and including other provisions of
ERISA or of other law, and regulations adopted under ERISA or such other law,
modifying, amending, interpreting or otherwise affecting the application of
such provisions, either in general or as applied to the nature or circumstances
of a particular entity that is a party to, or is affected by or is involved in,
the Agreement and with respect to which entity the use of the term in this
Agreement, or in the particular location in this Agreement, is relevant. A
reference to a Pension Plan shall include the trust, if any, forming a part
thereof.
14.18 Receivables. Accounts receivable, notes receivable, and other
obligations appearing as assets on the books of the Company or any Subsidiary,
or customarily required to be reflected as assets in balance sheets of the
Company or any Subsidiary prepared in accordance with GAAP, indicating moneys
owed to the Company or such Subsidiary.
14.19 Welfare Plan. A "welfare plan" or an "employee welfare
benefit plan," as defined in Section 3(1) of ERISA or successor provisions to
such provision adopted by amendments to ERISA and including other provisions of
ERISA or of other law, and regulations adopted under ERISA or such other law,
modifying, amending, interpreting or otherwise affecting the application of
such provision, either in general or as applied to the nature or circumstances
of a particular entity that is a party to, or is affected by or is involved in,
the Agreement and with respect to which entity the use of the term in this
Agreement, or in the particular location in this Agreement, is relevant.
ARTICLE 15
MISCELLANEOUS
15.1 Further Instruments. The parties hereto agree to execute and
deliver such instruments and take such other action as shall be reasonably
necessary, or as shall be reasonably requested by any other party, in order to
carry out the transactions, agreements and covenants contemplated in this
Agreement at or prior to the Closing Date.
15.2 Notices. Any notices, claims or demands which any party is
required or may desire to give to another under or in conjunction with this
Agreement shall be in writing, and shall be given by addressing the same to
such other party(ies) at the address set forth below, and by (i) depositing the
same so addressed, postage prepaid, first class, certified or registered, in
the United States mail (herein referred to as "Mailing"), (ii) overnight
delivery by a nationally recognized overnight courier service (e.g. UPS,
Federal Express), (iii) delivering the same personally to such other
party(ies), or (iv) transmitting by facsimile and Mailing the original. Any
notice shall be deemed to have been given five (5) U.S. Post Office delivery
days following the date of Mailing; one day after timely delivery to an
overnight courier; if by personal
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<PAGE> 50
delivery, upon such delivery; or if by facsimile, the day of transmission if
made within customary business hours, or if not transmitted within customary
business hours, the following business day.
(a) If to Sellers:
To the respective address of such Seller set forth on
the signature page hereto executed by such Seller
With a copy to Counsel to Sellers, Attention: David
E. Fielder.
(b) If to Purchaser:
Horizon Mental Health Management, Inc.
1500 Waters Ridge Drive
Lewisville, Texas 75057
Attn: James Ken Newman, President
Facsimile: (972) 420-8282
With a copy to Counsel to Purchaser, Attention:
David K. Meyercord.
Any party may change the address or facsimile telephone number for notices to
be sent to it by written notice delivered pursuant to the terms of this Section
15.2.
15.3 Entire Agreement; Amendments. This Agreement and the
documents to be delivered at Closing hereunder set forth the entire
understanding of the parties and supersede all prior agreements or
understandings, whether written or oral, with respect to the subject matter
hereof. This Agreement may be amended, modified or supplemented only by a
written agreement executed by Purchaser and Sellers owning a majority of the
shares of capital stock of the Company owned by all the Sellers. It is
expressly understood that Sellers owning a majority of the shares of capital
stock of the Company owned by all the Sellers may amend or modify this
Agreement, in any respect, including, without limitation, changing the purchase
price of the shares so long as any such amendment applies equally to all the
Sellers.
15.4 Binding Effect/Assignability. This Agreement shall extend to
and be binding upon and inure to the benefit of the parties hereto, their
respective heirs, legal representatives, successors and assigns. Purchaser
shall have the right at any time to assign this Agreement to any affiliate of
Purchaser without the necessity of seeking the consent of the Sellers;
provided, however, that Purchaser shall not be relieved of any obligations as a
result of such assignment and that, in addition to Purchaser remaining liable,
any such assignee shall assume and become liable for any and all of Purchaser's
obligations under this Agreement. None of the Sellers shall be entitled to
assign any of their respective rights or obligations under this Agreement;
provided, however, that the rights and obligations of a Seller may be assigned
by operation of law or may be assigned to an individual retirement account,
pension plan, trust or other entity under the control of such Seller but any
such assignment shall not relieve or release such Seller of any
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<PAGE> 51
obligations hereunder as a result of such assignment and that, in addition to
such Seller remaining liable, any such assignee shall assume and become liable
for any and all of such Seller's obligations under this Agreement. In
connection with any such assignment, a Seller may transfer all or any portion
of the Shares owned by the Seller and thereby effect an assignment on the basis
specified above.
15.5 Exhibits/Schedules. All Exhibits and Schedules referenced in
this Agreement are incorporated herein by reference and shall constitute a part
of this Agreement.
15.6 Invalid Provisions. If any provision of this Agreement is
held to be illegal, invalid or unenforceable under present or future laws
effective during the term hereof, such provisions shall be fully severable and
this Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision had never comprised a part hereof with the remaining
provisions remaining in full force and effect and not affected by the illegal,
invalid or unenforceable provision or by severance herefrom. Furthermore, in
lieu of such illegal, invalid or unenforceable provision there shall be added
automatically as part of this Agreement a provision similar in terms to such
illegal, invalid, or unenforceable provision as may be possible and still be
legal, valid and enforceable.
15.7 Headings/Captions. The captions to sections and subsections
of this Agreement have been inserted solely for convenience and reference, and
shall not control or affect the meaning or construction of any of the
provisions of this Agreement.
15.8 Waiver; Remedies. Waiver by any party hereto of any breach of
or exercise of any rights under this Agreement shall not be deemed to be a
waiver of similar or other breaches or rights or a future breach of the same
duty. The failure of a party to take any action by reason of any such breach
or to exercise any such right shall not deprive any party of the right to take
any action at any time while such breach or condition giving rise to such right
continues. Except as expressly limited by this Agreement, the parties shall
have all remedies permitted to them by this Agreement or law, and all such
remedies shall be cumulative.
15.9 Attorney's Fees and Costs. In the event of a breach by any
party to this Agreement and commencement of a subsequent legal action in a
court of law or forum of arbitration, or in the event legal counsel is
consulted in the event of any such breach or in anticipation of any such
prospective legal action, the prevailing party in any such dispute shall be
entitled to reimbursement of reasonable attorney's fees and court costs,
including, but not limited to, the costs of expert witnesses, transportation,
lodging and meal costs of the parties and witnesses, costs of transcript
preparation and other reasonable and necessary direct and incidental costs of
such dispute.
15.10 Time. Time is of the essence under this Agreement.
15.11 Governing Law. This Agreement shall be construed under and
governed by the internal laws, and not the law of conflicts, of the State of
Tennessee.
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15.12 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but which together
shall constitute one and the same agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 53
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date set forth above.
PURCHASER: SELLERS:
HORIZON MENTAL HEALTH
MANAGEMENT, INC. /s/ James A. Greene, M.D.
---------------------------
James A. Greene, M.D.
By:/s/ James W. McAtee Address: 1900 N. Winston Rd., Suite 500
- ------------------------------- Knoxville, TN 37919
James W. McAtee,
Executive Vice President
/s/ Diane R. Burkett
----------------------------
Diane R. Burkett
Address: 605 Plainfield Rd.
COMPANY: Knoxville, TN 37923
Geriatric Medical Care, Inc.
/s/ E. William Linam
By: /s/ James A. Greene, M.D. ----------------------------
-------------------------- E. William Linam
Its: CEO Address: 1310 Park Glen Rd.
Address: 1900 N. Winston Rd., Knoxville, TN 37919
Suite 500
Knoxville, TN 37919
THE CENTER FOR HEALTH & CREATIVE AGING,
P.C. PROFIT SHARING PLAN
By:/s/ James A. Greene, M.D., Trustee
----------------------------------
Address: 1900 N. Winston Rd.,
Suite 500
Knoxville, TN 37919
47
<PAGE> 54
FIRST AMENDMENT TO
STOCK PURCHASE AGREEMENT
This First Amendment to Stock Purchase Agreement (the "First
Amendment") is made on March 14, 1997 by and between Horizon Mental Health
Management, Inc. ("Purchaser"), James A. Greene, M.D. ("Greene") and Geriatric
Medical Care, Inc. ("the "Company").
WHEREAS, the Purchaser, Greene and other shareholders of the Company,
and the Company entered into that certain Stock Purchase Agreement (the "Stock
Purchase Agreement') dated as of February 24, 1997 relating to the sales of
shares of capital stock of the Company; and
WHEREAS, the Stock Purchase Agreement may be amended by an agreement
in writing between the Purchaser, the Company and Sellers (as such term is
defined in the Stock Purchase Agreement) owning a majority of the shares of
capital stock of the Company owned by all the Sellers that are parties to the
Stock Purchase Agreement, so long as such amendment applies equally to all the
Sellers; and
WHEREAS, Greene owns a majority of the outstanding shares of capital
stock of the Company; and
WHEREAS, the parties desire to amend the Stock Purchase Agreement as
hereinafter set forth and such amendment shall apply equally to all the
Sellers;
NOW, THEREFORE, in consideration of the premises and mutual terms and
conditions herein contained, the parties hereby agree as follows:
1. Effective Time. The parties acknowledge that, although the
Closing under the Stock Purchase Agreement is being held on March 14, 1997, the
effective time of the transaction shall be as of 12:01 a.m. March 15, 1997.
2. Exhibit A to Stock Purchase Agreement. The parties hereby
agree that Exhibit A to the Stock Purchase Agreement is hereby amended in its
entirety and that Exhibit A attached to this First Amendment shall be and
hereby is substituted as the Exhibit A to the Stock Purchase Agreement in all
respects.
3. Disputed Instruments. The parties hereby agreed, in order to
resolve all issues relating to the disputed instruments described in Section
2.6 of the Stock Purchase Agreement, as follows:
(a) The exercise price of the Ramsay Warrant and the
outstanding principal balances of the Convertible Notes have been included as
additional amounts in determining the Purchase Price pursuant to Section 2.2 of
the Stock Purchase Agreement.
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<PAGE> 55
(b) In no event shall the Sellers be entitled to receive
or be paid all or any portion of the Purchase Price attributable to the Ramsay
Warrant which otherwise would have been paid to Sellers if the Ramsay Warrant
had not been outstanding on the date of Closing whether pursuant to Section 2.6
of the Stock Purchase Agreement or any other provision thereof.
(c) Sellers have acknowledged and agreed that the holders
of the Convertible Notes have retained the right to convert the Convertible
Notes. Sellers shall have no right to all or any portion of the Purchase Price
attributable to the Convertible Notes which otherwise would have been paid to
Sellers if the holders of the Convertible Notes had not retained the right to
convert such Convertible Notes. Instead, the holders of the Convertible Notes
shall have the right to participate as a Seller under the Stock Purchase
Agreement upon exercising such right of conversion.
4. Payment of Purchase Price. The parties have agreed that
Purchaser shall pay the Purchase Price due to Sellers at the closing by wire
transfer to the trust account of Counsel to the Sellers. Counsel to the
Sellers shall distribute to the Sellers by check their respective portions of
the Purchase Price. Purchaser shall have no obligation or liability for the
distribution of such proceeds to the Sellers. Purchaser agrees to advance to
such trust account the full portions of the Purchase Price attributable to all
the Convertible Notes even though all the holders thereof have not exercised
the right to convert on prior to the Closing. The parties agreed that such
holders may exercise such right to convert after the date of Closing and
participate as a Seller under the Stock Purchase Agreement. However, such
holders shall not be paid their respective portion of the Purchase Price until
such right to convert has been properly exercised and, if any holder does not
exercise such right to convert and instead the principal amount of the
Convertible Note is paid to such Seller, then the portion of the Purchase Price
attributable to such Convertible Note shall be returned by Counsel to the
Seller to Purchaser. A properly exercised Convertible Note shall include a
written election to convert, a duly endorsed original Convertible Note and an
executed Signature Page and Joinder Agreement. Upon receipt of the foregoing
documents, Counsel for the Sellers shall have the authority to make payment to
the converting holder of the Convertible Notes without further authorization by
either Sellers, the Company or Purchaser. Upon such payment to the converting
holders of the Convertible Notes, the Counsel for Sellers shall promptly send
to Purchaser the originals of the election to convert, the endorsed Convertible
Note and the executed Signature Page and Joinder Agreement.
In the event that the provisions of Section 11.7 of the Stock Purchase
Agreement are satisfied by the execution of a qualifying management agreement,
the Purchaser shall be obligated to pay $270,000 to the Seller which payment
shall be made within ten (10) days after execution of the management agreement.
Payment shall be made by wire transfer to the trust account of Counsel to the
Sellers which shall distribute such additional payment to the Sellers on a pro
rata basis.
5. Post-Closing Escrow. Purchaser and Sellers have agreed that
(a) in consideration of the waiver of the Sellers to any claim to the portion
of the Purchase Price attributable to the Ramsay Warrant (even if the Ramsay
Warrant is subsequently determined not to be outstanding
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<PAGE> 56
or otherwise exercisable), the amount of the Post-Closing Escrow Account shall
be reduced to $540,000 and (b) in consideration of the reduction in the Net
Worth of the Company on the date of Closing, the amount of $60,000 shall not be
deposited in the Post-Closing Escrow Account, but shall be paid to the Company
for working capital purposes. As such, the $540,000 escrow funds shall be paid
by Purchaser in the amount of $480,000 to the escrow account and $60,000 to the
Company, as to which $60,000 neither Purchaser nor the Company shall have any
obligation or liability of any kind under any circumstances to repay or refund
such amount to Sellers. In consideration of such agreement by the Sellers,
Purchaser has waived satisfaction of the condition precedent to its obligations
under Section 9.1(m) of the Stock Purchase Agreement.
6. Non-Competition. For the purposes of clarifying Section 12.1
of the Stock Purchase Agreement, Purchaser expressly agrees that (a) Greene may
solicit the employment of and employ Diane R. Burkett at any time, whether or
not employed by Purchaser at such time and (b) Greene may continue his
ownership of The Center for Health and Creative Aging, P.C. provided that such
professional corporation only continue to engage in the business activity in
which it is currently engaged and expressly does engage in the management of
mental health treatment units or program for general acute care or specialty
hospitals.
7. Except as modified by this First Amendment, the provisions of
the Stock Purchase Agreement that are not inconsistent with the provisions of
this First Amendment shall remain in full force and effect in accordance with
the terms thereof. As amended by this First Amendment, the Stock Purchase
Agreement is hereby ratified and confirmed in all respects.
8. This First Amendment shall extend to and be binding upon and
inure to the benefit of the parties hereto, their respective heirs,
administrators, executors, successors and assigns.
9. This First Amendment may be executed in two or more
counterparts, each of which shall be deemed an original, but which together
shall constitute one and the same agreement.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
3
<PAGE> 57
IN WITNESS WHEREOF, the parties have executed this First Amendment to
the Stock Purchase Agreement as of the day and year first written above.
PURCHASER: GREENE:
HORIZON MENTAL HEALTH
MANAGEMENT, INC. /s/ James A. Greene, M.D.
--------------------------
James A. Greene, M.D.
By:/s/ James W. McAtee
----------------------------
James W. McAtee,
Executive Vice President
COMPANY:
GERIATRIC MEDICAL CARE, INC.
By: /s/ James A. Greene, M.D.
----------------------------
James A. Greene, M.D.
4
<PAGE> 1
EXHIBIT 10.2
AMENDMENT
This Amendment is made and effective this 10th day of February, 1997, by and
among Horizon Mental Health Management, Inc., a Texas corporation
("Purchaser"), and Joseph R. Bona, M.D., Nancy J. Simons, Ph.D., John G. Toms,
Ph.D., William L. Kale, Ph.D., and David E. Stenmark, Ph.D. (collectively
referred to herein as the "Sellers").
WHEREAS, Purchase and Sellers have entered into a Stock Purchase Agreement
dated the 31st day of July, 1996 (the "Agreement"), and
WHEREAS, Purchaser and Sellers desire to make certain changes to the Agreement.
NOW THEREFORE, in consideration of the premises and the mutual terms and
conditions contained herein, the Purchaser and the Sellers hereby agree as
follows:
1. Paragraph 2.3(f) shall be added to the Agreement as follows:
(f) Final Reconciliation. On or before July 15, 1997, and as of
June 30, 1997, Purchaser shall deliver to Sellers a Final Reconciliation
Statement of Income. The Final Reconciliation Statement of Income will adjust
the Statement of Income prepared and delivered in accordance with paragraph
2.3(e) above by incorporating any subsequent activity involving accrued
expenses and accounts receivable, but shall otherwise be prepared in accordance
with the same requirements of paragraph 2.3(e). Sellers shall have 30 days
from delivery to review the adjustments made and to notify Purchaser of any
dispute with such adjustments. If Sellers fail to notify Purchaser of any
dispute within the thirty day period, the Final Reconciliation Statement of
Income shall be deemed to be final and conclusive and shall be utilized to
calculate the Reconciled Purchase Price. Any disputes to the adjustments shall
be handled in the same manner as in paragraph 2.3(e). The Reconciled Purchase
Price shall be compared to the Purchase Price previously paid, and any amounts
owing to Purchaser or Seller shall be paid within 30 days of determination of
the Reconciled Purchase Price.
All other terms and conditions not modified by this Amendment shall remain in
full force and effect.
<PAGE> 2
IN WITNESS WHEREOF, the parties have executed this Amendment on the date set
forth above.
PURCHASER: SELLERS:
HORIZON MENTAL HEALTH
MANAGEMENT, INC.
BY: /s/ James W. McAtee /s/ Joseph R. Bona, M.D.
------------------------- ------------------------------
James W. McAtee Joseph R. Bona, M.D.
Executive Vice President
/s/ Nancy J. Simons, Ph.D.
-------------------------------
Nancy J. Simons, Ph.D.
/s/ John G. Toms, Ph.D.
-------------------------------
John G. Toms, Ph.D.
/s/ William L. Kale, Ph.D.
-------------------------------
William L. Kale, Ph.D.
/s/ David E. Stenmark, Ph.D.
-------------------------------
David E. Stenmark, Ph.D.
2
<PAGE> 1
EXHIBIT 11.1
HORIZON MENTAL HEALTH MANAGEMENT, INC.
COMPUTATIONS OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
February February
-------------------- -------------------
1996 1997 1996 1997
------ ------ ------ ------
SIMPLE
<S> <C> <C> <C> <C>
Net income $1,336 $1,793 2,585 3,583
Average outstanding shares (2) 5,345 5,508 5,345 5,492
------ ------ ----- -----
Simple net income per share $ 0.25 $ 0.33 $0.48 $0.65
====== ====== ===== =====
PRIMARY
Net income $1,336 $1,793 2,585 3,583
Average outstanding shares (2) 5,345 5,508 5,345 5,492
Common stock equivalents assuming
exercise of stock options (A) (2) 1,150 1,149 1,132 1,150
------ ------ ----- -----
Shares for primary 6,495 6,657 6,477 6,642
====== ====== ===== =====
Primary net income per share (1) $ 0.21 $ 0.27 $0.40 $0.54
====== ====== ===== =====
FULLY DILUTED
Net income $1,336 $1,793 2,585 3,583
Average outstanding shares (2) 5,345 5,508 5,345 5,492
Common stock equivalents assuming
exercise of stock options (A) (2) 1,175 1,151 1,170 1,151
------ ------ ----- -----
Shares for fully diluted 6,520 6,659 6,515 6,643
====== ====== ===== =====
Fully diluted net income per share (1) $ 0.20 $ 0.27 $0.40 $0.54
====== ====== ===== =====
</TABLE>
(A) Any computational differences between the primary and fully diluted
EPS are the result of using the average price in the primary
computation and the ending price (which was higher) in the fully
diluted computation.
(1) The calculations for primary and fully diluted net income per share
are submitted in accordance with Regulation S-K Item 601(b)(11).
(2) The Board of Directors of the Company approved a three-for-two stock
split effected in the form of a 50% stock dividend, pursuant to which
one additional share of Common Stock of the Company was issued on
January 31, 1997 for every two shares of Common Stock held by
stockholders of record at close of business on January 22, 1997. Upon
effecting the stock split/dividend, the stock options and their
related exercise prices were adjusted proportionately. Such stock
split/dividend has been retroactively reflected herein.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SIX
MONTHS ENDED FEBRUARY 28, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH YEAR TO DATE 10-Q FILING FOR THE SIX MONTHS ENDED
FEBRUARY 28, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> FEB-28-1997
<CASH> 8,713,746
<SECURITIES> 0
<RECEIVABLES> 10,415,852
<ALLOWANCES> 989,600
<INVENTORY> 0
<CURRENT-ASSETS> 19,965,558
<PP&E> 3,224,869
<DEPRECIATION> 1,797,766
<TOTAL-ASSETS> 36,669,885
<CURRENT-LIABILITIES> 10,736,307
<BONDS> 0
0
0
<COMMON> 55,643
<OTHER-SE> 24,276,653
<TOTAL-LIABILITY-AND-EQUITY> 36,669,885
<SALES> 0
<TOTAL-REVENUES> 37,358,471
<CGS> 0
<TOTAL-COSTS> 31,657,294
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 465,450
<INTEREST-EXPENSE> 352
<INCOME-PRETAX> 6,002,445
<INCOME-TAX> 2,367,801
<INCOME-CONTINUING> 3,583,084
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,583,084
<EPS-PRIMARY> .54
<EPS-DILUTED> .54
</TABLE>
