<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 quarterly period ended November 30, 1998
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
HORIZON HEALTH CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 75-2293354
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1500 Waters Ridge Drive
Lewisville, Texas 75057-6011
(Address of principal executive offices, including zip code)
(972) 420-8200
(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 January 6, 1999 was 6,824,250.
<PAGE> 2
INDEX
HORIZON HEALTH CORPORATION
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.....................................................................3
HORIZON HEALTH CORPORATION
Consolidated Balance Sheets as of August 31, 1998
and November 30, 1998 (unaudited)............................................................3
Consolidated Statements of Operations for the three months ended
November 30, 1997 and 1998 (each unaudited)..................................................5
Consolidated Statements of Cash Flows for the three months
ended November 30, 1997 and November 30, 1998 (each unaudited)...............................6
Notes to Consolidated Financial Statements (unaudited).......................................8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................................................13
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................................................22
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HORIZON HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31, 1998 NOVEMBER 30, 1998
--------------- -----------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and short-term investments $ 6,204,297 $ 2,205,240
Accounts receivable less allowance for uncollectible
accounts of $1,902,112 at August 31, 1998 and
$2,526,689 at November 30, 1998 13,464,705 16,900,011
Receivable from employees 91,715 89,473
Prepaid expenses and supplies 211,288 788,046
Income taxes receivable 317,197 --
Other receivables 166,714 226,947
Other current assets 469,540 696,781
Current deferred taxes 2,006,880 2,096,079
----------- -----------
TOTAL CURRENT ASSETS 22,932,336 23,002,577
----------- -----------
PROPERTY AND EQUIPMENT:
Equipment 5,874,100 6,244,203
Building improvements 421,331 462,311
----------- -----------
6,295,431 6,706,514
Less accumulated depreciation 2,868,062 3,162,240
----------- -----------
3,427,369 3,544,274
Goodwill, net of accumulated amortization
of $3,002,194 at August 31, 1998, and
$3,352,168 at November 30, 1998 51,310,574 53,651,956
Contracts, net of accumulated
amortization of $4,099,012 at August 31, 1998
and $4,505,905 at November 30, 1998 8,227,689 7,999,806
Other assets 774,100 723,369
=========== ===========
TOTAL ASSETS $86,672,068 $88,921,982
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 4
HORIZON HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31, 1998 NOVEMBER 30, 1998
--------------- -----------------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 2,314,404 $ 1,051,804
Employee compensation and benefits 6,166,226 6,452,411
Accrued expenses 7,934,916 10,725,331
Current debt maturities 18,470 83,105
----------- -----------
TOTAL CURRENT LIABILITIES 16,434,016 18,312,651
Other liabilities 237,308 245,119
Long-term debt, net of current debt maturities (Note 4) 26,010,901 26,469,180
Deferred income taxes 1,327,532 1,373,652
----------- -----------
TOTAL LIABILITIES 44,009,757 46,400,602
----------- -----------
Commitments and contingencies (Note 6) -- --
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value, 500,000 shares
authorized; none issued or outstanding -- --
Common stock, $.01 par value, 40,000,000 shares
authorized; 7,231,812 shares issued and outstanding
at August 31, 1998 and 7,267,750 shares issued and
outstanding at November 30, 1998 72,318 72,678
Additional paid-in capital 17,984,638 18,407,148
Retained earnings 24,605,355 26,371,766
----------- -----------
42,662,311 44,851,592
Less: Treasury Stock - at Cost (300,000 shares) (Note 7) -- 2,330,212
----------- -----------
42,662,311 42,521,380
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $86,672,068 $88,921,982
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NOVEMBER 30,
-------------------------------
1997 1998
------------ ------------
<S> <C> <C>
Revenues:
Contract management $ 26,598,903 $ 24,171,856
Premiums and fees 2,670,438 11,592,186
Other 53,071 84,520
------------ ------------
Total revenues 29,322,412 35,848,562
Expenses:
Salaries and benefits 15,728,569 18,346,690
Purchased services 4,858,679 9,490,372
Provision for (recovery of) bad debts 355,027 (692,881)
Depreciation and amortization 611,897 1,089,942
Other 3,574,921 4,349,641
------------ ------------
Total operating expenses 25,129,093 32,583,764
Other income (expense):
Interest expense (61,555) (408,644)
Interest and other income 105,613 61,519
Gain on sale of fixed assets -- 800
------------ ------------
Income before income taxes and minority interest 4,237,377 2,918,473
Income tax expense 1,707,194 1,152,046
------------ ------------
Income before minority interest 2,530,183 1,766,427
Minority interest (Note 3) 6,188 --
------------ ------------
Net income $ 2,523,995 $ 1,766,427
============ ============
Earnings per common share:
Basic $ .36 $ .25
============ ============
Diluted $ .33 $ .24
============ ============
Weighted average shares outstanding:
Basic 6,980,086 7,153,603
============ ============
Diluted 7,761,243 7,513,275
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NOVEMBER 30,
-------------------------------
1997 1998
------------ ------------
<S> <C> <C>
Operating Activities:
Net income $ 2,523,995 $ 1,766,427
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 611,897 1,089,942
Minority interest 6,188 --
Deferred income taxes 5,543 46,120
Gain on sale of equipment -- (800)
Changes in net assets and liabilities
Increase in accounts receivable (4,724,025) (3,231,075)
(Increase) decrease in other receivables (89,004) 259,206
Decrease in income taxes receivable 951,256 --
Increase in prepaid expenses and supplies (54,810) (550,528)
Increase in other assets (108,159) (253,527)
(Decrease) increase in accounts payable and accrued
expenses (1,760,922) 351,650
Increase in income taxes payable 734,839 --
Increase in other liabilities 69,685 7,811
------------ ------------
Net cash used by operating activities (1,833,517) (514,774)
------------ ------------
Investing activities:
Purchase of property and equipment (292,037) (170,565)
Proceeds from sale of equipment -- 800
Final payment for 80% purchase of Professional
Psychological Services, Inc., net of cash acquired (200,985) --
Payment for purchase of Acorn Behavioral HealthCare
Management Corporation, net of cash acquired (12,726,120) --
Payment for purchase of ChoiceHealth, Inc., net of cash
acquired -- (1,797,692)
------------ ------------
Net cash used in investing activities (13,219,142) (1,967,457)
------------ ------------
Financing activities:
Payments on long term debt (3,691) (6,009,484)
Proceeds from long term borrowings 11,000,000 6,400,000
Net proceeds from issuance of common stock 119,688 102,253
Tax benefit related to stock option exercise 177,955 320,617
Cash used in purchase of treasury stock -- (2,330,212)
------------ ------------
Net cash provided by (used in) financing activities 11,293,952 (1,516,826)
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
HORIZON HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Continued)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NOVEMBER 30,
-------------------------------
1997 1998
------------ ------------
<S> <C> <C>
Net decrease in cash and short term investments (3,758,707) (3,999,057)
Cash and short-term investments at beginning of period 5,516,575 6,204,297
------------ ------------
Cash and short-term investments at end of period 1,757,868 2,205,240
============ ============
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest 61,555 401,022
============ ============
Income taxes 15,777 52,317
============ ============
Supplemental disclosure of non-cash investing activities:
Payment for ChoiceHealth
Fair value of assets acquired $ -- $ 3,594,732
------------ ------------
Cash paid -- (2,000,000)
------------ ------------
Liabilities assumed $ -- $ 1,594,732
============ ============
Final payment for 80% purchase of Professional
Psychological Services, Inc.
Fair value of assets acquired $ 200,985 $ --
------------ ------------
Cash paid (200,985) --
------------ ------------
Liabilities assumed $ -- $ --
============ ============
Payment for Acorn Behavioral HealthCare Management
Corporation
Fair value of assets acquired $ 12,904,189 $ --
------------ ------------
Cash paid (12,726,357) --
------------ ------------
Liabilities assumed $ 177,832 $ --
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION
Horizon Health Corporation (the "Company" or "Horizon"), formerly known
as Horizon Mental Health Management, Inc., is a provider of employee
assistance programs ("EAP") and mental health services to business and
managed care organizations as well as a contract manager of clinical and
related services, primarily of mental health programs, offered by general
acute care hospitals in the United States. The management contracts are
generally for terms ranging from three to five years, the majority of
which have automatic renewal provisions. The Company currently has
offices in the Dallas, Texas; Los Angeles, California; Chicago, Illinois;
Tampa, Florida; Denver, Colorado; and Philadelphia, Pennsylvania
metropolitan areas. The Company's National Support Center is in
Lewisville, Texas.
Effective October 5, 1998, the Company acquired all of the outstanding
capital stock of ChoiceHealth, Inc. ("ChoiceHealth") of Westminster,
Colorado. The Company accounted for the acquisition of ChoiceHealth by
the purchase method as required by generally accepted accounting
principles. ChoiceHealth provides managed behavioral health care
services, employee assistance programs and other related behavioral
health care services to health maintenance organizations and self-insured
employers. ChoiceHealth had annualized revenues of approximately $7.6
million (unaudited) based on actual revenues for the eight months ended
August 31, 1998. The purchase price of approximately $2.0 million in cash
was funded by $2.0 million from an advance under the Company's existing
term loan credit facility with Chase Bank of Texas, National Association.
(See Note 3)
BASIS OF PRESENTATION:
The accompanying consolidated balance sheet at November 30, 1998, the
consolidated statements of operations for the three month period ended
November 30, 1997 and 1998, and the consolidated statements of cash flows
for the three months ended November 30, 1997 and 1998 are unaudited.
These financial statements should be read in conjunction with the
Company's audited financial statements for the year ended August 31,
1998. 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 November 30,
1998, and the results of operations for the three months ended November
30, 1997 and 1998.
Operating results for the three month period are not necessarily
indicative of the results that may be expected for a full year or any
portion thereof.
8
<PAGE> 9
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
2. EARNINGS PER SHARE
Earnings per share has been computed in accordance with Statement of
Financial Accounting Standards No. 128, Earnings per Share ("SFAS 128").
Basic earnings per share is computed by dividing income available to
common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflect the
potential dilution that could occur if the Company's stock options were
exercised. Such dilutive potential common shares are calculated using the
treasury stock method. All prior-period earnings per share data presented
has been restated in accordance with SFAS 128.
3. ACQUISITIONS
CHOICEHEALTH
Effective October 5, 1998, the Company acquired all of the outstanding
capital stock of ChoiceHealth. The Company accounted for the acquisition
of ChoiceHealth by the purchase method as required by generally accepted
accounting principles. ChoiceHealth provides managed behavioral health
care services, employee assistance programs and other related behavioral
health care services to health maintenance organizations and self-insured
employers. ChoiceHealth had annualized revenues of approximately $7.6
million (unaudited) based on actual revenues for the eight months ended
August 31, 1998. The purchase price of approximately $2.0 million in cash
was funded by $2.0 million from an advance under the Company's existing
term loan credit facility with Chase Bank of Texas, National Association.
The purchase price exceeded the fair value of ChoiceHealth's tangible net
assets by $2,870,363, of which $2,691,354 is recorded as goodwill and
$179,009 as service contracts. Tangible assets acquired and liabilities
assumed totaled $724,369 and $1,594,732, respectively.
FPM BEHAVIORAL HEALTH, INC.
Effective June 1, 1998, the Company acquired all of the outstanding
capital stock of FPM Behavioral Health, Inc. ("FPM") of Winter Park,
Florida, and FPM has been consolidated with the Company as of June 1,
1998. The Company accounted for the acquisition of FPM by the purchase
method as required by generally accepted accounting principles. FPM
provides managed behavioral health care services, employee assistance
programs and other related health care services to health maintenance
organizations and self-insured employers. FPM had total revenues of
approximately $19.9 million for the nine months ended March 31, 1998 and,
at February 28, 1998, FPM had 46 contracts covering 1,135,000 lives in
nine states. FPM provides its services both through health care
professionals employed by FPM and through independent health care
professionals that have been contracted with FPM on a fee-for-service
basis. At April 1998, the FPM provider network was composed of over 2,000
providers. The purchase price was $20.0 million in cash, subject to
certain post closing adjustments, and was funded by incurring debt of
$20.0 million under the term loan facility. The preliminary allocation of
the purchase price exceeded the fair value of FPM's tangible net assets
by $22,170,668, of which $20,665,912 is recorded as goodwill and
$1,504,756 as service contracts. Tangible assets acquired and liabilities
assumed totaled $3,301,876 and $5,472,544, respectively.
ACORN
Effective October 31, 1997, the Company acquired all of the outstanding
capital stock of Acorn Behaviroal Health Care Management Corporation
("Acorn"). The Company accounted for the acquisition of Acorn by the
purchase method as required by generally accepted accounting principles.
Acorn provides employee assistance programs and other related services to
self-insured employers. Acorn had total revenues of approximately
$7.0 million for the year ended August 31, 1997. The purchase price of
approximately $12.7
9
<PAGE> 10
HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
million in cash was funded from $1.7 million of working capital and $11.0
million from an advance under the Company's existing revolving credit
facility with Chase Bank of Texas, National Association. The purchase
price exceeded the fair value of Acorn's tangible net assets by
$12,629,261, of which $9,258,513 is recorded as goodwill and $3,370,748
as contracts.
INVESTMENT IN PPS
On July 31, 1996, the Company 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 the Company as of August 1, 1996. The
Company 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 final
purchase price of $3,324,310 was based primarily on a multiple of the
1996 pre-tax income of PPS. The purchase price exceeded the fair value of
PPS's net assets by $3,298,885 which is recorded as goodwill. Assets
acquired and liabilities assumed totaled $540,960 and $515,535,
respectively. Cash payments for the purchase of PPS, net of cash
acquired, were $786,767 and $1,898,230 during 1996 and 1997,
respectively. The final payment of $200,985 was made on September 30,
1997.
On February 27, 1998, the Company acquired an additional sixteen percent
(16%) of the outstanding common stock of PPS. The purchase price of
$831,879 was based primarily on a 5.0 multiple of the 1997 pre-tax income
of PPS. The purchase price exceeded the fair value of PPS's tangible net
assets acquired by $764,400 of which $560,315 is recorded as goodwill and
$204,085 as service contracts. Tangible assets acquired and liabilities
assumed totaled $147,072 and $79,593, respectively. On March 10, 1998,
the Company acquired the remaining 4% of the outstanding common stock of
PPS, under similar terms, for a purchase price of $207,970. The purchase
price exceeded the fair value of PPS's tangible net assets acquired by
$192,332 of which $141,311 is recorded as goodwill and $51,021 as service
contracts. Tangible assets acquired and liabilities assumed totaled
$35,536 and $19,898 respectively. The acquisitions were funded by
incurring debt of approximately $1.0 million under the term loan
facility.
4. LONG-TERM DEBT
At August 31, 1998 and November 30, 1998, the Company had the following
long-term debt:
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
1998 1998
----------- ------------
<S> <C> <C>
Chase Bank of Texas, National Association - Advance Term Loan
Facility $23,000,000 $20,400,000
Chase Bank of Texas, National Association - Revolving Credit
Facility 3,000,000 6,000,000
Equipment Leases 29,371 86,794
Borealis Note -- 65,491
----------- -----------
26,029,371 26,552,285
Less current maturities 18,470 83,105
----------- -----------
$26,010,901 $26,469,180
=========== ===========
</TABLE>
10
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HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
On October 16, 1997, the Company increased its existing revolving line of
credit from Chase Bank of Texas, National Association from $11.0 million
to $14.0 million.
On December 9, 1997, the Company entered into a Credit Agreement (the
"Credit Agreement") with Chase Bank of Texas, National Association, as
Agent, for itself and other lenders party to the Credit Agreement for a
senior secured credit facility in an aggregate amount of up to $50.0
million (the "New Credit Facility"). The New Credit Facility consists of
a $10.0 million revolving credit facility to fund ongoing working capital
requirements and a $40.0 million advance term loan facility to refinance
certain existing debt and to finance future acquisitions by the Company.
The New Credit Facility replaced the Company's existing $14.0 million
revolving credit facility. As of November 30, 1998, the Company has
borrowings of $6.0 million outstanding against the revolving credit
facility and $20.4 million outstanding against the advance term loan
facility.
The New Credit Facility bears interest at (1) the Base Rate plus the Base
Rate Margin, as defined or (2) the LIBOR Rate plus the LIBOR Margin, as
defined. The Base Rate Margin and LIBOR Margins vary depending on the
debt coverage ratio of the Company.
The revolving credit facility matures on November 30, 2000 and the
advance term loan facility matures on November 30, 2002.
The Company currently has various capitalized leases for computer and
other equipment. The leases contain bargain purchase options. The Company
acquired a custom software system upon the acquisition of ChoiceHealth.
The system is financed by a note to Borealis Software Systems, Inc.,
the company who designed the system.
5. STOCK OPTIONS
On October 17, 1997, the board of directors adopted the 1998 Stock Option
Plan and such plan was approved by the stockholders of the Company on
January 23, 1998. The 1998 Stock Option Plan authorizes the granting of
nonqualified stock options to purchase up to 500,000 shares of common
stock, which have been reserved for issuance under this plan, to such
directors, officers, employees, and consultants of the Company and its
subsidiaries as may be designated by the Compensation and Option
Committee of the board of directors. The options generally vest ratably
over five years from the date of grant and terminate 10 years from the
date of grant.
6. COMMITMENTS AND CONTINGENCIES
The Company leases various office facilities and equipment under
operating leases. The following is a schedule of minimum rental payments
under these leases which expire at various dates:
<TABLE>
<S> <C>
Nine months ending August 31, 1999 $ 938,227
For the year ending August 31, 2000 970,019
For the year ending August 31, 2001 805,741
For the year ending August 31, 2002 382,921
For the years ending August 31, 2003 and thereafter 20,819
----------
$3,117,727
==========
</TABLE>
11
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HORIZON HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Rent expense for the three months ended November 30, 1997, and 1998
totaled $243,174 and $510,518, respectively.
The Company leases a building it occupies as its executive offices and
National Support Center in Lewisville, Texas. In connection with this
lease transaction, the Company guaranteed a loan of approximately
$900,000 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 in September 2001, if it is not sold
to a third party, or the Company does not extend its lease.
The Company 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.
The Company 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 the Company's financial position or results of operations.
7. STOCK REPURCHASE
On September 21, 1998, the Board of Directors of the Company authorized
the repurchase of up to 1,000,000 shares of its common stock. The stock
repurchase plan authorized the Company to make purchases from time to
time in the open market or through privately negotiated transactions,
depending on market conditions and applicable securities regulations. The
repurchased shares will be added to the treasury shares of the Company
and may be used for employee stock plans and for other corporate
purposes. The stock will be repurchased utilizing available cash and
borrowings under the Company's term bank facility. The Company had
repurchased 300,000 shares of its common stock as of November 30, 1998,
and 443,500 shares of its common stock as of January 6, 1999.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a growing provider of EAP and mental health services to
business and managed care organizations, as well as the leading contract manager
of clinical programs offered by general acute care hospitals in the United
States. The Company has grown both internally and through acquisitions,
increasing both the number of its management contracts and the variety of its
treatment programs and services. The Company was formed in July 1989 as the
successor to Horizon Health Management Company, which had been engaged in the
mental health contract management business since 1981. During the period from
1989 to 1994, the Company grew primarily from its internal sales efforts as it
focused its business operations entirely on the contract management of mental
health programs. In 1995, the Company began to pursue acquisitions as an
additional source of growth. Over the last six years, the Company has increased
its management contracts from 43 to a total of 165 as of November 30, 1998, and
currently operates in 37 states. Of those management contracts, 143 related to
mental health programs and 22 related to physical rehabilitation programs. The
165 management contracts cover 268 various treatment programs. As of November
30, 1998, the Company had 227 contracts to provide EAP and mental health
services covering approximately 2,330,000 million lives. The Company has also
developed a proprietary mental health outcomes measurement system known as CQI+
and at November 30, 1998 provided outcome measurement services at 83 hospital
locations.
The fees received by the Company for its services under management
contracts are paid directly by its client hospital. The client hospitals receive
reimbursement under either the Medicare or Medicaid programs or payments from
insurers, self-funded benefit plans or other third-party payors for the mental
health and physical rehabilitation services provided to patients of the programs
managed by the Company. As a result, the availability and amount of such
reimbursement impacts the decisions of general acute care hospitals regarding
whether to offer mental health and physical rehabilitation services pursuant to
management contracts with the Company.
Recent amendments to the Medicare regulations established maximum
reimbursement amounts on a per case basis for both inpatient mental health and
physical rehabilitation services. The new regulations establish a nationwide cap
limiting the reimbursement amount on a per case basis for mental health and
physical rehabilitation services to $10,534 and $19,104, respectively, subject
to adjustments based on market indices. In addition, these amendments
established a new ceiling on the rate of increase in operating costs per case
for mental health and physical rehabilitation services furnished to Medicare
beneficiaries. Prior to these amendments, the reimbursement limits were tied to
the hospital's mental health or physical rehabilitation unit cost during the
unit's first year of operations, subject to certain adjustments. The limitations
have resulted, in some cases, in decreased amounts reimbursed to the Company's
client hospitals. This decrease in reimbursement has, in some cases, led to the
renegotiation of a lower contract management fee structure for the Company and
in other cases has resulted in the termination or nonrenewal of the management
contract. The new reimbursement limitations become applicable to the client
hospitals at the beginning of their first respective Medicare fiscal years
following enactment of the amendments.
The trend of renegotiated fees and canceled contracts, resulting in
reduced contract management fees due to these reimbursement changes, which
Horizon first encountered in its fiscal 1998 second quarter, can be expected to
continue on into the second quarter of fiscal 1999. However, due to the
individual nature of each such renegotiation, the overall effect on the
Company's future operating results is currently unclear, although the potential
for a material negative impact from such renegotiations exists.
Although the number of client hospitals with accounts receivable
balances greater than 90 days outstanding has declined from 24 to 19 over the
last four quarters, several hospitals have contributed to a larger bad debt
expense in the current quarter and may represent additional exposure to the
Company.
13
<PAGE> 14
Recent amendments to the Medicare statutes also provide for a phase-out
of cost-based reimbursement of physical rehabilitation services over a
three-year period beginning October 1, 2000. The resulting phase-in of
reimbursement for physical rehabilitation services based on the Medicare
prospective payment system utilizing a fixed reimbursement amount for specified
diagnoses could lower Medicare reimbursement levels to hospitals for physical
rehabilitation services. This could adversely affect the ability of the Company
to obtain management contracts for physical rehabilitation services and the
amount of fees paid to the Company under such contracts.
Effective October 5, 1998, the Company acquired all of the outstanding
capital stock of ChoiceHealth, Inc. of Westminster, Colorado. The Company
accounted for the acquisition of ChoiceHealth by the purchase method as required
by generally accepted accounting principles. ChoiceHealth provides managed
behavioral health care services, employee assistance programs and other related
behavioral health care services to health maintenance organizations and
self-insured employers. ChoiceHealth had annualized revenues of approximately
$7.6 million (unaudited) based on actual revenues for the eight months ended
August 31, 1998. The purchase price of approximately $2.0 million in cash was
funded by $2.0 million from an advance under the Company's existing term loan
credit facility with Chase Bank of Texas, National Association. The purchase
price exceeded the fair value of ChoiceHealth's tangible net assets by
$2,870,363, of which $2,691,354 is recorded as goodwill and $179,009 as service
contracts. Tangible assets acquired and liabilities assumed totaled $724,369 and
$1,594,732, respectively.
Effective June 1, 1998, the Company acquired all of the outstanding
capital stock of FPM Behavioral Health, Inc. of Winter Park, Florida, and FPM
has been consolidated with the Company as of June 1, 1998. The Company accounted
for the acquisition of FPM by the purchase method as required by generally
accepted accounting principles. FPM provides managed behavioral health care
services, employee assistance programs and other related health care services to
health maintenance organizations and self-insured employers. FPM had total
revenues of approximately $19.9 million for the nine months ended March 31, 1998
and, at February 28, 1998, FPM had 46 contracts covering 1,135,000 lives in nine
states. FPM provides its services both through health care professionals
employed by FPM and through independent health care professionals that have been
contracted with FPM on a fee-for-service basis. At April 1998, the FPM provider
network was composed of over 2,000 providers. The purchase price was $20.0
million in cash, subject to certain post closing adjustments, and was funded by
incurring debt of $20.0 million under the term loan facility. The preliminary
allocation of the purchase price exceeded the fair value of FPM's tangible net
assets by $22,170,668, of which $20,665,912 is recorded as goodwill and
$1,504,756 as service contracts. Tangible assets acquired and liabilities
assumed totaled $3,301,876 and $5,472,544, respectively.
On February 27, 1998, the Company acquired sixteen percent (16%) of the
outstanding common stock of PPS. The purchase price of $831,879 was based
primarily on a 5.0 multiple of the 1997 pre-tax income of PPS. The purchase
price exceeded the fair value of PPS's tangible net assets acquired by $764,400
of which $560,315 is recorded as goodwill and $204,085 as service contracts.
Tangible assets acquired and liabilities assumed totaled $147,072 and $79,593,
respectively. Effective March 10, 1998, the Company acquired the remaining 4% of
the outstanding common stock of PPS, under similar terms, for a purchase price
of $207,970. The purchase price exceeded the fair value of PPS's tangible net
assets acquired by $192,332 of which $141,311 is recorded as goodwill and
$51,021 as service contracts. Tangible assets acquired and liabilities assumed
totaled $35,536 and $19,898 respectively. These acquisitions were funded by cash
and incurring debt of $1.0 million under the term loan facility. The Company had
previously acquired eighty percent (80%) of the outstanding common stock of PPS
in July 1996.
Effective October 31, 1997, the Company acquired all of the outstanding
capital stock of Acorn. The Company accounted for the acquisition of Acorn by
the purchase method as required by generally accepted accounting principles.
Acorn provides employee assistance programs and other related services to
self-insured employers. Acorn had total revenues of approximately $7.0 million
for the year ended August 31, 1997. The purchase price of approximately $12.7
million in cash was funded from $1.7 million of working capital and $11.0
million from an advance under the Company's existing revolving credit facility
with Chase Bank of Texas, National Association. The purchase price exceeded the
fair value of Acorn's tangible net assets by $12,629,261, of which $9,258,513 is
recorded as goodwill and $3,370,748 as service contracts.
14
<PAGE> 15
The following schedule represents revenues and operating results for the quarter
ended November 30, 1998 by operating subsidiary:
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E)
Horizon Mental
Horizon Mental Specialty Health
Behavioral Health Rehab Outcomes, Support Inter-Co
Services Management Management Inc. Services Eliminations Consolidated
---------- ---------- ---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues 11,517,048 21,881,321 2,278,601 91,985 79,607 -- 35,848,562
Inter Company Revenues 12,927 -- -- 427,495 -- (440,422) --
Earnings before interest,
taxes, depreciation and
amortization 471,931 5,451,344 357,883 125,829 (2,052,247) -- 4,354,740
</TABLE>
(A) Horizon Behavioral Services consist of two divisions, Managed Care, located
in Winter Park, Florida and the EAP/Employer Division located in the
Philadelphia metropolitan area.
(B) Horizon Mental Health Management provides mental health contract management
services to general acute care hospitals in the United States.
(C) Specialty Rehab Management provides contract management services to
physical rehabilitation programs.
(D) Mental Health Outcomes, Inc. provides outcome information regarding the
effectiveness of a provider's mental health programs.
(E) Support Services represents the National Support Center located in
Lewisville, Texas which provides management and financial, human resource,
recruiting, information system, and sales support for the company.
SUMMARY STATISTICAL DATA
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31, AUGUST 31, NOVEMBER 30,
1996 1997 1998 1998
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
EAP AND MENTAL HEALTH SERVICES
Covered Lives 204,291 288,519 1,874,323 2,330,553
CONTRACT MANAGEMENT
NUMBER OF CONTRACT LOCATIONS:
Contract locations in operation 163 181 161 155
Contract locations signed and unopened 16 14 11 10
--------- --------- --------- ---------
Total contract locations 179 195 172 165
========= ========= ========= =========
SERVICES COVERED BY CONTRACTS IN OPERATION:
Inpatient 156 166 149 139
Partial Hospitalization 84 104 102 98
Outpatient 20 24 32 29
Home health 13 17 10 11
CQI Plus (under contract) 64 86 82 83
TYPES OF TREATMENT PROGRAMS IN OPERATION:
Geropsychiatric 144 197 189 179
Adult psychiatric 82 75 67 62
Substance abuse 20 10 8 8
Physical Rehabilitation 22 20 20 20
Other 5 9 9 8
</TABLE>
15
<PAGE> 16
RESULTS OF OPERATIONS
The following table sets forth for the three months ended November 30, 1997
and 1998, the percentage relationship to total net revenues of certain costs,
expenses and income and the number of management contracts in operation at the
end of each period.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NOVEMBER 30,
1997 1998
----- -----
<S> <C> <C>
Revenues:
Contract management revenues 90.7% 67.4%
Premiums and fees 9.1 32.3
Other .2 .3
----- -----
Total revenues 100.0 100.0
Operating revenues
Salaries and benefits 53.6 51.1
Purchased services 16.6 26.5
Provision for (recovery of) bad debts 1.2 (1.9)
Depreciation and amortization 2.1 3.0
Other 12.2 12.2
----- -----
Total operating expenses 85.7 90.9
----- -----
Operating income 14.3 9.1
----- -----
Interest and other income(expenses), net .2 (1.0)
----- -----
Income before taxes 14.5 8.1
Income tax expense 5.9 3.2
----- -----
Income before minority interest 8.6 4.9
Minority interest -- --
----- -----
Net income 8.6% 4.9%
===== =====
Number of contracts in operation, end of period 179 155
</TABLE>
16
<PAGE> 17
THREE MONTHS ENDED NOVEMBER 30, 1998 COMPARED TO THE THREE MONTHS ENDED
NOVEMBER 30, 1997
Revenue. Revenues for the three months ended November 30, 1998 were
$35.8 million representing an increase of $6.5 million, or 22.3%, as compared to
revenues of $29.3 million for the corresponding period in the prior fiscal year.
Premiums and Fees increased by $8.9 million as a result of the revenue recorded
for FPM and ChoiceHealth. Horizon acquired 100% of the outstanding voting stock
of FPM and ChoiceHealth effective June 1, 1998 and October 5, 1998,
respectively. This increase in premiums and fees was offset by a $2.4 million
decrease in contract management revenue as compared to the corresponding period
in the prior fiscal year. This decrease is due to the average number of contract
locations in operation decreasing from 181.5 for the three months ended November
30, 1997, to 156.5 for the three months ended November 30, 1998, a decrease of
13.8%.
Salaries and Benefits. Salaries and benefits for the three months ended
November 30, 1998 were $18.3 million representing an increase of $2.6 million,
or 16.6%, as compared to salaries and benefits of $15.7 million for the three
months ended November 30, 1997. Salaries and benefits increased $2.7 million and
$348,000 as a result of the acquisitions of FPM and ChoiceHealth, respectively.
Salary and benefits cost per full time equivalent for the three months ended
November 30, 1998 were $14,954 representing an increase of $608 per full time
equivalent, or 4.2% as compared to salary and benefits cost of $14,346 per full
time equivalent for the three months ended November 30, 1997. These increases
are offset by a decline of approximately 40 full time equivalents resulting
from the 13.8% decrease in the average number of contract locations in
operation.
Depreciation and Amortization. Depreciation and amortization expenses
for the three months ended November 30, 1998 were $1,090,000, representing an
increase of $478,000, or 78.1%, as compared to depreciation and amortization
expenses of $612,000 for the corresponding period in the prior fiscal year. An
increase of $179,000 is due to the amortization of goodwill of $23.4 million,
$9.3 million, and $2.6 million resulting from the acquisitions of FPM, Acorn and
ChoiceHealth. Amortization expense also increased $138,000 in relation to the
value placed on the contracts of FPM, Acorn, and ChoiceHealth. The remaining
increase results from the depreciation expense of additional equipment acquired
by acquisition or purchased for the operation of the Company's contract
management and managed care business.
Other Operating Expenses (Including Purchased Services and Provision
for Bad Debts). Other operating expenses for the three months ended November 30,
1998 were $13.1 million representing a increase of $4,359,000, or 49.6%, as
compared to other operating expenses of $8.8 million for the corresponding
period in the prior fiscal year. The following components identify the variances
between the periods reported.
Purchased services included a $4,941,000 increase in medical claims for
behavioral managed care services for the three months ended November 30, 1998 as
compared to the same period in the prior fiscal year as a result of the
acquisition of FPM on June 1, 1998 and ChoiceHealth on October 5, 1998. In
addition, medical director stipends decreased $234,000. This decrease is a
result of the decrease in the number of contract locations in operation, from
181.5 at November 30, 1997 to 156.5 at November 30, 1998. Consulting-contracted
fees also decreased $100,000.
Bad debt expense, excluding the recovery of $1,750,000 related to one
former Specialty Healthcare Management, Inc. contract, was $1.0 million, for the
three months ended November 30, 1998, as compared to $355,000 for the three
months ended November 30, 1997, an increase of $703,000. Approximately $630,000
of this increase is related to the non-timely payment from four contracted
hospital clients.
Other operating expense was $4.3 million for the three months ended
November 30, 1998 as compared to $3.6 million for the three months ended
November 30, 1997. Other operating expenses increased $768,000 and $85,000 as a
result of the acquisition of FPM and ChoiceHealth, respectively.
Interest and Other Income (Expense), Net. Interest income, interest
expense, and other income for the three months ended November 30, 1998 was a net
expense of $346,000, as compared to net interest income of $44,000 for the
corresponding period in the prior fiscal year. This change results primarily
from an increase in interest expense of $347,000 related to amounts borrowed
under the credit facility for the acquisitions of FPM and ChoiceHealth.
17
<PAGE> 18
Income Tax Expense. For the three month period ended November 30, 1998,
the Company recorded federal and state income taxes of $1.2 million resulting in
a combined tax rate of 39.5%. For the three month period ended November 30,
1997, the Company recorded federal and state income taxes of $1.7 million
resulting in a combined tax rate of 40.3%.
LIQUIDITY AND CAPITAL RESOURCES
On December 9, 1997, the Company entered into a Credit Agreement (the
"Credit Agreement") with Chase Bank of Texas, National Association as Agent (the
"Agent") for itself and other lenders party to the Credit Agreement, for a
senior secured credit facility in an aggregate amount of up to $50.0 million
(the "Credit Facility"). The Credit Facility consists of a $10.0 million
revolving credit facility to fund ongoing working capital requirements (the
"Revolving Credit Facility") and a $40.0 million advance term loan facility to
refinance certain existing debt and to finance future acquisitions by the
Company (the "Advance Term Loan Facility"). The Credit Facility replaced the
Company's existing $14.0 million revolving credit facility. At November 30,
1998, the revolving credit facility and advance term loan facility had $6.0
million and $20.4 million outstanding, respectively.
The following summary of certain material provisions of the Credit
Agreement does not purport to be complete, and is subject to, and qualified in
its entirety by reference to, the Credit Agreement, a copy of which was filed as
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q, for the quarter
ended November 30, 1997, as filed with the Securities and Exchange Commission
(the "Commission") on December 19, 1997.
The Company is the borrower under the Credit Facility which is
unconditionally guaranteed by all material domestic subsidiaries of the Company.
The Revolving Credit Facility terminates November 30, 2000 and the Advance Term
Loan Facility has a term of five years, with drawdowns available until November
30, 1999. Once a drawdown is made under the Advance Term Loan Facility, the
commitment thereunder will be reduced by the amount funded. Amounts outstanding
under the Advance Term Loan Facility on November 30, 1999 are to be repaid in
twelve quarterly principal payments, beginning February 28, 2000, based upon a
five year amortization schedule with the first eleven principal payments being
1/20th of the outstanding balance on November 30, 1999, and the twelfth being
the remaining unpaid principal balance. Principal outstanding under the Credit
Facility bears interest at the "Base Rate" (the greater of the Agent's "prime
rate" or the federal funds rate plus .5%) plus 0% to .5% (depending on the
Company's Indebtedness to EBITDA Ratio as defined in the Credit Agreement) or
the "Eurodollar Rate" plus .75% to 1.5% (depending on the Indebtedness to EBITDA
Ratio), as selected by the Company. The Company incurs quarterly commitment fees
ranging from .25% to .375% per annum (depending on the Indebtedness to EBITDA
Ratio) on the unused portion of the Revolving Credit Facility (until November
30, 2000) and unused portion of the Advance Term Loan Facility (until November
30, 1999).
The Company is subject to certain covenants which include prohibitions
against (i) incurring additional debt or liens, except specified permitted debt
or permitted liens, (ii) certain material acquisitions, other than specified
permitted acquisitions (including any single acquisition not greater than $10.0
million or cumulative acquisitions not in excess of $30.0 million during any
twelve consecutive monthly periods, with the exception of the restriction
referenced below), (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) material change in the nature of business
conducted. In addition, the terms of the New Credit Facility require the Company
to satisfy certain ongoing financial covenants. The Credit Facility is secured
by a first lien or first priority security interest in and/or pledge of
substantially all of the assets of the Company and of all present and future
subsidiaries of the Company.
As of September 30, 1998, the Credit Facility was amended to allow the
Company to finance, under the Term Loan Facility, the redemption or repurchase
of its capital stock. As a result of this amendment a limit of $10 million for
cumulative acquisitions was imposed for the period of September 30, 1998 through
August 31, 1999.
Effective September 1996, the Company entered into a lease agreement
with a term of five years for a building which had been constructed to the
Company's specifications for its National Support Center. In connection with the
lease transaction, the Company guaranteed a loan of approximately $900,000. The
loan was by a financial institution to the owner. The Company also agreed to
purchase the leased building for approximately $4.5 million at the end of the
lease term in September 2001 if either the building is not sold to a third party
or the Company does not extend its lease.
18
<PAGE> 19
The Company believes that its future cash flows from operations, cash
of $2.2 million at November 30, 1998 and $4.0 million currently available under
the revolving credit facility will be sufficient to cover all cash requirements
over the next twelve months, including estimated capital expenditures of $1.2
million. The Company is likely to require additional capital to fund any further
acquisition, $8.0 million of which is available under the current acquisition
line through August 31, 1999, and $19.6 million which will be available
thereafter.
Effective October 5, 1998, The Company acquired all the outstanding
capital stock of ChoiceHealth for approximately $2.0 million. The acquisition
was funded by incurring debt of $2.0 million under the term loan facility.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year. The
Company's computer equipment and software and devices with embedded technology
that are time-sensitive may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failure or miscalculations,
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities.
The Company has undertaken various initiatives intended to ensure that
the computer equipment and software used by the Company will function properly
with respect to dates in the Year 2000 and thereafter. For this purpose, the
term "computer equipment and software" includes systems thought of as
information technology ("IT") systems, including accounting, data processing and
telephone/PBX systems and other miscellaneous systems that may contain embedded
technology, as well as systems that are not commonly thought of as IT systems,
such as alarm systems, fax machines or other miscellaneous systems that may
contain embedded technology. Based upon its identification and assessment
efforts to date, the Company believes that certain of the computer equipment and
software systems it currently uses will require replacement or modification. In
addition, in the ordinary course of replacing computer equipment and software,
the Company attempts to obtain replacements that are Year 2000 compliant.
Utilizing both internal and external resources to identify and assess needed
Year 2000 remediation, the Company currently anticipates that its Year 2000
identification, assessment, remediation and testing efforts, which began in
April 1998, will be completed by December 31, 1999, and that such efforts will
be completed prior to any currently anticipated impact on its computer equipment
and software systems. The Company estimates that as of November 30, 1998 it had
completed approximately 55% of the initiatives that it believes will be
necessary to fully address potential Year 2000 issues related to its computer
equipment and software. The projects comprising the remaining 45% of the
initiatives are in process and are expected to be completed by December 31,
1999.
<TABLE>
<CAPTION>
PERCENT
YEAR 2000 INITIATIVE TIME PERIOD COMPLETE
<S> <C> <C>
Initial IT systems identification and assessment April 1998 to March 1999 90%
Remediation and testing of IT systems July 1998 to June 1999 25%
Identification and assessment of non-IT systems September 1998 to April 1999 30%
Remediation and testing of non-IT systems January 1999 to December 1999 0%
</TABLE>
19
<PAGE> 20
The Company is beginning assessment of the Year 2000 readiness of its
suppliers. Such assessment will include hardware, software and service
suppliers. The Company expects to complete its assessment of suppliers' Year
2000 readiness by March 1999. The Company is beginning assessment of the Year
2000 readiness of its customers. Such assessment will include contacting
significant customers regarding their state of Year 2000 readiness. The Company
expects to complete its assessment of customers' Year 2000 readiness by June
1999.
The Company believes that the costs to modify its computer equipment
and software systems to be Year 2000 compliant, as well as the currently
anticipated costs with respect to Year 2000 issues of third parties, will not
exceed $110,000, which expenditures will be funded from operating cash flows.
All of the $110,000 relates to analysis, repair or replacement of existing
software, upgrades of existing software or evaluation of information received
from significant suppliers or customers. Such an amount would represent an
immaterial percentage of the Company's total actual and anticipated IT
expenditures for fiscal 1998 and 1999. As of November 30, 1998, the Company had
incurred costs of approximately $55,000 related to its Year 2000 identification,
assessment, remediation and testing efforts. Other non-Year 2000 IT efforts have
not been materially delayed or impacted by Year 2000 initiatives. However, if
all Year 2000 issues are not properly identified, or assessment, remediation and
testing are not effected timely, there can be no assurance that the Year 2000
issue will not have a material adverse effect on the Company's results of
operations, or adversely affect the Company's relationships with customers,
suppliers or others. Additionally, there can be no assurance that the Year 2000
issues of other entities will not have a material adverse effect on the
Company's systems or results or operations.
The Company has begun, but not yet completed, a comprehensive analysis
of the operational problems and costs (including loss of revenues) that would be
reasonably likely to result from the failure by the Company and certain third
parties to complete efforts necessary to achieve Year 2000 compliance on a
timely basis. A contingency plan has not been developed for dealing with the
most reasonably likely worse case scenario, and such scenario has not yet been
clearly identified. The Company plans to complete such cost analysis and
contingency planning by June 1999.
The costs of the Company's Year 2000 identification, assessment,
remediation and testing efforts and the date by which the Company believes it
will complete such efforts are based upon management's best estimates, which are
derived utilizing numerous assumptions regarding future events, including the
continued availability of certain resources, third-party remediation plans, and
other factors. However, there can be no assurance that these estimates will
prove to be accurate, and actual results could differ materially from those
currently anticipated. Specific factors that might cause such material
differences include but are not limited to the availability and cost of
personnel trained in Year 2000 issues, the ability to identify, assess,
remediate and test all relevant computer codes and embedded technology, and
similar uncertainties.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Certain written and oral statements made or incorporated by reference
from time to time by the Company or its representatives in this report, other
reports, filings with the Commission, press releases, conferences, or otherwise,
are "forward looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements include, without limitation, any
statement that may predict, forecast indicate, or imply future results,
performance or achievements, and may contain the words "believe," "anticipate,"
"expect," "estimate," "project," "will be," "will continue," "will likely
result," or words or phrases of similar meaning. Such statements involve risks,
uncertainties or other factors which may cause actual results to differ
materially from the future results, performance or achievements expressed or
implied by such forward looking statements. Certain risks, uncertainties and
other important factors are detailed in this report and will be detailed from
time to time in reports filed by the Company with the Commission, including
Forms 8-K, 10-Q, and 10-K, and include, among others, the following: general
economic and business conditions which are less favorable than expected;
unanticipated changes in industry trends; decreased demand by general hospitals
for the Company's services; the Company's inability to retain existing
management, EAP or managed care contracts or to obtain additional contracts;
adverse changes in reimbursement to general hospitals by Medicare or other
third-party payers for costs of providing mental health or physical
rehabilitation services; adverse changes to other regulatory provisions relating
to mental health or physical rehabilitation services; fluctuations and
difficulty in forecasting operating results; the ability of the Company to
sustain, manage or forecast its growth; heightened competition, including
specifically the intensification of price
20
<PAGE> 21
competition; the entry of new competitors and the development of new products or
services by new and existing competitors; changes in business strategy or
development plans; inability to carry out marketing and sales plans; business
disruptions; liability and other claims asserted against the Company; loss of
key executives; the ability to attract and retain qualified personnel; customer
services; adverse publicity; demographic changes; and other factors referenced
or incorporated by reference in this report and other reports or filings with
the Commission. Moreover, the Company operates in a very competitive and rapidly
changing environment. New risk factors emerge from time to time and it is not
possible for management to predict all such risk factors, nor can it assess the
impact of all such risk factors on the Company's business or the extent to which
any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward looking statements. These forward
looking statements represent the estimates and assumptions of management only as
of the date of this report. The Company expressly disclaims any obligation or
undertaking to disseminate any updates or revisions to any forward looking
statement contained herein to reflect any change in its expectations with regard
thereto or any change in events, conditions or circumstances on which any
statement is based. Given these risks and uncertainties, investors should not
place undue reliance on forward looking statements as a prediction of actual
results.
21
<PAGE> 22
PART II - OTHER INFORMATION
ITEM 5. DIRECTOR/EXECUTIVE OFFICER CHANGES
During the period covered by this report, James K. Newman retired as
Chief Executive Officer of the Company but remained as Chairman of the Board of
Directors and as a consultant to the Company. James W. McAtee, previously
Executive Vice President, succeeded Mr. Newman as President and Chief Executive
Officer.
During the period covered by this report, John F. DeVaney voluntarily
resigned as a Senior Vice President.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
NUMBER EXHIBIT
3.1 Certificate of Incorporation of the Company, as amended
(incorporated herein by reference to Exhibit 3.1 to the
Company's Current Report on Form 8-K dated August 11, 1997).
3.2 Amended and Restated Bylaws of the Company, as amended
(incorporated herein by reference to Exhibit 3.2 to Amendment
No. 2 as filed with the Commission on February 16, 1995 to the
Company's Registration Statement on Form S-1 filed with the
Commission on January 6, 1995 (Registration No. 33-88314)).
4.1 Specimen certificate for the Common Stock, $.01 par value of
the Company (incorporated herein by reference to Exhibit 4.1
to the Company's Current Report on Form 8-K dated August 11,
1997).
4.2 Rights Agreement, dated February 6, 1997, between the Company
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 No.
000-22123, as filed with the Commission on February 7, 1997).
10.1 Second Amendment to Credit Agreement and Third Amendment to
Letter Loan Agreement dated as of September 30, 1998, among
the Company, Chase Bank of Texas, National Association, as
Agent, and the banks named therein (filed herewith).
10.2 Stock Purchase Agreement dated as of October 5, 1998 by and
among Gary M. Unruh, Lawrence H. Nelson II, Leon Evans, M.D.
and Andrew L. Bruan and Choicehealth, Inc. and Horizon
Behavioral Services, Inc. (filed herewith).
11.1 Statement Regarding Computation of Per Share Earnings
(filed herewith).
27.1 Financial Data Schedule for the Three Months Ended
November 30, 1998 (filed herewith).
b) The Company filed the following report on Form 8-K during
the quarter covered by this report:
Current Report on Form 8-K/A dated June 2, 1998 and filed
with the Commission on October 16, 1998. The item reported
was Item 7, which included the financial statements and
pro forma financial information omitted from the Company's
Current Report on Form 8-K filed with the Commission on
June 17, 1998 relating to the consummation of the
Company's acquisition of FPM Behavioral Health, Inc. on
June 2, 1998.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: JANUARY 8, 1999
HORIZON HEALTH CORPORATION
BY: /s/ JAMES W. MCATEE
-------------------------------------------
JAMES W. MCATEE
PRESIDENT, CHIEF EXECUTIVE OFFICER,
TREASURER AND SECRETARY
23
<PAGE> 24
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER EXHIBIT
- ------ -------
<S> <C>
3.1 Certificate of Incorporation of the Company, as amended
(incorporated herein by reference to Exhibit 3.1 to the
Company's Current Report on Form 8-K dated August 11, 1997).
3.2 Amended and Restated Bylaws of the Company, as amended
(incorporated herein by reference to Exhibit 3.2 to Amendment
No. 2 as filed with the Commission on February 16, 1995 to the
Company's Registration Statement on Form S-1 filed with the
Commission on January 6, 1995 (Registration No. 33-88314)).
4.1 Specimen certificate for the Common Stock, $.01 par value of
the Company (incorporated herein by reference to Exhibit 4.1
to the Company's Current Report on Form 8-K dated August 11,
1997).
4.2 Rights Agreement, dated February 6, 1997, between the Company
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 No.
000-22123, as filed with the Commission on February 7, 1997).
10.1 Second Amendment to Credit Agreement and Third Amendment to
Letter Loan Agreement dated as of September 30, 1998, among
the Company, Chase Bank of Texas, National Association, as
Agent, and the banks named therein (filed herewith).
10.2 Stock Purchase Agreement dated as of October 5, 1998 by and
among Gary M. Unruh, Lawrence H. Nelson II, Leon Evans, M.D.
and Andrew L. Bruan and Choicehealth, Inc. and Horizon
Behavioral Services, Inc. (filed herewith).
11.1 Statement Regarding Computation of Per Share Earnings
(filed herewith).
27.1 Financial Data Schedule for the Three Months Ended
November 30, 1998 (filed herewith).
b) The Company filed the following report on Form 8-K during
the quarter covered by this report:
Current Report on Form 8-K/A dated June 2, 1998 and filed
with the Commission on October 16, 1998. The item reported
was Item 7, which included the financial statements and
pro forma financial information omitted from the Company's
Current Report on Form 8-K filed with the Commission on
June 17, 1998 relating to the consummation of the
Company's acquisition of FPM Behavioral Health, Inc. on
June 2, 1998.
</TABLE>
<PAGE> 1
EXHIBIT 10.1
SECOND AMENDMENT TO CREDIT AGREEMENT
------------------------------------
and
THIRD AMENDMENT TO LETTER LOAN AGREEMENT
----------------------------------------
THIS SECOND AMENDMENT TO CREDIT AGREEMENT and THIRD AMENDMENT TO LETTER
LOAN AGREEMENT (the "Amendment"), dated as of September 30, 1998, is among
HORIZON HEALTH CORPORATION, a corporation duly organized and validly existing
under the laws of the State of Delaware (the "Borrower"), each of the banks or
other lending institutions which is a signatory hereto (individually, a "Bank"
and, collectively, the "Banks"), CHASE BANK OF TEXAS, NATIONAL ASSOCIATION,
formerly known as Texas Commerce Bank National Association, individually as a
Bank and as agent for itself and the other Banks under the hereinafter defined
Credit Agreement (in its capacity as agent, together with its successors in such
capacity, the "Agent") and in its individual capacity as a lender under the
hereinafter defined Term Loan Agreement (in such capacity, "Chase"), NORTH
CENTRAL DEVELOPMENT AUTHORITY ("North Central") and the other Obligated Parties
(as defined in the Credit Agreement).
RECITALS:
WHEREAS, Borrower, the Banks and Agent have entered into that certain
Credit Agreement dated as of December 9, 1997 (as amended by that certain letter
agreement dated as of June 30, 1998, herein the "Credit Agreement").
WHEREAS, Borrower, certain Subsidiaries of Borrower, North Central and
Chase have entered into that certain Letter Loan Agreement dated as of December
20, 1995 (as amended by that certain First Amendment to Letter Loan Agreement
and Note Modification Agreement dated as of December 9, 1997 and that certain
letter agreement dated as of June 30, 1998, herein the "Term Loan Agreement")
WHEREAS, Borrower, the Obligated Parties, North Central, the Banks,
Agent and Chase now desire to further amend the Credit Agreement and the Term
Loan Agreement as herein set forth.
NOW, THEREFORE, in consideration of the premises herein contained and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
<PAGE> 2
ARTICLE 1
Definitions
Section 1.1 Definitions. Capitalized terms used in this Amendment, to
the extent not otherwise defined herein, shall have the same meanings as in the
Credit Agreement and Term Loan Agreement, as amended hereby.
ARTICLE 2
Amendments
Section 2.1 Amendment to Section 3.4. Effective as of the date hereof,
Section 3.4 of the Credit Agreement is amended in its entirety to read as
follows:
Section 3.4 Use of Proceeds . The proceeds of Term Loans shall be used
by the Borrower to repay the Previous Senior Debt, to finance Permitted
Acquisitions and to finance the redemption or repurchase of its capital stock
(to the extent permitted by Section 10.4 of this Agreement).
Section 2.2 Amendment to Section 10.4. Effective as of the date hereof,
Section 10.4 of the Credit Agreement and the similar provision incorporated into
the Term Loan Agreement pursuant to Section 6.01 of the Term Loan Agreement are
amended in their entirety as follows:
Section 10.4 Restrictions on Dividends and other Distributions. The
Borrower will not and will not permit any Subsidiary to directly or indirectly
declare, order, pay, make or set apart any sum for (a) any dividend or other
distribution, direct or indirect, on account of any shares of any class of stock
(or other equity interest) of the Borrower or any Subsidiary now or hereafter
outstanding; (b) any redemption, conversion, exchange, retirement, sinking fund
or similar payment, purchase or other acquisition for value, direct or indirect,
of any shares of any class of stock (or other equity interest) of the Borrower
or any Subsidiary now or hereafter outstanding; or (c) any payment made to
retire, or to obtain the surrender of, any outstanding warrants, options, or
other rights to acquire shares of any class of stock (or other equity interest)
of the Borrower or any Subsidiary now or hereafter outstanding; except that (i)
Subsidiaries (other than Borrower) may make, declare and pay dividends and make
other distributions with respect to their capital stock (or other equity
interest) to Borrower or the other Subsidiaries, (ii) the Borrower may redeem or
repurchase shares of its stock issued to employees and directors in connection
with the exercise by such Person of stock options granted to such Person under
the Borrower's stock option plans; provided that no Default exists or would
result therefrom and the Dollar amount of such repurchases in any individual
case shall not exceed an amount equal to exercise price pay by such Person to
exercise the option in question plus all United States federal withholding taxes
arising as a result of such exercise, (iii) this Section 10.4 shall not prohibit
the transactions permitted by clauses (a), (j) or (m) of Section 10.5, and (iv)
from September 30, 1998 through and including August 31, 1999, the Borrower may
redeem or repurchase shares of its capital stock; provided that the aggregate
amount paid by Borrower in connection with such
<PAGE> 3
redemptions and repurchases does not exceed Nine Million Dollars ($9,000,000)
and no Default exists or would result therefrom.
Section 2.3 Amendment to Section 10.5. Effective as of the date hereof,
Section 10.5 of the Credit Agreement and the similar provision incorporated into
the Term Loan Agreement pursuant to Section 6.01 of the Term Loan Agreement are
amended in their entirety to read as follows:
Section 10.5 Investments. The Borrower will not, and will not
permit any Subsidiary to, make or permit to remain outstanding any
advance, loan, other extension of credit, or capital contribution to or
investment in any Person, or purchase or own any stock, bonds, notes,
debentures, or other securities of any Person, or be or become a joint
venturer with or partner of any Person, except:
(a) Borrower or any wholly owned Subsidiary directly
owned by Borrower may acquire shares, other equity securities
or other evidence of beneficial ownership of a Person or, for
purposes of Section 10.3, all or substantially all of a
Persons's assets or the assets of a division or branch of such
Person, if, with respect to each such acquisition:
(i) Default. No Default exists or would result
therefrom;
(ii) Bank Approval. Borrower shall have obtained the
prior written consent of the Required Banks if (A)
the Purchase Price for the acquisition is greater
than Ten Million Dollars ($10,000,000) or (B) if
after giving effect to such acquisition, the
aggregate Purchase Price of all Permitted
Acquisitions that have occurred (1) from September
30, 1998 through and including August 31, 1999, is
greater than Ten Million Dollars ($10,000,000) and
(2) at any time thereafter, during the twelve (12)
month period then most recently ending, Thirty
Million Dollars ($30,000,000). As used above, the
phrase "Purchase Price" means, as of any date of
determination and with respect to a proposed
acquisition, the purchase price to be paid for the
Target or its assets, including all cash
consideration paid (whether classified as purchase
price, noncompete, consulting or postclosing
performance based payments or otherwise) or to be
paid (based on the estimated amount thereof), the
value of all other assets to be transferred by the
purchaser in connection with such acquisition to the
seller (but specifically excluding any stock of
Borrower issued to the seller which shall not be part
of the Purchase Price for purposes of this clause
(ii)) all valued in accordance with the applicable
purchase agreement and the outstanding principal
amount of all Debt of the
<PAGE> 4
Target or the seller assumed or acquired in
connection with such acquisition.
(iii) Delivery and Notice Requirements.
Borrower shall provide the Agent fifteen (15) days
prior to the consummation of the acquisition the
following: (A) notice of the acquisition, (B) the
most recent financial statements of the Target that
Borrower has available, (C) such other documentation
and information relating to the Target and the
acquisition as the Agent may reasonably request, and
(D) evidence certified by the chief executive or
chief financial officer of Borrower that Borrower
shall be in compliance with the covenants contained
in Article 11 on a pro forma basis for the four (4)
Fiscal Quarter period then most recently ending
(assuming (1) the consummation of the acquisition in
question; (2) that the incurrence or assumption of
any Debt in connection therewith occurred on the
first day of such period; (3) to the extent such Debt
bears interest at a floating rate, the rate in effect
for the entire period of calculation was the rate in
effect at the time of calculation; and (4) any sale
of Subsidiaries or lines of business which occurred
during such period occurred on the first day of such
period). Within sixty (60) days of such acquisition
the obligations under subsections 9.10(b) and (c)
shall be fulfilled.
(iv) Diligence. Borrower has completed due
diligence on the Target or the assets to be acquired;
(v) U.S. Acquisitions. The Target is
organized under the laws of a state in the United
States of America and is involved in the same general
type of business activities as the Subsidiaries; and
(vi) Structure. If the proposed acquisition
is an acquisition of the stock of a Target, the
acquisition will be structured so that the Target
will become a wholly owned Subsidiary directly owned
by Borrower. If the proposed acquisition is an
acquisition of assets, the acquisition will be
structured so that Borrower or a whole owned
Subsidiary directly owned by Borrower shall acquire
the assets; and
(b) readily marketable direct obligations of the
United States of America or any agency thereof with maturities
of one year or less from the date of acquisition;
(c) fully insured certificates of deposit with
maturities of one year or less from the date of acquisition
issued by any commercial bank
<PAGE> 5
operating in the United States of America having capital and
surplus in excess of $250,000,000;
(d) commercial paper or bonds of a domestic issuer if
at the time of purchase such paper or bonds are rated in one
of the two highest rating categories of Standard and Poor's
Corporation or Moody's Investors Service, Inc.;
(e) current trade and customer accounts receivable
for services rendered in the ordinary course of business;
(f) shares of any mutual fund registered under the
Investment Company Act of 1940, as amended, which invests
solely in investment of the type described in clauses (b)
through (d) of this Section 10.5;
(g) loans to physicians; provided that (i) at the
time of such loan no Default shall exist or result therefrom;
(ii) the aggregate amount of such loans made by Borrower and
the Subsidiaries and outstanding at any one time shall not
exceed Two Hundred Fifty Thousand Dollars ($250,000),
calculated net of any bad debt reserves;
(h) advances to employees for business expenses
incurred in the ordinary course of business including, without
limitation, loans in connection with employee relocations and
changes in the Borrower's and the Subsidiaries' payroll
payment dates;
(i) existing investments described on Schedule 10.5
hereto;
(j) the purchase by Horizon Mental Health Management,
Inc. of shares of capital stock of Florida Professional
Psychological Services, Inc. not owned by Horizon Mental
Health Management, Inc. on the Closing Date;
(k) loans, advances and other extensions of credit to
Subsidiaries made in accordance with the restrictions set
forth in subsection 10.1 (b); provided that, at the time any
such loan, advance or other extension of credit is made, no
Default exists or would result therefrom;
(l) Guarantees permitted by Section 10.1; and
(m) if no Default exists, Borrower and the
Subsidiaries may make additional capital contributions to and
or investments in or purchase any stocks, bonds, or other
equity securities authorized to be issued under Section 10.6
of a wholly owned Subsidiary or a newly created Person
<PAGE> 6
organized by Borrower or a Subsidiary that, immediately after
such investment or purchase, will be a wholly owned Subsidiary
if the obligations under Section 9.10 shall be fulfilled and
the aggregate amount of such contributions and investments
made under the permissions of this clause (m) does not exceed
One Hundred Thousand Dollars ($100,000) during the entire term
of this Agreement.
Section 2.4 Amendment to Section 11.1. Effective as of the date hereof,
Section 11.1 of the Credit Agreement and the similar provision
incorporated into the Term Loan Agreement pursuant to Section 6.01 of
the Term Loan Agreement are amended in their entirety to read as
follows:
Section 11.1 Consolidated Net Worth. The Borrower will at all
times maintain a Consolidated Net Worth in an amount not less than the
sum of (a) Thirty-Two Million Dollars ($32,000,000); plus (b) fifty
percent (50%) of the Borrower's net income determined on a consolidated
basis in accordance with GAAP for each Fiscal Quarter to have
completely elapsed since August 31, 1997; plus (c) one hundred percent
(100%) of the net cash proceeds of any sale of equity securities or
other contributions to the capital of the Borrower received by Borrower
since August 31, 1997, calculated without duplication minus (d) one
hundred percent (100%) of the purchase price of any shares of stock of
the Borrower that are redeemed or repurchased by the Borrower in
accordance with Section 10.4 during the four (4) Fiscal Quarters then
most recently ended as of the date of determination. If Borrower's
consolidated net income for a Fiscal Quarter is zero or less, no
adjustment to the requisite level of Consolidated Net Worth shall be
made. "Consolidated Net Worth" means, at any particular time, all
amounts which, in conformity with GAAP, would be included as
stockholders' equity on a consolidated balance sheet of the Borrower
and the Subsidiaries.
Section 2.5 Amendment to Section 11.2. Effective as of the date hereof,
Section 11.2 of the Credit Agreement and the similar provision incorporated into
the Term Loan Agreement pursuant to Section 6.01 of the Term Loan Agreement are
amended in their entirety to read as follows:
Section 11.2 Indebtedness to Capitalization. The Borrower will
not at any time permit the ratio of Indebtedness to Capitalization to
exceed .50 to 1.00. As used in this Section 11.2, the following terms
have the following meanings:
"Adjusted Consolidated Net Worth" means, at any particular
time, (a) all amounts which, in conformity with GAAP, would be included
as stockholders' equity on a consolidated balance sheet of the Borrower
and the Subsidiaries, plus (b) one hundred percent (100%) of the
purchase price of any shares of stock of the Borrower that are redeemed
or repurchased by the Borrower in accordance with Section 10.4 during
the four (4) Fiscal Quarters then most recently ended as of the date of
determination.
<PAGE> 7
"Capitalization" for means, at any particular time, the sum of
Adjusted Consolidated Net Worth plus Indebtedness.
"Indebtedness" means, at the time of determination, the sum of
the following determined for Borrower and the Subsidiaries on a
consolidated basis (without duplication); (a) all obligations for
borrowed money; (b) all obligations of such Person evidenced by bonds,
notes, debentures, or other similar instruments; (c) all Capital Lease
Obligations; and (d) the outstanding principal amount of the loans
extended to North Central Development Company which are secured by a
Lien on the facility located at 1500 Water Ridge, Lewisville, Texas
leased by the Borrower.
Section 2.6 Amendment to Exhibit "J". Effective as of the date hereof,
Exhibit "J" to the Credit Agreement and the similar exhibit incorporated into
the Term Loan Agreement pursuant to Section 6.01 of the Term
Loan Agreement are amended in their entirety to read as set forth
in Exhibit "J" hereto.
ARTICLE 3
Waivers
Section 3.1 Waivers of Non-Compliance with Certain Provisions of the
Loan Documents. The Borrower has advised the Agent, the Banks and Chase
(collectively the "Lenders") that it has failed to comply with Section 10.3,
Section 10.5(a)(vi) and Section 10.8 of the Credit Agreement, the similar
provisions incorporated into the Term Loan Agreement pursuant to Section 6.01 of
the Term Loan Agreement and Paragraph 10 of the Borrower Pledge Agreement, each
as more specifically described below (the following specifically described
provisions of the Credit Agreement, the Term Loan Agreement and the Borrower
Pledge Agreement are hereinafter referred to as the "Applicable Covenants").
(a) The Borrower has notified the Agent that (i) FPMBH
Clinical Services, Inc. ("FPMBHC") (a wholly owned Subsidiary directly
owned by Horizon Behavioral Services, Inc., formerly known as FPM
Behavioral Health, Inc., and herein "HBS") was merged with and into
HBS's wholly-owned Subsidiary, Florida Psychiatric Associates, Inc.
("FPA") effective as of September 10, 1998; and (ii) Arizona
Psychiatric Affiliates, Inc. ("APA") was merged with and into FPA
effective as of September 24, 1998 (collectively, the "Florida
Psychiatric Mergers"). The Florida Psychiatric Mergers do not comply
with Section 10.3 of the Credit Agreement and the similar provision
incorporated into the Term Loan Agreement pursuant to Section 6.01 of
the Term Loan Agreement, which require that the Florida Psychiatric
Mergers be structured so that the surviving Person is or becomes a
wholly owned Subsidiary directly owned by Borrower.
(b) HBS acquired all of the shares of capital stock of Choice
Health, Inc. (the "Acquisition") for a Purchase Price equal to
$2,000,000. The structure of the Acquisition
<PAGE> 8
does not comply with Section 10.5(a)(vi) of the Credit Agreement and
the similar provision incorporated into the Term Loan Agreement
pursuant to Section 6.01 of the Term Loan Agreement, which require that
the Acquisition be structured so that Choice Health, Inc. will become a
wholly owned Subsidiary directly owned by Borrower.
(c) The Borrower has notified the Agent that it has
contributed 100% of the issued and outstanding shares of the capital
stock (the "Shares") of Acorn Behavioral Healthcare Management
Corporation ("ABHMC") (a wholly owned Subsidiary directly owned by
Borrower) to HBS (the "Contribution"). The Contribution does not comply
with (i) Section 10.8 of the Credit Agreement and the similar provision
incorporated into the Term Loan Agreement pursuant to Section 6.01 of
the Term Loan Agreement, which prohibit the Borrower from disposing of
any of its assets except as specifically set forth therein and (ii)
Paragraph 10 of the Borrower Pledge Agreement which prohibits the
disposition of the Shares without the consent of the Agent.
The Borrower, the Obligated Parties and North Central (collectively the
"Loan Parties") have requested that the Lenders waive the Defaults arising as a
result of the failure of the Borrower to comply with the Applicable Covenants
with respect to the transactions specifically described in clauses (a), (b) and
(c) of this Section 3.1 (the "HBS Transactions").
The undersigned Lenders waive the Defaults arising as a result of the
failure of the Borrower to comply with the Applicable Covenants with respect to
the HBS Transactions.
To induce the Lenders to agree to the terms of this Section 3.1 each
Loan Party agrees that the waivers set forth herein shall not be deemed a
consent to the departure from or waiver of (1) the Applicable Covenants for any
purpose other than to permit the HBS Transactions or (2) any other covenant,
condition or Default (including without limitation, any other covenant,
condition or Default set forth in or relating to the Applicable Covenants, in
any Loan Document as defined in the Credit Agreement and as defined in the Term
Loan Agreement (all such Loan Documents, herein the "Transaction Documents")) or
(3) any other default or event of default under any Transaction Document (a
"Transaction Default") that otherwise may arise as a result of the HBS
Transactions. The failure to comply with the Applicable Covenants for any other
transaction of the type restricted by the Applicable Covenants shall constitute
a Transaction Default.
In addition to the foregoing, the Borrower and HBS agree to execute and
deliver to the Agent, on or before October 30, 1998, all documentation requested
by the Agent (1) to pledge to the Agent the shares of stock of HBS that were
issued to the Borrower to reflect HBS's name change from "FPM Behavioral Health,
Inc." to "Horizon Behavioral Services, Inc.", (2) to pledge to the Agent the
shares of stock of FPA that were issued to HBS as a result of the Florida
Psychiatric Mergers, and (3) to pledge to the Agent the shares of stock of ABHMC
that were issued to HBS as a result of the Contribution.
Section 3.2 Consent to Release of Stock of Merged Subsidiaries. The
Borrower has notified the Agent that the following mergers (collectively, the
"Mergers") have been completed,
<PAGE> 9
all (except the Florida Psychiatric Merger as described above) in accordance
with Section 10.3 of the Credit Agreement: (a) Florida Professional
Psychological Services, Inc. ("FPPS") was merged with and into HBS effective as
of June 4, 1998; (b) FPM/Hawaii, Inc. ("FPMH"), FPM Management, Inc. ("FPMI"),
FPM of Louisiana, Inc. ("FPML"), FPM of Ohio, Inc. ("FPMO"), FPM of Utah, Inc.
("FPMU"), FPM of West Virginia, Inc. ("FPMWV") and FPM/Southeast, Inc. ("FPMSE")
were merged with and into HBS effective as of September 1, 1998; and (c) the
Florida Psychiatric Mergers.
As a consequence of the Mergers, the Borrower has requested that the
Agent release and return the stock certificates together with the accompanying
stock powers evidencing the shares of stock of FPPS, FPMH, FPMI, FPML, FPMO,
FPMU, FPMWV, FPMSE, FPMBHC and APA that were pledged to the Agent pursuant to
the Credit Agreement (the "Stock Certificates"). The Banks hereby consent to the
Agent's release and return of the Stock Certificates.
ARTICLE 4
Miscellaneous
Section 4.1 Ratifications. The terms and provisions set forth in this
Amendment shall modify and supersede all inconsistent terms and provisions set
forth in the Credit Agreement and Term Loan Agreement and except as expressly
modified and superseded by this Amendment, the terms and provisions of the
Credit Agreement and Term Loan Agreement and the other Transaction Documents are
ratified and confirmed and shall continue in full force and effect. The Loan
Parties and the Lenders agree that the Credit Agreement and Term Loan Agreement
as amended hereby and the other Transaction Documents shall continue to be
legal, valid, binding and enforceable in accordance with their respective terms.
Section 4.2 Reference to Credit Agreement and Term Loan Agreement. Each
of the Transaction Documents, including the Credit Agreement and Term Loan
Agreement and any and all other agreements, documents, or instruments now or
hereafter executed and delivered pursuant to the terms hereof or pursuant to the
terms of the Credit Agreement or Term Loan Agreement as amended hereby, are
hereby amended so that any reference in such Transaction Documents to the Credit
Agreement or Term Loan Agreement shall mean a reference to the Credit Agreement
and Term Loan Agreement as amended hereby.
Section 4.3 Expenses of Agent. As provided in the Credit Agreement and
the Term Loan Agreement, Borrower agrees to pay on demand all costs and expenses
incurred by the Agent in connection with the preparation, negotiation, and
execution of this Amendment.
Section 4.4 Amendment Fee. As consideration for each of the undersigned
Banks agreement to enter into this Amendment the Borrower agrees to pay to the
Agent for the benefit of each of the undersigned Banks an amendment fee equal
the product of one-tenth of one percent (.10%) multiplied the amount of such
Bank's Commitments (the "Amendment Fee"), which Amendment Fee shall be due and
payable on or before October 15, 1998.
<PAGE> 10
Section 4.5 Severability. Any provision of this Amendment held by a
court of competent jurisdiction to be invalid or unenforceable shall not impair
or invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
Section 4.6 Applicable Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of Texas.
Section 4.7 Successors and Assigns. This Amendment is binding upon and
shall inure to the benefit of the Loan Parties, the Lenders and their respective
successors and assigns, except the Loan Parties may not assign or transfer any
of their rights or obligations hereunder without the prior written consent of
the Lenders.
Section 4.8 Counterparts. This Amendment may be executed in one or more
counterparts and on telecopy counterparts, each of which when so executed shall
be deemed to be an original, but all of which when taken together shall
constitute one and the same agreement.
Section 4.9 Effect of Waiver. No consent or waiver, express or implied,
by any Lender to or for any breach of or deviation from any covenant, condition
or duty by Borrower or any other Loan Party shall be deemed a consent or waiver
to or of any other breach of the same or any other covenant, condition or duty.
Section 4.10 Headings. The headings, captions, and arrangements used in
this Amendment are for convenience only and shall not affect the interpretation
of this Amendment.
Section 4.11 ENTIRE AGREEMENT. THIS AMENDMENT EMBODIES THE FINAL,
ENTIRE AGREEMENT AMONG THE PARTIES HERETO AND SUPERSEDE ANY AND ALL PRIOR
COMMITMENTS, AGREEMENTS, REPRESENTATIONS AND UNDERSTANDINGS, WHETHER WRITTEN OR
ORAL, RELATING TO THIS AMENDMENT, AND MAY NOT BE CONTRADICTED OR VARIED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS
OF THE PARTIES HERETO. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES HERETO.
<PAGE> 11
Executed as of the date first written above.
LENDERS:
CHASE BANK OF TEXAS, NATIONAL
ASSOCIATION, as Agent and in its individual
capacity as a Lender under the Credit
Agreement and the Term Loan Agreement
By: /s/ JOANNE BRAMANTI
-------------------------------------
Joanne Bramanti, Vice President
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By: /s/ VANESSA SHEH MEYER
--------------------------------------
Name: Vanessa Sheh Meyer
------------------------------------
Title: Managing Director
-----------------------------------
COMERICA BANK-TEXAS
By: /s/ SEAN SHOPE
--------------------------------------
Name: Sean Shope
------------------------------------
Title: Corporate Banking Officer
-----------------------------------
<PAGE> 12
COOPERATIEVE CENTRALE RAIFFEISEN-
BOERENLEENBANK B.A., "RABOBANK
NEDERLAND," NEW YORK BRANCH
By: /s/ ROBERT B. BENOIT
--------------------------------------
Name: Robert B. Benoit
------------------------------------
Title: Senior Vice President
-----------------------------------
By: /s/ JOHN GRIGEO
--------------------------------------
Name: John Grigeo
------------------------------------
Title: Vice President
-----------------------------------
BANQUE PARIBAS, HOUSTON AGENCY
By: /s/ GLENN E. MEALEY
--------------------------------------
Name: Glenn E. Mealey
------------------------------------
Title: Director
-----------------------------------
By: /s/ ROGER A. MAY
--------------------------------------
Name: Roger A. May
------------------------------------
Title: Vice President
-----------------------------------
<PAGE> 13
LOAN PARTIES
HORIZON HEALTH CORPORATION
HORIZON MENTAL HEALTH MANAGEMENT, INC.
MENTAL HEALTH OUTCOMES, INC.
HHG COLORADO, INC.
GERIATRIC MEDICAL CARE, INC.
SPECIALTY REHAB MANAGEMENT, INC.
ACORN BEHAVIORAL HEALTHCARE MANAGEMENT CORPORATION
HHMC PARTNERS, INC.
HORIZON BEHAVIORAL SERVICES, INC.
FLORIDA PSYCHIATRIC ASSOCIATES, INC.
FLORIDA PSYCHIATRIC MANAGEMENT, INC.
FPMBH OF ARIZONA, INC.
FPMBH OF TEXAS, INC.
By: /s/ JAMES W. MCATEE
-------------------------------------------------------
James W. McAtee, Executive Vice President and Secretary
of each of the above listed Loan Parties
<PAGE> 14
NORTH CENTRAL DEVELOPMENT COMPANY
By: /s/ JOHN T. AMEND
---------------------------------
John T. Amend, President
<PAGE> 15
EXHIBIT "J"
TO
HORIZON HEALTH CORPORATION
CREDIT AGREEMENT
Compliance Certificate
<PAGE> 16
COMPLIANCE CERTIFICATE
for the
Fiscal Quarter ending ________ __, ____
To: Chase Bank of Texas, National Association,
as Agent
1111 Fannin, 9th Floor, MS46
Houston, Texas 77002
Attention: Loan Syndication Services
re: Horizon Health Corporation
and each Bank
Ladies and Gentlemen:
This Compliance Certificate (the "Certificate") is being delivered
pursuant to Section 9.1(c) of that certain Credit Agreement (as amended, the
"Agreement") dated as of December 9, 1997, among the Horizon Health Corporation,
the banks and lending institutions named therein (the "Banks") and Texas
Commerce Bank National Association, as agent for the Banks ("Agent"). All
capitalized terms, unless otherwise defined herein, shall have the same meanings
as in the Agreement. All the calculations set forth below shall be made pursuant
to the terms of the Agreement.
The undersigned, as an authorized financial officer of the Borrower,
and not individually, does hereby certify to the Agents and the Banks that:
1. DEFAULT.
No Default has occurred and is continuing or if a Default has occurred and is
continuing, I have described on the attached Exhibit "A" the nature thereof and
the steps taken or proposed to remedy such Default.
2. SECTION 9.1 - FINANCIAL STATEMENTS AND RECORDS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(a) Annual audited financial statements of Borrower and the Yes No N/A
Subsidiaries on or before ninety (90) days after the end of each
Fiscal Year.
(b) Quarterly unaudited financial statements of Borrower and the Yes No N/A
Subsidiaries within forty-five (45) days after the end of the first 3
Fiscal Quarters and within ninety (90) days after the last Fiscal
Quarter
(c) Financial Projections of Borrower and Subsidiaries within Yes No N/A
forty-five (45) days after the beginning of each Fiscal Year.
</TABLE>
<PAGE> 17
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
3. SECTION 10.1 - DEBT
(a) Purchase money not to exceed: $ 500,000
Actual Outstanding: $ Yes No
--------
(b) Guarantees of surety, appeal bonds, etc. not to exceed: $ 500,000
Actual Outstanding: $ Yes No
--------
(c) Aggregate Debt of newly acquired or merged Subsidiaries not
to exceed: $ 500,000
Actual Outstanding: $ Yes No
--------
(d) Other Debt not to exceed: $ 100,000
Actual Outstanding: $ Yes No
--------
4. SECTION 10.4 - RESTRICTIONS ON DIVIDENDS AND OTHER
DISTRIBUTIONS
(a) From September 30, 1998 through and including August 31, $ 9,000,000 Yes No
1999, the aggregate amount paid by Borrower in connection with the $
repurchase or redemption of its stock shall not exceed:
Actual Outstanding:
5. SECTION 10.5 - INVESTMENTS
(a) Aggregate amount of loans to physicians employed by a $ 250,000 Yes No
Subsidiary not to exceed (calculated net of bad debt reserve): $
Actual Outstanding:
(b) Aggregate amount of investments in or contributions to wholly $ 100,000 Yes No
owned Subsidiaries not to exceed: $
Actual Outstanding:
6. SECTION 10.8 - ASSET DISPOSITIONS
(a) Aggregate book value of assets disposed during any 12-month $ 200,000
period not to exceed:
(b) Total book value of asset dispositions for 12-month period $ Yes No
--------
most recently ending:
7. SECTION 11.1 - CONSOLIDATED NET WORTH
(a) $ 32,000,000 $
(b) Net income for Current Fiscal Quarter (if positive) $
(c) Aggregate positive Net Income since 8/31/97 Fiscal Quarter $
end (excluding current Fiscal Quarter)
(d) 7(b) + 7(c) $
(e) 50% of 7(d) $
(f) Aggregate amount of net cash proceeds or other Capital $
Contribution to Borrower since 8/31/97
(g) Aggregate amount of purchase price of all shares of stock of $
the Borrower that have been redeemed or repurchased by the Borrower
during the four (4) Fiscal Quarters most recently ending:
(h) Required Consolidated Tangible Net Worth: $
7(a) + 7(e) + 7(f) - 7(g)
(i) Actual Consolidated Net Worth $ Yes No
--------
</TABLE>
<PAGE> 18
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
8. SECTION 11.2 - INDEBTEDNESS TO CAPITALIZATION
---------------------------------------------
(a) Debt for borrowed money $
(b) Debt evidenced by bonds, notes, etc. $
(c) Capital Lease Obligations $
(d) North Central Development Company debt $
(e) Sum of 8(a) - 8(d) $
(f) Actual Net Worth
(from Section 11.1) $
(g) Aggregate amount of purchase price of all shares of stock of
the Borrower that have been redeemed or repurchased by the Borrower
during the four (4) Fiscal Quarters most recently ending:
$
(h) 8(e) + 8(f) + 8(g) $
(i) 8(e) / 8(h) = :1.00
------
(j) Maximum Indebtedness to Capitalization 0.50:1.00 Yes No
9. SECTION 11.3 - FIXED CHARGE COVERAGE
(a) Borrower and the Subsidiaries' Consolidated Net Income
for last four Fiscal Quarters (from Schedule 1) $
(b) Plus provisions for tax $
(c) less benefit from tax $
(d) Plus interest expense $
(e) Plus amortization $
(f) Plus depreciation $
(g) Plus, if applicable, 8/97 merger expenses $
(h) Borrower and the Subsidiaries' EBITDA:
(a) plus (b), (d), (e), (f), and (g) less (c) $
(i) provisions for taxes $
(j) plus benefit from taxes $
(k) Cash Flow
9(h) plus 9(j) minus 9(i) $
(l) Fixed Charges $
(i) Cash interest expense for last four Fiscal Quarters $
(ii) Scheduled amortization of Debt (excluding $
outstanding Revolving Loans and Term Loan $
current maturities if prior to 11/30/99) $
(iii) Aggregate amount of Capital Expenditures for $
last four Fiscal Quarters $
(iv) if prior to 11/30/99, an amount equal to #3 below
(1) Term Loans $
(2) (iv)(1) / 20 $
(3) (iv)(2) x 4 $
(v) Sum of 9(l)(i) through (iv) $
(m) Actual Fixed Charge Coverage 9(k) / 9(l)(v)= ______:1.00
(n) Minimum Fixed Charge Coverage 1.2:1.00 Yes No
</TABLE>
<PAGE> 19
<TABLE>
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10. SECTION 11.4 - INDEBTEDNESS TO ADJUSTED EBITDA
----------------------------------------------
(a) Indebtedness from 8(e) $
(b) Actual EBITDA (from 9(h)) $
(c) Prior Period/Prior Target EBITDA $
(d) Adjusted EBITDA (10(b) plus 10(c)) $
(e) 10(a) / 10(d) ____:1.00
(f) Maximum Indebtedness to Adjusted EBITDA allowed by
Credit Agreement 2.5:1.00 Yes No
</TABLE>
11. ATTACHED SCHEDULES
Attached hereto as schedules are the calculations supporting the
computation set forth above in this Certificate. All information
contained herein and on the attached schedules is true and correct.
12. FINANCIAL STATEMENTS
The unaudited financial statements attached hereto were prepared in
accordance with GAAP (excluding footnotes) and fairly present (subject
to year end audit adjustments) the financial conditions and the results
of the operations of the Persons reflected thereon, at the date and for
the periods indicated therein.
13. CONFLICT
In the event of any conflict between the definitions or covenants
contained in the Credit Agreement and as they may be interpreted or
abbreviated in the Compliance Certificate, the Credit Agreement shall
control.
IN WITNESS WHEREOF, the undersigned has executed this Certificate
effective this _______ day of __________ , 199_ .
HORIZON HEALTH CORPORATION
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
<PAGE> 20
Schedule 1
to
Compliance Certificate
Borrower Consolidated Net Income
for period ______________ to _________________
<TABLE>
<S> <C> <C>
1. GAAP for Borrower (the "Subject Person") excluding the following $
consolidated net income ___________
(a) extraordinary gains or losses or nonrecurring revenue
or expenses ___________
(b) gains on sale of securities ___________
(c) losses on sale of securities ___________
(d) any gains or losses in respect of the write-up of any asset at greater
than original cost or write-down at less than original cost; ___________
(e) any gains or losses realized upon the sale or other disposition of
property, plant, equipment or intangible assets which is not sold or
otherwise disposed of in the ordinary course of business; ___________
(f) any gains or losses from the disposal of a discontinued business; ___________
(g) any net gains or losses arising from the extinguishment of any debt; ___________
(h) any restoration to income of any contingency reserve for long term
asset or long term liabilities, except to the extent that provision
for such reserve was made out of income accrued during such period; ___________
(i) the cumulative effect of any change in an accounting principle on income
of prior periods; ___________
(j) any deferred credit representing the excess of equity in any acquired
company or assets at the date of acquisition over the cost of the
investment in such company or asset; ___________
(k) the income from any sale of assets in which the book value of such assets
prior to their sale had been the book value inherited; ___________
(l) the income (or loss) of any Person (other than a subsidiary) in which
the Subject Person or a subsidiary has an ownership interest;
provided, however, that (i) Consolidated Net Income shall include
amounts in respect of the income of such Person when actually received
in cash by the Subject Person or such subsidiary in the form of
dividends or similar distributions and (ii) Consolidated Net Income
shall be reduced by the aggregate amount of all investments,
regardless of the form thereof, made by the Subject Person or any of
its subsidiaries in such Person for the purpose of funding any deficit
or loss of such Person; ___________
(m) the income of any subsidiaries to the extent the payment of such
income in the form of a distribution or repayment of any Debt to the
Subject Person or a Subsidiary is not permitted, whether on account of
any restriction in by-laws, articles of incorporation or similar
governing document, any agreement or any law, statute, judgment,
decree or governmental order, rule or regulation applicable to such
Subsidiary; ___________
(n) any reduction in or addition to income tax expense resulting from an
increase or decrease in a deferred income tax asset due to the
anticipation of future income tax benefits; ___________
(o) any reduction in or addition to income tax expense due to the change
in a statutory tax rate resulting in an increase or decrease in a
deferred income tax asset or in a deferred income tax liability; ___________
</TABLE>
<PAGE> 21
<TABLE>
<S> <C> <C>
(p) any gains or losses attributable to returned surplus assets of any
pension- benefit plan or any pension credit attributable to the excess
of (i) the return on pension-plan assets over (ii) the pension
obligation's service cost and interest cost; ___________
(q) the income or loss of any Person acquired by the Subject Person or a
subsidiary for any period prior to the date of such acquisition; and ___________
(r) the income from any sale of assets in which the accounting basis of
such assets had been the book value of any Person acquired by the
Subject Person or a subsidiary prior to the date such Person became a
subsidiary or was merged into or consolidated with the Subject Person
or a subsidiary. ___________
TOTAL: $
===========
</TABLE>
<PAGE> 1
EXHIBIT 10.2
STOCK PURCHASE AGREEMENT
BY AND AMONG
GARY M. UNRUH,
LAWRENCE H. NELSON II,
LEON EVANS, M.D. AND
ANDREW L. BRAUN
AND
CHOICEHEALTH, INC.
AND
HORIZON BEHAVIORAL SERVICES, INC.
AS OF
OCTOBER 5, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE I
PURCHASE AND SALE
1.1 Agreement to Sell and Purchase 1
1.2 Purchase Price 1
1.3 Indemnity Escrow Deposit 1
1.4 Closing Purchase Price Adjustment 2
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLERS
2.1 Due Authorization 4
2.2 Due Organization of the Company 4
2.3 Subsidiaries/Investments 4
2.4 Conflicts 4
2.5 Licenses/Compliance with Law 5
2.6 Financial Statements 5
2.7 No Adverse Change 6
2.8 No Undisclosed Liabilities 6
2.9 Title to and Condition of Assets 6
2.10 Litigation 7
2.11 Real Property 7
2.12 Intellectual Property 7
2.13 Customer Contracts and Other Agreements 8
2.14 Employees 9
2.15 Employee Benefit Plans 9
2.16 Receivables 11
2.17 Broker's and Finder's Fees 11
2.18 Labor Practices 11
2.19 Claims 11
2.20 Consents 11
2.21 Environmental Matters 11
2.22 Taxes 12
2.23 Transactions With Affiliates 12
2.24 Improper Payments 13
2.25 Insurance 13
2.26 Bank Accounts 13
2.27 Customers 13
2.28 Capitalization 13
2.29 Ownership of Shares 13
2.30 Accounts Payable/IBNR 14
2.31 Costs and Expenses 14
2.32 Full Disclosure 14
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PURCHASER
3.1 Due Organization of Purchaser 15
3.2 Due Authorization 15
3.3 Broker's and Finder's Fees 15
3.4 Consents 15
ARTICLE IV
CERTAIN AGREEMENTS APPLICABLE PRIOR TO THE CLOSING DATE
4.1 Access and Information 15
4.2 Operation of Businesses; Course of Conduct. 16
4.3 Public Communications 17
4.4 Solicitation of Inquiries 17
4.5 Cooperation 17
4.6 Updating of Schedules 17
ARTICLE V
CONDITIONS PRECEDENT TO OBLIGATIONS
5.1 Conditions to Obligations of Sellers 18
5.2 Conditions to Obligations of Purchaser 18
ARTICLE VI
CLOSING
6.1 Closing 20
6.2 Actions by Sellers 20
6.3 Actions by Purchaser 21
6.4 Section 338(h)(10) Election 21
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNITY POST-CLOSING AGREEMENTS
7.1 Representations and Warranties to Survive 22
7.2 Access to Records Following Closing 22
7.3 Indemnity 22
7.4 Indemnity Procedures 23
7.5 Limitations on Indemnification 24
7.6 Remedies; Default; Notice and Cure 24
7.7 Employees 24
7.8 IBNR Adjustment 24
</TABLE>
<PAGE> 4
<TABLE>
<S> <C> <C>
ARTICLE VIII
SEVERANCE ARRANGEMENTS/NON-COMPETITION
8.1 Severance Arrangements 25
8.2 Covenant Not to Compete; Non-Solicitation 27
8.3 Non-Disclosure 27
8.4 Nondisparagement 28
8.5 Reasonableness; Reformation 28
8.6 Remedies for Breach 28
ARTICLE IX
TERMINATION AND ABANDONMENT OF THE AGREEMENT
9.1 Termination 29
9.2 Effect of Termination 29
9.3 Termination Fee 29
ARTICLE X
ARBITRATION
10.1 Arbitration Procedure 30
10.2 Self-Execution 31
10.3 Arbitrator's Fees 31
10.4 Rules Governing Arbitration 32
10.5 Entry of Award 32
10.6 Injunctive Relief 32
ARTICLE XI
MISCELLANEOUS
11.1 Waiver and Amendment 32
11.2 Entire Agreement 32
11.3 Schedules 32
11.4 Descriptive Headings 33
11.5 Defined Terms 33
11.6 Notices 33
11.7 Expenses 34
11.8 Assignment 34
11.9 Choice of Law 34
11.10 Attorney's Fees and Costs 34
11.11 Counterparts 34
</TABLE>
<PAGE> 5
LIST OF EXHIBITS
EXHIBIT A - Escrow Agreement
LIST OF SCHEDULES
Schedule 2.4 Conflicts
Schedule 2.5 Licenses
Schedule 2.6 Financial Statements/Capitalized Leases
Schedule 2.9 Liens
Schedule 2.10 Litigation
Schedule 2.13(a) Customer Contracts
Schedule 2.13(b) Providers
Schedule 2.13(c) Other Contracts
Schedule 2.14 Employees
Schedule 2.15 Employee Benefit Plan
Schedule 2.19 Claims
Schedule 2.20 Consents
Schedule 2.22 Taxes
Schedule 2.23 Affiliate Transaction
Schedule 2.25 Insurance
Schedule 2.26 Bank Accounts
Schedule 2.27 Customers
<PAGE> 6
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement ("Agreement") is made as of October 5,
1998 (the "Effective Date") by and among Gary M. Unruh, Lawrence H. Nelson II,
Leon Evans, M.D. and Andrew L. Braun (individually a "Seller" and collectively
the "Sellers"); ChoiceHealth, Inc., a Colorado corporation (the "Company"); and
Horizon Behavioral Services, Inc., a Delaware corporation ("Purchaser").
WHEREAS, the Sellers own all the issued and outstanding shares of
common stock, no par value of the Company (the "Common Stock"); and
WHEREAS, the Purchaser desires to acquire from the Sellers and the
Sellers desire to sell to the Purchaser, for the consideration hereinafter
provided, all of the issued and outstanding shares of Common Stock of the
Company (collectively, the "Shares");
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein contained, the parties hereto hereby agree as
follows:
ARTICLE I.
PURCHASE AND SALE
1.1 Agreement to Sell and Purchase. On the Closing Date (hereinafter
defined) and subject to the terms and conditions hereof, the Sellers shall sell,
assign and convey the Shares to the Purchaser and the Purchaser shall purchase
the Shares from the Sellers.
1.2 Purchase Price. The total aggregate purchase price for the
Shares to be paid at the Closing shall be Two Million Dollars ($2,000,000) (the
"Closing Purchase Price"). The Closing Purchase Price shall be allocated to each
Seller based on the respective percentage ownership of all the Shares
represented by the Shares held by such Seller. The Closing Purchase Price shall
be subject to adjustment as specified in Section 1.4 below (as so adjusted, the
"Purchase Price"). The Closing Purchase Price shall be payable by Purchaser by
wire transfer of immediately available federal funds to the accounts of the
Sellers on the Closing Date; subject, however, to the Escrow Deposit to be made
by the Sellers at the Closing pursuant to Section 1.3 of this Agreement.
1.3 Indemnity Escrow Deposit. At the Closing, the Sellers shall
deposit the aggregate sum of $200,000 of the Purchase Price with 1stBank of
Longmont, as escrow agent (the "Escrow Agent"), by certified or official bank
check payable to the order of the Escrow Agent or by wire transfer of
immediately available funds to the account of the Escrow Agent (the "Escrow
Deposit" and, together with all earnings thereon, the "Escrow Funds"). Each
Seller shall contribute a proportionate share of the Escrow Deposit based on the
percentage of the Closing Purchase Price paid to each Seller. The Escrow Funds
will be held, invested and disbursed as specified in and pursuant to the terms
and conditions of an escrow agreement substantially in the form attached hereto
as Exhibit A attached hereto (the "Escrow Agreement").
<PAGE> 7
1.4 Closing Purchase Price Adjustment.
(a) As promptly as practicable following the Closing Date, but
in no event later than ninety (90) days thereafter, the Purchaser shall prepare
and deliver to the Sellers (i) an unaudited consolidated balance sheet of the
Company (the "Closing Balance Sheet") as of the Closing Date (immediately prior
to the Closing and without giving effect to the Closing) and (ii) a certificate
setting forth the Closing Net Worth (defined below) as of the Closing Date
(immediately prior to the Closing and without giving effect to the Closing)
computed in accordance with the terms of this Agreement, and setting forth the
computation and components thereof in reasonable detail (the "Statement of
Closing Net Worth"). The Closing Balance Sheet shall be prepared in accordance
with generally accepted accounting principles ("GAAP") as if the Closing Date
were the last day of the fiscal year of the Company.
(b) On the forty-fifth (45th) day after the date on which the
Closing Balance Sheet and the Statement of Closing Net Worth have been delivered
to the Sellers (or such earlier date as the Sellers notify the Purchaser in
writing), if the Closing Net Worth shown on the Statement of Closing Net Worth
is not disputed by the Sellers pursuant to Section 1.4(c) hereof, then (i) in
the event that the Closing Net Worth exceeds the Base Net Worth, the Purchaser
shall pay to the Sellers on the same proportionate basis by bank wire transfer
the amount by which the Closing Net Worth exceeds the Base Net Worth, (ii) in
the event that the Closing Net Worth equals the Base Net Worth, the Purchase
Price shall equal the Closing Purchase Price and no adjustment shall be made
pursuant to this Section 1.4, and (iii) in the event that the Base Net Worth
exceeds the Closing Net Worth, the Sellers, jointly and severally, shall pay to
the Purchaser by bank wire transfer the amount by which the Base Net Worth
exceeds the Closing Net Worth. It is expressly understood that any payment by
the Sellers pursuant to subsection (iii) of the immediately preceding sentence
shall not be made with any funds constituting the Escrow Funds. In addition, it
is understood and agreed that, if the Sellers do not deliver a Dispute Notice to
the Purchaser within forty-five (45) days after the receipt by the Sellers of
the Closing Balance Sheet and the Statement of Closing Net Worth, then the
Closing Balance Sheet and the Statement of Closing Net Worth shall be deemed
accepted in all respects by the Sellers and shall be final and binding upon the
parties hereto.
(c) If the Sellers dispute the Closing Net Worth shown on the
Statement of Closing Net Worth, the Sellers shall give written notice (the
"Dispute Notice") to the Purchaser within the forty-five (45) day period
specified in subparagraph (b) above, which Dispute Notice shall specify in
reasonable detail the reasons for such disagreement and the amount in dispute.
If the Sellers and the Purchaser are unable to resolve the disputed matters
within thirty (30) days after receipt by the Purchaser of the Dispute Notice,
all disputed matters raised in the Dispute Notice and not so resolved shall be
submitted to (i) the Dallas office of Arthur Anderson, L.L.P. and if such firm
refuses to accept such engagement, then (ii) the Dallas office of the next
nationally recognized "Big Five" independent accounting firm which is listed in
alphabetical order, excluding, however, Price Waterhouse Coopers, L.L.P. (such
firm which accepts the engagement, the "Independent Auditor") for final
resolution in accordance with the terms and provisions of this Agreement. Each
party shall be permitted to submit to the Independent Auditor a written
statement in support of its position with respect to the disputed matters raised
<PAGE> 8
in the Dispute Notice and not resolved. The Independent Auditor's resolution of
any such dispute shall be reflected in a written report which the Purchaser and
Sellers shall use their respective best efforts to cause to be delivered
promptly to the Sellers and the Purchaser, which written report shall, in
addition to setting forth the resolution of the disputed matters, set forth the
Closing Net Worth determined in accordance with the terms hereof (and after
giving effect to such resolution) and shall set forth, after giving effect to
the foregoing determinations, which of clauses (i), (ii) or (iii) of subsection
(c) above is applicable in the circumstances (all of the foregoing, the
"Independent Auditor's Determination"). The Sellers and the Purchaser shall use
their respective best efforts to cause the Independent Auditor to make the
Independent Auditor's Determination as soon as possible, but in no even later
than forty-five (45) days after receipt of the disputed matters. The Independent
Auditor's Determination shall be final and binding upon the parties hereto. The
Independent Auditor's resolution of disputed matters shall be limited to matters
of dispute which are raised in the Dispute Notice and not resolved by the
Sellers and the Purchaser. One-half of all fees and disbursements of the
Independent Auditor shall be paid by the Sellers and one-half of such fees and
disbursements shall be paid by the Purchaser. Any payment to be made as a
consequence of the decision of the Independent Auditor shall be made, free and
clear of any deductions or set-off, not later than three business days after the
receipt of such written report by the Sellers and the Purchaser, in accordance
with the provisions of clauses (i) through (iii) of Section 1.4(b), as
applicable.
(d) All amounts paid pursuant to this Section 1.4 shall be
paid by bank wire transfer of immediately available funds and shall bear
interest from and after the end of the 45-day period (as described in Section
1.4(b)), until paid, at the per annum rate equal to the prime rate of Chase
Manhattan Bank (or its successors), as in effect from time to time, on the basis
of a 365-day year and the actual number of days elapsed.
(e) During the time periods specified in this Section 1.4, the
Purchaser shall afford the Sellers and their representatives access to the books
and records of the Company and, upon reasonable prior notice and without
unreasonable disruption, to the employees of the Company, and afford the Sellers
and their representatives with the opportunity to participate in and consult
with the Purchaser in connection with the preparation by the Purchaser of the
Closing Balance Sheet and the Statement of Closing Net Worth.
(f) For the purposes of this Section 1.4, the term "Closing
Net Worth" shall mean the assets of the Company minus the liabilities of the
Company on the Closing Date (immediately prior to the Closing and without giving
effect to the Closing), all determined in accordance with GAAP, and in a manner
consistent with the preparation of the Company Balance Sheet (hereinafter
defined) included in the Financial Statements (hereinafter defined), but only to
the extent not contrary to GAAP; provided, however, that in making such
calculation there shall be excluded from the liabilities of the Company all
reserves for incurred unpaid provider claims which reserves have been
historically identified on the balance sheets of the Company as accounts payable
(the "IBNR Payables"). For the purposes of this Section 1.4, Base Net Worth
shall mean a positive $382,469, representing the net worth of the Company
determined from one of the unaudited May 31, 1998 balance sheets of the Company
by deducting
<PAGE> 9
the liabilities of the Company (excluding, however, IBNR Payables) from the
assets of the Company.
ARTICLE II.
REPRESENTATIONS AND WARRANTIES OF SELLERS
Sellers, jointly and severally, hereby represent and warrant to
Purchaser that, as of the Effective Date and as of the Closing Date:
2.1 Due Authorization.
(a) Sellers. This Agreement has been duly and validly executed
and delivered by each Seller and constitutes a valid and binding agreement of
each Seller enforceable in accordance with its terms.
(b) The Company. The execution and delivery of this Agreement
by the Company and the performance of this Agreement by the Company have been
duly authorized by all requisite corporate action of the directors and
shareholders of the Company. This Agreement has been duly and validly executed
and delivered by the Company and constitutes a valid and binding agreement of
the Company enforceable in accordance with its terms. The Sellers are holders of
all the issued and outstanding capital stock of the Company and, in such
capacity, have approved and authorized the execution, delivery and performance
of this Agreement by the Company. The Sellers have delivered to the Purchaser a
complete and accurate copy of the articles of incorporation and bylaws of the
Company as amended.
2.2 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 Colorado with all requisite corporate power and authority to conduct
its business operations as being conducted on the Effective Date. The Company
has not qualified as a foreign corporation authorized to do business in any
other jurisdiction. There are no other jurisdictions where the failure to be so
authorized would have a material adverse effect on the business (financial or
otherwise) or operations of the Company.
2.3 Subsidiaries/Investments. The Company has no subsidiaries,
whether direct or indirect. The Company has no equity interest or investment in,
and does not possess any other right or obligation to purchase any equity
interest or other investment in, and is not a partner of or joint venturer with,
any other person or entity.
2.4 Conflicts. 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
a Seller or the Company is or will be a party do not on the Effective Date, and
will not on the Closing Date, (i) violate any decree or judgment of any court or
governmental authority which may be applicable to a Seller or the Company; (ii)
violate any law, rule or regulation applicable to a Seller or the Company; (iii)
except as set forth in Schedule 2.4, violate or conflict with, or result in a
breach of, or
<PAGE> 10
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 any encumbrance upon any of the assets of the Company, under
the terms, conditions, or provisions of any contract, lease, sales order,
purchase order, indenture, mortgage, note, bond, instrument, license or other
agreement to which a Seller or the Company is a party, or by which a Seller or
the Company is bound; (iv) except as set forth in Schedule 2.4, permit the
acceleration of the maturity of any indebtedness of the Company; or (v) violate
or conflict with any provision of the certificate of incorporation or bylaws of
the Company.
2.5 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 business operations as such are being conducted on the Effective
Date, the absence of which would have a material adverse effect on the business
(financial or otherwise) operations of the Company. In order to conduct its
business operations as presently conducted, the Company is not required to hold
any licenses, permits and other governmental approvals or authorizations; except
to the extent that the Company may be required to obtain a license as a Limited
Services Provider Network under Regulation 2-1-9 of the Division of Insurance of
the Department of Regulatory Agencies of the State of Colorado as set forth on
Schedule 2.5. The Company has filed an application for a Limited Service
Licensed Provider Network License. The business of the Company as presently
conducted complies in all material respects with all applicable laws and
governmental rules, regulations and other requirements. The Company has made all
filings with governmental agencies required for the conduct of its business
operations. There are no judgments, consent decrees or injunctions of any court
or any governmental department, commission, agency or instrumentality by which a
Seller or the Company is bound or to which a Seller or the Company is subject
which relate in any manner to the business of the Company. Neither the Company
nor any Seller is subject to or has received any request for notice, demand
letter, administrative inquiry or formal or informal complaint or claim from any
governmental department, commission, agency or instrumentality which relate in
any manner to the business operations of the Company.
2.6 Financial Statements. Sellers have delivered to Purchaser a copy
of (i) an unaudited financial statement of the Company as of December 31, 1997
consisting of a balance sheet at such respective date and the related statement
of income for the twelve (12) month period then ended and (ii) an unaudited
financial statement of the Company as of August 31, 1998 (the "Company Balance
Sheet Date") consisting of a balance sheet of the Company at such date (the
"Company Balance Sheet") and the related statement of income for the applicable
month and year-to-date period then ended. Complete and accurate copies of all
such financial statements are included as Schedule 2.6 (the "Company Financial
Statements"). The Company Financial Statements present fairly in all material
respects the financial position of the Company and the results of the
operations, as of the respective dates thereof and for the respective periods
covered thereby, in conformity with GAAP. Except as set forth in the Company
Balance Sheet included in the Company Financial Statements, as of the Company
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.
<PAGE> 11
The Company Financial Statements were prepared from the books and records of the
Company. At the Company Balance Sheet Date, the Company owned each of the assets
included in the Company Balance Sheet, except for the assets which are subject
to the capitalized leases specifically identified in Schedule 2.6.
2.7 No Adverse Change. Since the Company Balance Sheet Date, the
business of the Company has been conducted only in the ordinary and usual 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 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 operations as
previously conducted or any other event or condition of any character which has
materially and adversely affected the business 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 asset 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) any entry into or termination of any 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; (ix) any transfer or right granted by the Company of or
under any material lease, contract, license, agreement, patent, trademark, trade
name, service mark or copyright; (x) any mortgage, pledge, or imposition of any
lien or other encumbrance on any material asset of the Company; (xi) any default
or breach by the Company in any material respect under any material contract,
license, or permit; or (xii) any agreement relating to or contemplating any of
the foregoing not in the ordinary and usual course of business.
2.8 No Undisclosed Liabilities. The Company has no material
indebtedness or other liabilities which are not adequately disclosed and
reflected or reserved against on the Company Balance Sheet, except liabilities
incurred since the Company 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 business (financial or otherwise), assets or operations of
the Company.
2.9 Title to and Condition of Assets. The Company has good and
marketable title to all the assets reflected in the Company Balance Sheet, free
and clear of any liens, security interests, claims, demands or other
encumbrances of any kind whatsoever and effective title in and to the Assets
free and clear of all liens, security interests, restrictions, claims,
encumbrances, and charges of any kind whatsoever except (i) those disclosed in
the Company Balance Sheet or (ii) listed on Schedule 2.9 or (iii) those which do
not have a material adverse impact on either the value of the asset or the
ability of the Company to use the asset in its ongoing operations. The Sellers
and the Company 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 the Sellers have notice, that
would materially affect the ability of the
<PAGE> 12
Company to conduct its business as being conducted on the Effective Date. The
assets reflected on the Company Balance Sheet constitute all assets reasonably
necessary to permit the business and operations of the Company to be conducted
on substantially the same terms as such business has been conducted historically
and is being conducted on the Effective Date. To the knowledge of Sellers and
the Company, except for violations which will not have a material adverse effect
on the business of the Company none of the assets owned, leased or used by the
Company in its operations 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.
2.10 Litigation. To the knowledge of the Sellers and the Company,
except as set forth in Schedule 2.10, no material investigation or review by any
governmental entity with respect to the Company or the Sellers is pending or,
threatened, nor has any governmental entity indicated to the Company an
intention to conduct the same. 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 and the Company, threatened against or affecting the Company to
which the Company or a Seller 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. To the knowledge of the Sellers or
the Company, there are no pending or 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 materially and adversely limiting, prohibiting or changing the business
operations of the Company as presently conducted. Neither the Company nor a
Seller is now, or has been, a party to any injunction, order or decree
restricting the method or geographic area under which the Company may conduct
business operations or the marketing or sale of any of its products or services.
2.11 Real Property. The Company does not own any real property and,
except for the leased real property described below, no real property is
necessary to conduct the business operations of the Company as being conducted
on the Effective Date. The Company leases its principal offices pursuant to that
certain office lease, dated July 17, 1996, as amended April 21, 1998, between
the Company and Park Centre Properties, L.L.C. (the "Office Lease"). A true,
complete and correct copy of the Office Lease as the same has been amended or
modified on or prior to the Effective Date has been delivered to Purchaser. The
Office Lease is in full force and effect and there are no outstanding defaults
or disputes under the Office Lease.
2.12 Intellectual Property. The Company has no copyrights, trade
names, trademarks, service marks or other intellectual property that the Company
uses in its business operations other than the common law tradename
"ChoiceHealth." The Company has no United States or foreign patents, patent
applications, patent licenses, trademarks or 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 of infringement against the
<PAGE> 13
Company, or to the knowledge of Sellers and the Company, there is no threatened
litigation or claim of infringement. To the knowledge of Sellers and the
Company, 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 for a non-exclusive limited
license of certain computer software programs to Complementary Healthcare
Resources pursuant to that certain Strategic Alliance and Service Agreement
dated July 1, 1998.
<PAGE> 14
2.13 Customer Contracts and Other Agreements.
(a) Customer Contracts.
(i) True, complete and correct copies of all the contracts
listed in Schedule 2.13(a) as the same have been amended or modified on
or prior to the Effective Date have been delivered to Purchaser by the
Company (the "Customer Contracts"). Except for the Customer Contracts
listed on Schedule 2.13(a), the Company has no other contracts pursuant
to which it renders its services to its customers. Except to the extent
disclosed on Schedule 2.13(a) (i) all of the Customer Contracts listed
on such Schedule 2.13(a) are in full force and effect, have not been
terminated or canceled and no notice of termination or cancellation has
been given or received, (ii) the Company has not been advised and has
no knowledge that the other party thereto intends to cancel any
Customer Contract, (iii) there are no outstanding disputes under any
Customer Contract, (iv) each Customer Contract is with an unrelated
third party entered into on an arms-length basis in the ordinary course
of business, (v) there are no defaults under any of the Customer
Contracts and, to the knowledge of the Sellers and the Company, there
has been no occurrence of any act or omission under any of the Customer
Contracts which with the passage of time or the giving of notice would
constitute a default, (vi) there has been no breach or violation of, or
default under, any of the Customer Contracts which has been waived,
either permanently or temporarily, by the other party to such contract,
(vii) there are no verbal amendments, modifications or other
understandings relating to any of the Customer Contracts which are
legally binding on the parties thereto, and (viii) the Company has no
obligation or liability to refund all or any portion of the fees that
have been paid under any of the Customer Contracts. The Company has not
assigned in whole or in part any of its rights or obligations under the
Customer Contracts. Each Customer Contract expressly sets forth on its
face: (i) the termination date of such contract; (ii) any rights to
cancel prior to the termination date of such contract; (iii) the
current rates payable under such contract; and (iv) any covenants
restricting competition contained in such contract. To the knowledge of
the Sellers and the Company, there is no fact or occurrence in
existence that has or will result, either singularly or in the
aggregate, in a material reduction in the monthly revenues under any of
the Customer Contracts which will have a material adverse effect on the
business (financial or otherwise) or operations of the Company even
though such fact or occurrence may not result in, or constitute, the
termination of or a default under the respective Customer Contract.
(ii) Schedule 2.13(a) lists for each Customer Contract, as
of July 31, 1998, the number of employees covered by the respective
Customer Contract on the Effective Date and the state or states where
such employees are located.
(b) Provider Contracts. All physicians, psychiatrists,
psychologists, or other health care providers, including entities owned by or
employing any such health care providers that have contracted with the Company
to provide services required under the Customer Contracts are listed in Schedule
2.13(b). The Company has a provider agreement with each of the providers listed
in Schedule 2.13(b) (the "Provider Contracts"). Seller has delivered to
<PAGE> 15
Purchaser true, complete and correct copies of the Provider Contracts as the
same have been amended or modified on or prior to the Effective Date. All of the
Provider Contracts are in full force and effect. The Company has not received
any notice of cancellation with respect to a Provider Contract and is not aware
that a provider intends to cancel any Provider Contract. There are no
outstanding disputes under any material Provider Contract and there are no
outstanding defaults or violations under any material Provider Contract. All
payments due under the Provider Contracts have been fully and timely paid and
there are no outstanding past due amounts payable to a provider under any
Provider Contract except for non-material claims disputed in the ordinary course
of business. There has not been a significant number of Provider Contracts that
have terminated or canceled within the twelve (12) month period prior to the
Effective Date. Except as set forth in Schedule 2.13(b), no single provider
provides the services to more than five percent (5%) of the employees covered by
any of the respective Customer Contracts.
(c) Other Contracts. Except as set forth in Schedule 2.13(c),
other than the Customer Contracts, the Provider Contracts, and the Office Lease,
there are no other contracts or agreements to which the Company is a party which
are necessary for the business operations of the Company or which are material
in amount, duration or any other respect or restricts or limits in any manner
the way the Company conducts its business operations.
2.14 Employees. Schedule 2.14 hereto lists in accurate and complete
detail all employees of the Company as of the Effective Date, their job titles,
annual rates of compensation and accrued benefits as of the most recent regular
payroll date of the Company immediately preceding the Effective Date; other
fringe benefits, if any; and a description of any severance pay arrangements, if
any. Except as reflected on Schedule 2.14, there are no other employees of any
third party which are necessary for the continued operation of the business of
the Company as presently conducted.
2.15 Employee Benefit Plans. Except as disclosed in Schedule 2.15:
(a) The Company has no Welfare Plan (as defined in Section
3(1) of The Employee Retirement Income Security Act of 1974, as amended
("ERISA")), no Pension Plan (as defined in Section 3(2) of ERISA), or 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 ERISA and Section 4980B of the Internal Revenue
Code of 1986, as amended (the "Code") with respect to itself and its employees.
(b) 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 (as defined in ERISA Section 3(37) or Section 414(f) of
the Code).
<PAGE> 16
(c) With respect to each Pension Plan and each Welfare Plan
listed on Schedule 2.15, to the knowledge of the Seller and the Company: (i)
there is no fact, including, without limitation, any reportable event, that
exists that would constitute grounds for termination of such plan by The Pension
Benefit Guaranty Corporation ("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 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 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 Sellers or the Company,
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.
(d) There has been no termination of any Pension Plan or
Welfare Plan by the Company during the five-year period prior to the Effective
Date.
(e) 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 material compliance with all applicable laws,
including but not limited to, ERISA and the Code.
(f) Each Pension Plan listed on Schedule 2.15 which is
intended to be qualified under Section 401(a) of the Code, has received a
favorable determination letter from the Internal Revenue Service (the "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 Sellers and the Company, no event has
occurred since the date of such favorable determination letter that would
adversely affect such qualification.
(g) 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.
<PAGE> 17
True, correct and complete copies of each Pension Plan and Welfare Plan listed
on Schedule 2.15 as amended to and in effect on the Effective Date; any
agreements entered into in connection with each such Pension Plan and Welfare
Plan; the most recent annual report filed with the 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 Seller
and describing benefits provided under each such Pension Plan and Welfare Plan,
have been delivered to Purchaser.
2.16 Receivables. All accounts receivable and other receivables (the
"Receivables") of the Company reflected in Company Balance Sheet represent and
result from transactions in the ordinary course of business. In addition, to the
knowledge of the Company and the Sellers, all receivables are collectible and
none of such receivables will have to be written off as bad debt expense in
future months.
2.17 Broker's and Finder's Fees. Other than W.G. Nielsen & Co. no
agent, broker, employee, officer, stockholder or other person or entity acting
on behalf of, or under the authority of, Sellers, or the Company is or will be
entitled to any broker's or finder's fee, or commission or bonus from any of the
parties hereto in connection with this Agreement or the consummation of the
transactions contemplated hereby.
2.18 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 Sellers and the Company, threatened labor
dispute, strike or work stoppage affecting the Company, nor has there been any
of the same or any labor union organizing activity relating to the Company
within the last three (3) years.
2.19 Claims. Schedule 2.19 lists all claims submitted in connection
with liability, medical or professional malpractice claims involving the Company
or any of its employees for the latest three (3) years.
2.20 Consents. Schedule 2.20 lists all consents required from third
parties for the consummation of the transactions contemplated by this Agreement
(the "Consents"). Except as reflected on Schedule 2.20, no other consents,
approvals, or authorizations of any person, entity or governmental agency,
including, without limitation, consents under the Customer Contracts, the
Provider Contracts and the Office Lease are required in connection with the
consummation of the transactions contemplated by this Agreement.
2.21 Environmental Matters. The Company has not received any notice
from any governmental authority or private person or entity advising it that the
operations of the Company s is or has been in violation of any environmental law
or any applicable environmental permit or that the Company is responsible (or
potentially responsible) for the cleanup of any pollutants, contaminants,
hazardous or toxic wastes, substances or materials at, on or beneath any
contract location. The Company is not the subject of federal, state, local or
private litigation or
<PAGE> 18
proceedings involving a demand for damages or other potential liability with
respect to violations of any environmental laws.
2.22 Taxes. All reports, estimates, declarations of estimated tax,
information statements and returns relating to, or required to be filed in
connection with, any Taxes, including information returns or reports with
respect to backup withholding and other payments to third parties "(Returns") of
the Company required by law to be filed on or prior to the Effective Date have
been prepared and properly filed or valid extensions obtained, and all Taxes
imposed upon the Company or any of its properties, assets or income which are
due and payable on or before the Effective Date or claimed by any federal,
territorial, state, local or foreign government or any agency or political
subdivision of any such government ("Taxing Authority"), to be due and payable
on or before the Effective Date have been paid. The term "Taxes" shall mean all
taxes, however, denominated, including any interest, penalties or other
additions to tax that may become payable in respect thereof, imposed by any
Taxing Authority which taxes shall include, without limiting the generality of
the foregoing, all income or profits taxes (including, but not limited to,
federal income taxes and state income taxes), real property gains taxes, payroll
and employee withholding taxes, unemployment insurance taxes, social security
taxes, sales and use taxes, ad valorem taxes, excise taxes, franchise taxes,
gross receipts taxes, business license taxes, occupation taxes, real and
personal property taxes, stamp taxes, environmental taxes, transfer taxes,
workers' compensation, Pension Benefit Guaranty Corporation premiums and other
governmental charges, and other obligations of the same or of a similar nature
to any of the foregoing, which (i) the Company and (ii) any individual, trust,
corporation, partnership or any other entity as to which the Company is liable
for Taxes incurred by such individual or entity either as a transferee, or
pursuant to Treasury Regulations Section 1.1502-6, or pursuant to any other
provision of federal, territorial, state, local or foreign law or regulations
(individually and collectively, the "Group") is required to pay, withhold or
collect.
Except as set forth in Schedule 2.22, there are no claims for Taxes
pending against the Company nor any liens (other than for current Taxes not yet
due and payable) upon the assets of the Company, and the Sellers and the Company
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 Sellers
or the Company for the extension of time for the assessment of any tax, nor has
any such waiver or agreement been requested by the Service or any other Taxing
Authority.
No shareholder of the Company is a person other than a United States
person within the meaning of the Code.
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.
<PAGE> 19
The Company is not a party to any joint venture, partnership, or other
arrangement or contract which could be treated as a partnership for federal
income tax purposes.
2.23 Transactions With Affiliates. Except as set forth in Schedule
2.23, 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, Seller, or any member of such stockholder's, director's or
officer's immediate family. No shareholder, 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.
2.24 Improper Payments. 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 and has not proposed or offered to make or receive any such
payments.
2.25 Insurance. Set forth on Schedule 2.25 hereto is a list as of the
Effective Date of all insurance policies and coverages (other than health and
life insurance covered by Section 2.14 hereof) 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, professional liability insurance, medical malpractice
insurance, excess insurance and umbrella insurance.
2.26 Bank Accounts. Set forth in Schedule 2.26 hereto is a list as of
the date hereof of all bank and securities accounts maintained by or on behalf
of the Company, and a list of persons authorized to sign on behalf of the
Company with respect to each such account.
2.27 Customers. Set forth in Schedule 2.27 hereto is a list of the
Company's top ten customers (measured by net revenues) for the 7-month period
ended July 31, 1998.
2.28 Capitalization. The authorized capital stock of the Company
consists of Fifty Thousand (50,000) shares of Common Stock, no par value, of
which 400 shares are issued and outstanding and owned by the Sellers as follows:
(a) Gary M. Unruh -- 156 shares (39%); (b) Lawrence H. Nelson II -- 100 shares
(25%); (c) Leon Evans, M.D. -- 98 shares (24%); and (d) Andrew L. Braun -- 48
shares (12%). All of the outstanding shares of the Common Stock of the Company
have been duly and validly authorized and issued and are fully paid and
non-assessable and are owned of record and beneficially by the Sellers. There
are no outstanding subscriptions, warrants, options, calls, commitments,
convertible or exchangeable securities, or other rights or agreements to
purchase or acquire shares of capital stock of the Company to which the Company
or any Seller is a party or by which the Company or any Seller is bound. There
are no agreements concerning the issuance, voting, transfer, acquisition or
disposition of shares of capital stock of the Company to which the Company or
any Seller is a party or by which the Company or any Seller is bound.
<PAGE> 20
2.29 Ownership of Shares. The Sellers are the unconditional sole
legal, beneficial, record and equitable owner of the Shares as specified in
Section 2.28 above, free and clear of any and all liens and claims, options,
voting agreements or trusts, proxies, preemptive rights, rights of first refusal
or other restrictions or interests of any kind or nature whatsoever except
restrictions on transfer under applicable securities laws (collectively,
"Claims"). As of the Closing Date, the Sellers will own all of the Shares, free
and clear of any and all liens and Claims except restrictions on transfer under
applicable securities laws and the Sellers will have the unrestricted right and
power to sell and transfer the Shares to the Purchaser. Upon transfer of the
Shares by the Sellers to the Purchaser at the Closing in accordance with the
terms hereof, the Purchaser will acquire good and valid title to such Shares,
free and clear of any lien and Claims, except solely for any liens created by
the Purchaser in connection with the acquisition by the Purchaser of the Shares
and except for restrictions on transfer under applicable securities laws. As of
the Closing Date, the Sellers will not own any shares of capital stock of the
Company other than the Shares and will not have any option or other right to
acquire from the Company or any other person or entity, or any obligation or
commitment to sell or otherwise transfer to any person any shares of capital
stock of the Company owned by the Seller.
2.30 Accounts Payable/IBNR.
(a) The accounts payable and accrued expenses reflected on the
Company Balance Sheet reflect in all material respects all amounts owed by the
Company in respect of all accounts and other payables required by GAAP to be
identified on the Company Balance Sheet and those reflected on the books of the
Company on the Closing Date will reflect all such amounts in all material
respects. No account payable or accrued expense of the Company is past due or
otherwise in default which would have a material adverse effect.
(b) The reserves accrued and reflected on the Company Balance Sheet
for expenses incurred but not yet reported for services provided by behavioral
health care providers to employees or members of customers of the Company are a
reasonable estimate made in good faith in accordance with the customary
practices which have been historically followed in determining such reserve by
the Company.
2.31 Costs and Expenses. The Company has not and will not pay any
costs or expenses including, without limitation, investment advisors, brokers,
accountant and attorneys' fees, for services rendered after August 31, 1998, as
a result of or in connection with the preparation, negotiation, execution or
performance of this Agreement. Any such fees for services rendered after August
31, 1998 shall be paid by the Sellers.
2.32 Full Disclosure. This Agreement and the documents, certificates
and other writings furnished or to be furnished by or on behalf of the Sellers
and the Company to Purchaser pursuant to the provisions of this Agreement do not
and will not contain any untrue statement of material fact or omit to state any
material fact necessary to make the statements made, in light of the
circumstances under which they are made, not misleading.
<PAGE> 21
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser represents and warrants to the Sellers that, as of the
Effective Date hereof and as of the Closing Date:
3.1 Due Organization of Purchaser. Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware with all requisite corporate power and authority to conduct its
business operations as being conducted on the Effective Date.
3.2 Due Authorization. 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 Purchaser is or will be a party does not on the Effective Date, and will
not on the Closing Date, (i) violate any decree or judgment of any court or
governmental authority which may be applicable to Purchaser; (ii) violate any
law, rule or regulation binding on Purchaser; (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 any encumbrance upon, any
of the assets of Purchaser 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 Purchaser is a party, or
by which Purchaser or its assets are bound; (iv) violate or conflict with any
provision of the certificate of incorporation or bylaws of Purchaser, and (vi)
has been duly authorized by all requisite corporate action of Purchaser.
3.3 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, Purchaser is or will be entitled to any broker's or finder's fee,
commission or bonus from any of the parties hereto in connection with this
Agreement or the consummation of any of the transactions contemplated hereby.
3.4 Consents. No consents, approvals, or authorizations of any
person, entity or governmental agency are required in connection with the
consummation of the transactions contemplated by this Agreement.
<PAGE> 22
ARTICLE IV.
CERTAIN AGREEMENTS APPLICABLE PRIOR TO THE CLOSING DATE
4.1 Access and Information. The Sellers shall give or cause to be
given by the Company to Purchaser and its accountants, counsel and other
representatives full access during normal business hours throughout the period
prior to the Closing Date to all properties, books, contracts and records
(including tax returns and insurance policies) of or relating to the Company and
provide all information relating to the Company reasonably requested by
Purchaser. Except as consented to by Sellers, all information provided by the
Company hereunder which is not otherwise public shall be held confidential by
the Purchaser and, in the event of termination of this Agreement, except to the
extent required because of any pending or threatened litigation or governmental
laws, all documents (including copies thereof) obtained hereunder by the
Purchaser from Sellers containing such information shall be destroyed or
returned to the Company. Purchaser shall disclose such information only to
officers, employees, attorneys, accountants or other representatives who need to
know such information and shall take all reasonable measures to protect the
confidentiality of, and avoid the unauthorized use of, such information.
4.2 Operation of Businesses; Course of Conduct.
(a) From the Effective Date to the Closing Date, except as
otherwise consented to or approved by Purchaser in writing, the Sellers will
operate, and will cause the Company to operate, the business of the Company as
presently operated in the ordinary course and, consistent with such operation,
Seller will, and will cause the Company to, substantially comply with all
applicable legal and contractual obligations, and use its best efforts
consistent with past practice to preserve the business organization of the
Company intact and to preserve the goodwill of the suppliers, customers and
others with whom the Company has business relationships; and Sellers will not
take, and shall prevent the Company from taking, any action (or omit to take any
action) which action or omission would cause any representation or warranty
contained in Article II hereof to be untrue at any time at, prior to or on the
Closing Date as if such representation or warranty were made at and as of such
time. In addition, Sellers agree that, from the Effective Date through the
Closing Date, Sellers and the Company shall not:
(i) make or permit any change in the assets of the Company
used in connection with the operation of the Customer Contracts or make
any commitment for any capital expenditures involving the Customer
Contracts;
(ii) make, enter into, modify, supplement or extend any of the
Customer Contracts or any new or other Customer Contracts or permit the
Company to take any such action;
(iii) take any action which would prevent compliance with any
of the conditions in Article V of this Agreement;
(iv) carry on any negotiations with other parties relating to
the acquisition of the capital stock or membership interests or any
material assets of the Company or permit
<PAGE> 23
the Company to merge or consolidate with or into any entity or sell or
otherwise dispose of, or purchase, any material assets or properties of
the Company or enter into any agreement in respect of such purchases,
sales, and dispositions; and
(v) cancel or surrender any insurance policies presently
maintained by the Company.
(b) Notwithstanding any provision of this Agreement to the
contrary, the Sellers covenant and agree that from the Effective Date to the
Closing Date:
(i) Purchaser shall be permitted access to the clients of the
Customer Contracts and shall have the right to discuss with such
clients all aspects of the respective Customer Contract with each such
client;
(ii) Sellers shall not make or implement, or permit the
Company to make or implement, any employee or officer hiring or
termination decision without the prior consent of Purchaser which shall
not be unreasonably withheld or delayed;
(iii) Seller shall and shall cause the Company to involve
Purchaser and allow Purchaser to participate in all discussions,
correspondence or negotiations relating to any existing or proposed new
Customer Contract; and
(iv) shall not and shall not permit the Company to terminate,
amend, modify, amend, supplement or renew any Customer Contract or
enter into any new Customer Contract without the prior written consent
of Purchaser which shall not be unreasonably withheld or delayed.
4.3 Public Communications. All press releases or other public
communications of any kind relating to this Agreement or the transaction
contemplated by this Agreement, and the method of the release for publication
thereof, shall be subject to the prior approval of both Purchaser and the
Sellers, which approval shall not be unreasonably withheld by either of such
parties, except to the extent that disclosure is otherwise required by law or
judicial process.
4.4 Solicitation of Inquiries. From the Effective Date to the
Closing Date, the Sellers and the Company shall not solicit from any other
person, firm or corporation any inquiries or proposals relating to the
disposition of any substantial portion of the assets of the Company or to the
acquisition of all or a substantial portion of the capital stock of the Company
(whether issued and outstanding or authorized but not issued) or to the merger,
reorganization or consolidation of the Company. Until the Closing Date, Sellers
and the Company additionally agree that, without the prior written consent of
Purchaser, they and the Company will not furnish to any person or entity (other
than Purchaser and its directors, employees, agents and representatives) any
non-public information concerning the Company, or its financial affairs or
prospects for the purpose
<PAGE> 24
or with the intent of permitting such person or entity to evaluate a possible
acquisition of the Company or its assets.
4.5 Cooperation. The parties will fully cooperate each with the
other and their respective counsel and accountants in connection with any steps
required to be taken as part of their obligations under this Agreement. The
Sellers, the Company and Purchaser each agrees to use its best efforts to make
all necessary filings and to obtain all necessary consents to the transactions
contemplated by this Agreement, including without limitation all consents of
parties to any contracts or agreements requiring such consents, and all
necessary consents of governmental authorities.
4.6 Updating of Schedules. The Sellers shall notify Purchaser of any
changes, additions, or events which may cause any change in or addition to the
Schedules delivered by Seller 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. Purchaser shall be deemed to have waived any breach
resulting from any such change or addition of which it has received written
notice from the Sellers prior to the Closing if Purchaser proceeds with the
Closing notwithstanding such change or addition of which it received written
notification. 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 the Seller and
the Company herein.
ARTICLE V.
CONDITIONS PRECEDENT TO OBLIGATIONS
5.1 Conditions to Obligations of Sellers. The obligations of Sellers
to effect the transactions contemplated by this Agreement shall be subject to
the fulfillment on or prior to the Closing Date of the following conditions,
unless the Sellers shall waive such fulfillment in whole or in part in writing:
(a) The representations and warranties of Purchaser set forth
in this Agreement shall be true and correct at and as of the Effective Date and
shall also be true and correct at and as of the Closing Date as though made at
and as of the Closing Date, except to the extent such representations and
warranties are not true and correct by reason of actions permitted or authorized
by this Agreement or consented to in writing by Seller. Seller shall have
received a certificate of Purchaser, dated the Closing Date and duly executed by
its chief executive officer or its principal financial officer, to such effect.
(b) Purchaser shall have performed all covenants and
agreements required to be performed by it under this Agreement at or prior to
the Closing Date.
<PAGE> 25
(c) No inquiry by any governmental agency or instrumentality
shall have been made which would or could, and no action or proceeding shall
have been asserted, threatened or instituted, and no decree, injunction, or
judgment shall have been entered, to restrain or prohibit the carrying out of
the transactions contemplated by this Agreement or any part thereof, or to
recover damages with respect thereto, or which, if such transactions are
consummated, would materially and adversely affect the business, properties or
assets of the Company.
(d) All consents, waivers or approvals from any third party
(including any required consents of third parties under the Customer Contracts
and any federal, state or local governmental agency or instrumentality consents)
as may be necessary or appropriate in connection with Seller's or the Company's
execution and delivery of this Agreement or to the consummation of the
transactions contemplated hereby shall have been obtained.
(e) The Sellers shall have received such other certificates,
opinions, and documents as the Sellers or their counsel may reasonably require
in order to consummate the transactions contemplated hereby all of which shall
be in form and substance reasonably satisfactory to the Sellers and their
counsel.
5.2 Conditions to Obligations of Purchaser. The obligations of
Purchaser to effect the transactions contemplated by this Agreement shall be
subject to the fulfillment on or prior to the Closing Date of the following
conditions, unless Purchaser shall waive such fulfillment in whole or in part in
writing:
(a) The representations and warranties of the Sellers and the
Company set forth in this Agreement shall be true and correct at and as of the
Effective Date and shall also be true and correct at and as of the Closing Date
as though made at and as of the Closing Date, except to the extent such
representations and warranties are not true and correct by reason of actions
permitted or authorized by this Agreement or consented to in writing by
Purchaser. Purchaser shall have received a certificate of the Sellers, dated the
Closing Date and duly executed by its chief executive officer, to such effect.
(b) Sellers shall have each performed all covenants and
agreements required to be performed by them under this Agreement at or prior to
the Closing Date.
(c) The Purchaser shall have received
(i) Certificates as to the existence and good standing (or
other appropriate certificates) of the Company from its jurisdiction of
incorporation as of a date not more than 20 days before the Closing;
(ii) A true and correct copy of the certificate of
incorporation of the Company certified as true and correct by the
Secretary of State or other appropriate governmental official of the
Company's respectively jurisdiction of incorporation and a copy of the
bylaws of the Company certified as true and correct by the Secretary of
the Company.
<PAGE> 26
(iii) Certificates from the appropriate governmental agency or
official in each jurisdiction where the Company conducts business
operations as to the results of a search of the appropriate
governmental records of a UCC-1 financing statement filed of record
under the name of the Company as the debtor which search results shall
reflect no UCC-1 financing statement of record evidencing any kind of
lien or security interest in the assets of the Company.
(iv) The Purchaser shall have received such other certificates,
instruments and other documents as the Purchaser or its counsel may
reasonably require in order to consummate with the transactions
contemplated hereby all of which shall be in form and substance
satisfactory to Purchaser and its counsel.
(d) No inquiry by any governmental agency or instrumentality
shall have been made which would or could, and no action, suit or proceeding
shall have been asserted, threatened or instituted to, and no decree, injunction
or judgment shall have been entered, restrain or prohibit the carrying out of
the transactions contemplated by this Agreement or any part thereof, or to
recover damages with respect thereto, or which, if such transactions are
consummated, would materially and adversely affect the business, properties or
assets of Purchaser or the Company.
(e) All consents, waivers or approvals from any third party
(including any required consents of third parties under the Customer Contracts,
the Provider Contracts and the Office Lease or any federal, state or local
governmental agency or instrumentality consents) as may be necessary or
appropriate in connection with Purchaser's execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby shall have
been obtained.
(f) Since the Effective Date, 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,
liabilities, results or operations, business or prospects of the Company. For
the purposes of this Section 5.2(f), the termination or cancellation after the
Effective Date of a Customer Contract (irrespective of the date of cancellation)
or the non-renewal of a Customer Contract having an expiration or termination
date in period between Effective Date and the Closing Date or the occurrence of
any event that has reduced or will materially reduce the revenues under a
Customer Contract (irrespective of whether such event constitutes a default or
breach under, or termination of, a Customer Contract) shall constitute a
material adverse change if such has a material adverse effect on the business
(financial or otherwise) revenues or operations of the Company.
<PAGE> 27
(g) On the Closing Date, payments to providers under the
Provider Contracts shall be current within the historical policy of the Company
of paying such providers within thirty (30) days or less except for non-material
disputed claims.
ARTICLE VI.
CLOSING
6.1 Closing. The closing of the transactions contemplated by this
Agreement shall take place on the later of October 5, 1998 or the second
business day after the satisfaction of all the conditions precedent to the
parties hereunder, effective as of 12:01 a.m. on such date at the offices of
Seller in Denver, Colorado, or such other date and place as the parties may
mutually agree (the date and time of the closing is herein referred to as the
"Closing Date").
6.2 Actions by Sellers. At the Closing:
(a) Shares. The Sellers shall deliver the shares to the
Purchaser by delivering the original of the certificates evidencing such shares
duly endorsed in blank, each certificate to be accompanied by any requisite
stock transfer tax stamps.
(b) Escrow Agreement. The Sellers shall execute and deliver
the escrow agreement in the form of Exhibit A attached hereto (the " Escrow
Agreement") and the sum of $200,000 out of the Purchase Price shall be deposited
by the Sellers into the escrow account contemplated by the Escrow Agreement.
(c) Other Agreements. Seller shall have performed or shall
perform all of the covenants and agreements contained in this Agreement to be
performed or complied with by Seller on or before the Closing Date.
6.3 Actions by Purchaser. At the Closing:
(a) Payment. Purchaser shall pay the Closing Purchase Price to
the Sellers.
(b) Escrow Agreement. Purchaser shall execute and deliver the
Escrow Agreement.
(c) Other Agreements. Purchaser shall have performed or shall
perform all of the covenants and agreements contained in this Agreement to be
performed or complied with on or prior to the Closing Date.
6.4 Section 338(h)(10) Election.
(a) If requested by Purchaser, and if available under
applicable law, Purchaser, Sellers and the Company shall join in an election
(the "338(h)(10) Election") to have the provisions of Section 338(h)(10) of the
Internal Revenue Code apply to the acquisition of the
<PAGE> 28
Company. Purchaser shall be responsible for, and control, the preparation and
filing of such election. Sellers and the Company shall execute and deliver to
Purchaser such documents or forms (including Section 338 Forms, as defined
below) as Purchaser shall request or as are required by applicable law for an
effective 338(h)(10) Election. "Section 338 Forms" shall mean all returns,
documents, statements, and other forms that are required to be submitted to any
federal, state, or other local taxing authority in connection with a 338(h)(10)
Election, including, without limitation, any "statement of Section 338 election"
and IRS Form 8023 (together with any schedules or attachments thereto), that are
required pursuant to treasury regulations. To the extent an election similar to
the 338(h)(10) Election is available under any applicable state or local income
tax laws (which is not mandatory in the event of an election made under Section
338(h)(10) of the Code), and if such election will not give rise to double
taxation of the Sellers, Sellers, the Company and Purchaser agree to join in
making each such election (a "Non-Federal Election"). The Sellers, the Company
and the Purchaser shall report the transaction consistent with such elections
under Section 338(h)(10) of the Code or any similar state or local tax
provision, as applicable, and agree not to take any action that could cause such
elections to be invalid, and shall take no position contrary thereto on any tax
return involving a jurisdiction for which such an election has been made.
(b) The allocation of the adjusted deemed sales price among
the assets of the Company shall be made in accordance with Code Sections 338 and
1060 and any comparable provisions of state, local or foreign law, as
appropriate. Unless it would be unreasonable to do so, Sellers shall accept
Purchaser's determination of such purchase price allocations, and shall report,
act, file in all respects and for all purposes consistent with such
determination of Purchaser. The Sellers shall cause a copy of a Form 8023-A to
be attached to the Federal income tax return of that includes the Company for
the periods ending on the Closing Date. The Sellers acknowledge that, by virtue
of the Election, the Company shall recognize gain or loss with respect to the
transaction as if they had sold all of their assets in the tax period covered by
the tax return of the Sellers that includes the Company for the period ending on
the Closing Date. The Sellers shall be responsible for and shall pay any income,
franchise or similar Taxes arising as a result of the 338(h)(10) Election and
any non-federal elections made pursuant to the provisions of this Section 6.4.
<PAGE> 29
ARTICLE VII.
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNITY
POST-CLOSING AGREEMENTS
7.1 Representations and Warranties to Survive. All statements
contained in any agreement, certificate, instrument, schedule, or document
delivered by or on behalf of a party pursuant to this Agreement and the
transactions contemplated hereby shall be deemed representations and warranties
by the delivering party hereunder. All representations and warranties made by
the parties 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 two
years, ending at midnight on the second anniversary of the Closing Date;
provided, however, that if, prior to the expiration of such two-year period, the
party hereto entitled to indemnification hereunder has either instituted a legal
or arbitration proceeding against the other seeking indemnification or has had a
legal proceeding instituted against it by a third party that is the subject of
such indemnification, 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) and the party seeking indemnification shall
diligently pursue a resolution of any such matter as quickly as practicable.
Except as expressly provided in Section 4.6, 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.
7.2 Access to Records Following Closing. Purchaser and the Sellers
agree that so long as any books, records and files retained by Seller relating
to the Customer Contracts, or the books, records and files delivered to the
control of Purchaser pursuant to this Agreement to the extent they relate to the
Customer Contracts prior to the Closing Date, remain in existence, each party
(at its expense) shall have the right upon prior notice to inspect and to make
copies of the same at any time during business hours for any proper purpose.
Purchaser and the Sellers shall use reasonable efforts not to destroy or allow
the destruction of any such books, records and files without first offering in
writing to deliver them to the other.
7.3 Indemnity. Subject to the limitations set forth in Section 7.5
below,
(a) Sellers. Sellers, jointly and severally, shall indemnify
and hold harmless Purchaser and the parent, affiliates, subsidiaries,
shareholders, directors, officers, and employees of Purchaser and the Company,
from, against, and in respect of, any loss, liability, claim, demand, or
expense, including but not limited to reasonable attorney, investigation and
consultant fees and costs, 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 any of the Sellers or the Company
under this Agreement or under any other agreement or document executed
and delivered by the Sellers at Closing hereunder; and
<PAGE> 30
(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 harmless the
Sellers and the shareholders, members, officers and employees of Seller from,
against, and in respect of, any loss, liability, claim, demand, or expense,
including but not limited to reasonable attorney, investigation and consultant
fees and costs, of any kind whatsoever, arising out of or resulting from any of
the following:
(i) Any misrepresentations, 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 Seller
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.
7.4 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 7.3 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) business 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 the indemnifying party, the indemnified party shall cooperate with
the indemnifying party subject to preserving their own legal and economic
interests 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
<PAGE> 31
to the defense of any claim for indemnification undertaken by the indemnifying
party pursuant to this Article VII, 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.
7.5 Limitations on Indemnification.
(a) Maximum Liability. In no event shall the aggregate
liability of a Seller under this Article VII exceed the total Purchase Price
received by the Seller under this Agreement.
(b) Initial Threshold. No party 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"); provided, however, that all indemnifiable losses shall be
recoverable when any indemnifiable losses, individually or in the aggregate,
exceed $10,000.
(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 two years after the date hereof; provided, however, that if, prior to
the applicable date of expiration, the party hereto entitled to indemnification
hereunder has either instituted a legal or arbitration proceeding against the
other seeking indemnification or has had a legal proceeding instituted against
it by a third party that is the subject of such indemnification within such
two-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 (including disposition by the expiration of the applicable statute
of limitations with respect to such liability). The party seeking
indemnification shall diligently pursue a resolution of any such matter as
quickly as possible.
7.6 Remedies; Default; Notice and Cure. If the Closing Date occurs,
indemnification pursuant to this Article VII is the sole and exclusive remedy of
the parties after the Closing Date for matters arising out of this Agreement
(without limiting the rights of the parties under any other agreement), except
as otherwise expressly provided in Section 1.4 and Section 7.8 of 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 specifying the specific item of
noncompliance and the defaulting party has failed to cure such noncompliance
within ten (10) days after receipt of such notice.
7.7 Employees. Seller expressly agrees that (a) Purchaser shall have
no obligation to employ any employee or officer of the Company (or any liability
for any compensation or benefits of any kind whatsoever) after the Closing Date,
but (b) Purchaser may cause the Company to continue the employment of any
employee of the Company at any time on or after the Closing Date.
7.8 IBNR Adjustment. The unaudited May 31, 1998 balance sheet of the
Company reflects a reserve in the amount of $981,931 for provider claims for
services rendered on or prior
<PAGE> 32
to May 31, 1998 (whether or not reported to the Company on or before May 31,
1998) but not paid by the Company as of May 31, 1998. In order to recognize any
change in the IBNR reserve from May 31, 1998 through the date of the Closing
Balance Sheet and to insure that the amount actually paid by the Company
following the Closing Date for provider services performed on or before the
Closing Date is equal to the Closing Balance Sheet IBNR reserve, the Sellers and
the Purchaser agree as follows:
(a) In the event that the Company actually pays claims for
services rendered on or prior to the Closing Date after the Closing Date in an
aggregate amount greater than $981,931, then Purchaser shall be reimbursed the
amount of such excess paid in each calendar month to and including September,
1999 after such payments have exceeded $981,931 in the aggregate. Purchaser
shall notify Sellers of the amount of such excess payments paid in each calendar
month to and including the month of September, 1999, but not thereafter, and the
Sellers, jointly and severally, shall promptly reimburse to Purchaser the amount
of such excess upon receipt of each such notice. No such payments shall be due
with respect to any payments made in a calendar month after September 30, 1999.
Purchaser at its election may cause such excess to be reimbursed by the Escrow
Agent out of the Escrow Funds by written request for such reimbursement
delivered to the Escrow Agent and the Sellers.
(b) In the event that as of September 30, 1999, the Company
has actually paid after the Closing Date provider claims for services rendered
on or prior to the Closing Date in an aggregate amount less than $981,931, then
the Purchaser within ten (10) days after September 30, 1999 shall pay the amount
of such difference to the Sellers on a prorata basis according to the
percentages of the Closing Purchase Price paid to each respective Seller.
ARTICLE VIII.
SEVERANCE ARRANGEMENTS/NON-COMPETITION
8.1 Severance Arrangements.
(a) Purchaser agrees that each of the Sellers that is an
employee of the Company on the Closing Date and who is terminated at any time on
or within twelve (12) months of the Closing Date, shall, subject to the
limitations set forth below in this Section 8.1, be paid a severance payment in
an amount equal to the annual base salary (excluding bonuses) of such Seller on
July 1, 1998.
(b) Except as provided otherwise in Sections 8.1(f), (g), and
(h) below, no severance payment shall be due to a Seller in the event the Seller
voluntarily resigns his employment or his employment is terminated for cause.
For the purposes of this Agreement, "cause" shall mean (i) conviction of a crime
punishable by imprisonment, dishonesty to the Company, willful failure to
perform employment duties, or the commission of any act which is harmful to the
reputation or business relationships of the Company.
<PAGE> 33
(c) Any severance payment due hereunder shall be payable in
equal monthly installments over a twelve (12) month period commencing the first
day of the month following the date of termination of employment.
(d) Purchaser shall have no obligation to make any severance
payment to any Seller whose employment with the Company is terminated for any
reason prior to the Closing Date; provided, however, that such termination shall
not release such Seller from the obligations under Sections 8.2 through 8.6
below.
(e) It is expressly understood that neither the Company nor
the Purchaser shall have the obligation to employ any Seller or any other
employee of the Company after the Closing.
(f) Andrew L. Braun shall be entitled to terminate his
employment without cause and receive twelve months severance pay in twelve (12)
equal monthly installments if any of the following situations occur:
(i) The job location of his employment is moved without his
approval outside the Denver SMSA within 18 months of the Closing Date;
(ii) The job responsibilities of his employment are changed
within 12 months of the Closing Date such that it entails a reduction
of 10% or more in the number of employees directly or indirectly
supervised by Andrew L. Braun as compared to the number of such
employees immediately prior to the Closing Date; or
(iii) His compensation is materially and substantially reduced
after the Closing Date from his compensation on July 1, 1998.
(g) In the event that at any time within twelve (12) months
after the Closing Date, the employment of Leon Evans, M.D. is continued on a
less than full-time basis with the concurrence of Leon Evans, M.D., then Leon
Evans, M.D. shall be entitled to a severance payment equal to the percentage
reduction of such employment times the annual base salary of Leon Evans, M.D.,
on July 1, 1998 payable in twelve (12) equal monthly installments from and after
the date of such reduction (with an additional severance payment calculated in
the same manner in the event of each further reduction, if any) and, if
thereafter the employment of Leon Evans, M.D. is terminated within twelve (12)
months of the Closing Date, then the severance payment shall be an amount equal
to the annual base salary of Leon Evans, M.D. on July 1, 1998 less the total of
all severance payments previously paid to Leon Evans, M.D., with respect to a
reduction to part-time status, such amount to be payable in twelve (12) equal
monthly installments after the date of such termination.
(h) Leon Evans, M.D. and Lawrence H. Nelson, II shall each be
entitled to terminate his employment without cause and receive the twelve (12)
months severance pay payable in twelve (12) equal monthly installments in the
event that his respective job responsibilities or compensation are materially
and substantially reduced after the Closing Date
<PAGE> 34
from his respective job responsibilities prior to the Closing Date; or his
compensation on July 1, 1998, respectively; provided, however, that the removal
of either of them as a corporate officer of the Company in and of itself shall
not constitute a material and substantial reduction in such responsibilities and
provided further that he must elect such termination without cause within thirty
(30) days of an alleged reduction in such job responsibilities.
8.2 Covenant Not to Compete; Non-Solicitation. For and in
consideration of the Purchase Price and other good and valuable consideration,
each Seller covenants and agrees that, for a period of two (2) years after the
Closing Date, such Seller shall not, directly or indirectly, as an employer,
employee, director, officer, consultant, creditor, investor, owner, agent,
principal, partner, shareholder, or through any other kind of ownership (other
than ownership of securities of Purchaser or of any other publicly held entity
in which such person, 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) engage in the ownership, operation or management of the
provision of managed care mental health benefits and employer
assistance program benefits (the "Business) in the State of Colorado or
any adjoining contiguous state (the "Restricted Area");
(ii) engage in any business which calls upon, solicits,
diverts or takes away any customer or customers of Purchaser or its
affiliated corporations in the Restricted Area for the purpose of
selling or attempting to sell to any of such customers any products or
services similar to any products or services heretofore sold or
provided to any of such customers by Purchaser or its affiliated
corporations; and
(iii) engage in any business which solicits any present or
future employee of Purchaser or its affiliated corporations or initiate
discussions with any such employee regarding his or her termination or
resignation from employment with the Purchaser or its affiliated
corporations, so that such employee may accept employment with, or
engagement as a partner, investor, shareholder, employee, agent,
consultant, or otherwise, directly or indirectly, with any party
engaged in any of the activities proscribed as specified above.
Notwithstanding the foregoing provisions of this Section 8.2, it is expressly
understood that (i) the non-competition provisions hereof shall not prohibit or
limit the right of a Seller to render personally services as a behavioral health
care provider and (ii) in the event of the termination of the employment of
Andrew L. Braun "for cause" without the payment of severance benefits under
Section 8.1 hereof, the non-competition provision hereof shall be applicable to
Andrew L. Braun for a period of only six (6) months after the date of
termination of employment.
8.3 Non-Disclosure. Each of the Sellers further covenants and agrees
that all information concerning the business of the Company constitute trade
secrets and confidential, proprietary business information which is the property
of Purchaser and that, unless otherwise required by law, from and after the
Closing Date:
<PAGE> 35
(a) he shall use his best efforts and exercise utmost
diligence to protect and safeguard all of such trade secrets and confidential,
proprietary information;
(b) he 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 except to the attorney,
accountant or other advisor of the Seller who has a need to know such
information;
(c) without the prior written consent of Purchaser, he shall
not, directly or indirectly, disclose any of such trade secrets or confidential,
proprietary information; and
(d) he 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 available to the public on a non-confidential basis prior
to the date of this Agreement or was or becomes available to the public on a
non-confidential basis from a third party who is not bound to the Company or the
Purchaser keep such information confidential.
8.4 Nondisparagement. Each Seller further agrees that he shall not
make or publish any statement, written or oral, disparaging the reputation of
Purchaser or any of its affiliated corporations, the executive officers of
Purchaser or any of its affiliated corporations or any of the business services
or products of Purchaser or any of its affiliated corporations.
8.5 Reasonableness; Reformation. The Sellers each severally
acknowledge and agree that (i) the provisions of this Article VIII are ancillary
to the transaction contemplated by this Agreement, (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 Purchaser 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 him.
8.6 Remedies for Breach. If a Seller has failed to satisfactorily
cure any breach or threatened breach of any covenant or agreement contained in
this Article VIII within ten (10) days after written notice of such breach or
threatened breach is given by Purchaser, any one or more of the following
remedies, as selected by Purchaser in its sole discretion, shall be available to
Purchaser in the event of a breach of this Agreement:
<PAGE> 36
(a) Specific Performance. In the event of a breach or
threatened breach of any covenant or agreement in this Article VIII remedies at
law will not adequately compensate Purchaser for its injuries incurred as a
result thereof. Accordingly, injunctive and/or equitable relief shall be
available to Purchaser to specifically enforce this Article VIII 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 8.6(a) above, in the event of any breach of any covenant or agreement of
this Article VIII, Purchaser may sue the party committing such breach for
damages arising out of such breach and otherwise enforce this Article VIII and
obtain all other remedies available to Purchaser under applicable law.
ARTICLE IX.
TERMINATION AND ABANDONMENT OF THE AGREEMENT
9.1 Termination. This Agreement and the transactions contemplated by
this Agreement may be terminated prior to the Closing Date:
(a) by mutual written consent of Purchaser and the Sellers at any
time;
(b) by the Sellers at any time after October 5, 1998, provided
that neither a Seller nor the Company is in material breach of any covenant,
agreement, representation or warranty made by it in this Agreement;
(c) by Purchaser at any time after October 5, 1998, provided
that Purchaser is not in material breach of any covenant, agreement,
representation or warranty made by it in this Agreement;
(d) by the Sellers or Purchaser at any time if an order is
entered by any court or governmental agency having jurisdiction enjoining
Purchaser or a Seller or the Company, respectively, from consummating the
transactions contemplated by this Agreement and such order shall not have been
vacated, reversed or withdrawn on or before October 5, 1998;
(e) by either the Sellers or Purchaser if (i) any material
representation or warranty of the other hereunder shall not have been true and
correct as of the Effective Date or shall become untrue or incorrect after the
Effective Date or (ii) material default shall be made by the other hereunder in
the due and timely observance or performance of any of its covenants and
agreements herein contained, in either event, however, only if such
representation or warranty cannot be made true and correct or such default
cannot be cured on or prior to October 5, 1998.
9.2 Effect of Termination. In the event of termination pursuant to
Section 9.1 hereof, this Agreement shall become void and have no effect, without
any liability on the part of any of the parties, except as otherwise provided in
Section 9.3 hereof.
<PAGE> 37
9.3 Termination Fee. In the event that either the Sellers or
Purchaser terminates this Agreement prior to Closing as a result of a failure to
perform any obligations by the other party or as a result of any material
misstatement of any representation or warranty contained in this Agreement by
the other party, then such defaulting party shall promptly pay to the other
party on demand a termination fee, payable in cash, in the amount of Twenty-Five
Thousand Dollars ($25,000.00) as liquidated damages and the sole and exclusive
remedy of such party for such default under this Agreement. Such termination fee
shall be in lieu of any other damages arising out of such termination.
ARTICLE X.
ARBITRATION
10.1 Arbitration Procedure. In the event of a dispute regarding any
matters arising out of or relating to this Agreement (including, but not limited
to, actions for injunctive or declaratory relief) (hereinafter collectively
"arbitrable issues") that cannot be settled by agreement between the parties,
such controversy or dispute shall be submitted for arbitration in Dallas, Texas,
and for this purpose each party hereby expressly consents to such arbitration in
such forum; provided, however, it is expressly understood that the Purchaser
shall reimburse fifty percent (50%) of the transportation expense incurred by a
Seller in order to attend any arbitration proceeding in Dallas, Texas under this
Article X. The arbitration process shall proceed as follows:
(a) Step One. In the event of a dispute, the disputing party
(herein so called) may at any time notify the other party ("answering party") in
writing that the disputing party demands to pursue arbitration as provided in
Step Two below, setting forth in specific terms the disputing party's proposed
statement of the matters in dispute to be submitted to arbitration and the name
and address of the arbitrator selected by the disputing party. Within ten (10)
business days following receipt of the disputing party's written arbitration
demand complying with the requirements of this Step One, the answering party
shall notify the disputing party in writing, setting forth in specific terms the
answering party's proposed statement of the matter in dispute and identifying
the name and address of the arbitrator selected by such answering party.
(b) Step Two. The two (2) arbitrators so selected shall meet
and confer within twenty (20) business days after receipt by the disputing party
of the answering party's written notice as called for under Step One above, and
if they are unable within said twenty (20) day period to reach a decision on the
matters in dispute, they shall, at the expiration of said twenty (20) day
period, jointly select a neutral third arbitrator. If said arbitrators are
unable to choose a neutral third arbitrator, any party may request the American
Arbitration Association ("AAA") to appoint an additional arbitrator from its
National Panel of Commercial Arbitrators. Any party to this Agreement may advise
the AAA that time is of the essence and that the parties to this Agreement would
like such selection as soon as is reasonably possible, it being expressly
understood that in such AAA selection process the selection is in the sole
discretion of the AAA, and that the AAA shall not be required by reason of this
Agreement to consult with the parties to this Agreement in said selection
process; provided that all arbitrators, including the additional
<PAGE> 38
arbitrator selected by the AAA, shall be disinterested individuals knowledgeable
in commercial transactions. Upon selection of the additional arbitrator, all
arbitrators shall within ten (10) business days thereafter convene an
arbitration proceeding at a date, time and place (in metropolitan Dallas, Texas)
designated by said arbitrators by a majority vote, written notice of which shall
be given to the parties not later than seven (7) calendar days prior to said
hearing date. At the hearing, each party may be represented by counsel and
present testimony and evidence. If at the commencement of the hearing the
parties cannot agree on a joint statement of the matters in dispute to be
submitted to the arbitrators, the arbitrators shall be empowered to frame the
submission issue(s). A Certified Court Reporter's transcript may be demanded by
any party or by the arbitrators and said official transcript shall be prepared,
completed, and delivered to the arbitrators with copies to each party within ten
(10) business days following the conclusion of the hearing. Arbitration sessions
following the initial session, if necessary, shall be scheduled by the
arbitrators so that the arbitration proceedings (i.e., presentation of evidence
and/or oral arguments) are completed within twenty (20) days of the initial
session. Each party shall be given the opportunity to file with the arbitrators
simultaneous written briefs five (5) business days following receipt by the
arbitrators of the official transcript but, if no transcript is demanded as
provided in this Agreement, said briefs shall be filed simultaneously five (5)
business days following conclusion of the hearing. Copies of any such briefs
shall be provided to the other party concurrently upon filing with the
arbitrators.
(c) Step Three. Within ten (10) business days following the
receipt by the arbitrators of the brief(s) (or within ten (10) business days
following conclusion of the hearing if all parties waive briefs), the
arbitrators shall make and deliver to the parties their decision and award in
writing. The arbitrators shall have the authority to enter any award or to grant
any relief which could be obtained in a court of competent jurisdiction and
reasonable attorneys', arbitrators' and experts' fees and expenses of
arbitration may be awarded as the arbitrators see fit, consistent with the
provisions of this Agreement. The arbitrators shall have no authority to modify,
amend or alter the provisions of this Agreement and shall base their decision
and award on applicable law, the language contained in this Agreement and the
facts giving rise to the dispute as presented on the record at the hearing. The
arbitrators shall issue a written opinion explaining the basis for their
findings.
10.2 Self-Execution. It is expressly understood between the parties
that this Article X is a self-executing arbitration provision and that any party
may unilaterally select an arbitrator if the other party refuses to arbitrate.
It is further expressly agreed that said unilaterally-selected arbitrator may
proceed to arbitrate the issue(s) and the arbitration and decision shall be
self-executing and therefore shall not require the order of any Court to
proceed. The parties may, however, mutually stipulate in writing to extend or to
shorten the prescribed time periods (including a stipulation to expedite the
referral and submission to arbitration). All provisions of this Agreement not in
dispute shall be observed and performed without interruption during the pendency
of any proceeding called for under this Article X.
10.3 Arbitrator's Fees. If an additional arbitrator is required
pursuant to Step Two under Section 10.01 above, each party shall pay its pro
rata share of any required retainer or other payments required by such
arbitrator upon such arbitrator's demand, with the ultimate
<PAGE> 39
responsibility for the arbitrators' fees to be determined by the arbitrators in
the final arbitration award pursuant to Step Three of Section 10.01 above;
otherwise, except as specified in Section 10.1 above, each party shall bear its
own costs and expenses in connection with any proceedings under this Article X
and, in any event, each party shall pay the fees of the arbitrator it selects.
10.4 Rules Governing Arbitration. In all other respects, the
arbitration shall be conducted pursuant to the then-existing Commercial Rules of
the AAA to the extent such rules are not inconsistent with any provision of this
Agreement. Subject to the foregoing, the arbitrators shall determine the scope
and extent of permissible discovery, if any.
10.5 Entry of Award. The award of the arbitrators may be entered as a
final judgment by any court of competent jurisdiction.
10.6 Injunctive Relief. Notwithstanding the provisions of this
Article X to the contrary, each party shall be entitled to seek temporary or
preliminary injunctive relief from a court of competent jurisdiction if the
failure to immediately obtain injunctive relief will result in irreparable harm
to that party. The jurisdiction of the court shall extend only to such relief
and any request for permanent injunctive relief shall remain subject to the
arbitration provisions of this Agreement.
ARTICLE XI.
MISCELLANEOUS
11.1 Waiver and Amendment. Any term or provision of this Agreement
may be waived in writing at any time by the party which is entitled to the
benefits thereof, and any term or provision of this Agreement may be amended or
supplemented at any time by a writing signed by the parties.
11.2 Entire Agreement. This Agreement, together with the Exhibits and
Schedules hereto and the documents referred to herein, constitute the entire and
complete agreement among the parties, and supersedes all prior arrangements or
understandings, whether written or oral, with respect to the subject matter of
this Agreement specifically, including, without limitation, that certain
confidentiality agreement dated November 11, 1997 and that certain letter of
intent dated August 12, 1998.
11.3 Schedules. 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; provided, however, that
the representations and warranties of a party 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 the reference on the face of the Schedule expressly by its
terms indicates that such agreement or document limits the scope of a
representation or warranty. The parties acknowledge that certain agreements and
documents listed on the Schedules are not attached to the Schedules, but were
previously delivered or made available to the party or its representatives
<PAGE> 40
in connection with the due diligence investigation conducted by the parties
prior to Closing Date. The parties represent and warrant to each other that such
agreements and documents made available or delivered to the other party were
originals or true and complete copies of the originals of all such agreements
and documents. The Schedules delivered pursuant to this Agreement shall be
attached hereto and shall constitute a part hereof.
11.4 Descriptive Headings. The descriptive headings are for
convenience of reference only and shall not control or affect the meaning or
construction of any provision of this Agreement.
11.5 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.
11.6 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 business day after timely delivery to an overnight courier; if by
personal 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.
If to Purchaser:
Horizon Behavioral Services, Inc.
1500 Waters Ridge Drive
Lewisville, Texas 75057-6011
Attention: James W. McAtee, Executive Vice President
Facsimile Number: (972) 420-8282
With a copy to:
Strasburger & Price, L.L.P.
901 Main Street, Suite 4300
Dallas, Texas 75202
Attention: David K. Meyercord, Esq.
Facsimile Number: (214) 651-4330
<PAGE> 41
If to Sellers or the Company:
ChoiceHealth, Inc.
12000 Pecos Street, Suite 250
Westminister, CO 80234
Attention: Gary M. Unruh, President
Facsimile Number: (303) 252-1194
With a copy to:
Yu Stromberg Cleveland, P.C.
Suite 700
650 South Cherry Street
Denver, CO 80222
Attention: Elizabeth Rada Carver, Esq.
Facsimile: (303) 388-9311
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
11.6.
11.7 Expenses. The Sellers and the Purchaser will each pay their or
its respective expenses incurred in connection with the preparation and
performance of this Agreement; provided, however, that the Company shall pay no
cost or expenses incurred for services rendered after August 31, 1998, in
connection with the preparation or performance of this Agreement including,
without limitation, investment advisor, broker, attorney and accountant fees, or
any fees of W. R. Nielsen & Co. for services rendered after August 31, 1998 in
connection with the transactions contemplated by this Agreement.
11.8 Assignment. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective heirs, successors and
assigns, but shall not be assigned by any party without the prior written
consent of the other party hereto.
11.9 Choice of Law. This Agreement is being executed and delivered,
and is intended to be performed, in the State of Texas, and the laws of such
state and of the United States of America shall govern the rights, duties and
obligations of the parties and the validity, construction, enforcement, and
interpretation of this Agreement.
11.10 Attorney's Fees and Costs. Subject to the provisions of Section
10.1(c) of this Agreement, 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, 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.
<PAGE> 42
11.11 Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one and the
same agreement.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
<PAGE> 43
IN WITNESS WHEREOF, the parties hereto have executed this Stock
Purchase Agreement as of the day and year first written above.
PURCHASER: SELLERS:
/s/ GARY M. UNRUH
HORIZON BEHAVIORAL SERVICES, -----------------------------------------
INC. GARY M. UNRUH
/s/ LAWRENCE H. NELSON II
-----------------------------------------
LAWRENCE H. NELSON II
By: /s/ JAMES W. MCATEE
-------------------------------- /s/ LEON EVANS, M.D.
Name: James W. McAtee -----------------------------------------
Title: Executive Vice President LEON EVANS, M.D.
/s/ ANDREW L. BRAUN
-----------------------------------------
ANDREW L. BRAUN
COMPANY:
CHOICEHEALTH, INC.
By: /s/ Gary M. Unruh
--------------------------------------
Name: Gary M. Unruh
Title: President
<PAGE> 1
EXHIBIT 11.1
HORIZON HEALTH CORPORATION
COMPUTATIONS OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NOVEMBER 30,
----------------------------
1997 1998
---------- ----------
<S> <C> <C>
BASIC
Net income $2,523,995 $1,766,427
Weighted average shares outstanding (basic) 6,980,086 7,153,603
---------- ----------
Basic earnings per share $ .36 $ .25
========== ==========
DILUTED
Net income $2,523,995 $1,766,427
Weighted average shares outstanding (basic) 6,980,086 7,153,603
Effect of dilutive securities 781,157(1) 359,672(1)
---------- ----------
Weighted average shares outstanding (diluted) 7,761,243 7,513,275
---------- ----------
Diluted earnings per share $ .33 $ .24
========== ==========
</TABLE>
(1) During 1997 and 1998 certain options to acquire common stock were not
included in certain computations of EPS because the options exercise
price was greater than the average market price of the common shares.
The computation of the quarter ended November 30, 1997 excluded 15,000
options with an option price of $26.00. The computation of the quarter
ended November 30, 1998 excluded 157,950 options with option prices
ranging from $7.4167 to $23.75.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE THREE
MONTHS ENDED NOVEMBER 30, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH YEAR TO DATE 10-Q FILING FOR THE THREE MONTHS
ENDED NOVEMBER 30, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 2,205,240
<SECURITIES> 0
<RECEIVABLES> 19,478,714
<ALLOWANCES> 2,578,703
<INVENTORY> 0
<CURRENT-ASSETS> 23,002,577
<PP&E> 6,706,514
<DEPRECIATION> 3,162,240
<TOTAL-ASSETS> 88,921,982
<CURRENT-LIABILITIES> 18,284,478
<BONDS> 0
0
0
<COMMON> 72,678
<OTHER-SE> 42,448,702
<TOTAL-LIABILITY-AND-EQUITY> 88,921,982
<SALES> 0
<TOTAL-REVENUES> 35,848,562
<CGS> 0
<TOTAL-COSTS> 33,276,645
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (692,881)
<INTEREST-EXPENSE> 408,644
<INCOME-PRETAX> 2,918,473
<INCOME-TAX> 1,152,046
<INCOME-CONTINUING> 1,766,427
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,766,427
<EPS-PRIMARY> .25
<EPS-DILUTED> .24
</TABLE>
