UNITED STATES
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 March 31, 2004
--------------
Commission File Number 0-19294
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
REHABCARE GROUP, INC.
---------------------
(Exact name of Registrant as specified in its charter)
Delaware 51-0265872
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
7733 Forsyth Boulevard, Suite 2300, St. Louis, MO 63105
-------------------------------------------------------
(Address of principal executive offices and zip code)
314-863-7422
----------------------------------------------------
(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
----- -----
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act.) Yes X No
----- -----
Indicate the number of shares outstanding of the Registrant's common stock, as
of the latest practicable date.
Class Outstanding at May 6, 2004
- -------------------------------------- --------------------------
Common Stock, par value $.01 per share 16,204,705
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REHABCARE GROUP, INC.
Index
Part I. - Financial Information
Item 1. - Condensed Consolidated Financial Statements
Condensed consolidated balance sheets,
March 31, 2004 (unaudited) and December 31, 2003 3
Condensed consolidated statements of earnings for the
three months ended March 31, 2004 and 2003 (unaudited) 4
Condensed consolidated statements of cash flows for the
three months ended March 31, 2004 and 2003 (unaudited) 5
Notes to condensed consolidated financial statements (unaudited) 6
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. - Quantitative and Qualitative Disclosures about Market Risks 20
Item 4. - Controls and Procedures 20
Part II. - Other Information 21
Item 1. - Legal Proceedings 21
Item 4. - Submission of Matters to Security Holders 22
Item 6. - Exhibits and Reports on Form 8-K 23
Signatures 25
2 of 25
PART 1. - FINANCIAL INFORMATION
Item 1. - Condensed Consolidated Financial Statements
REHABCARE GROUP, INC.
Condensed Consolidated Balance Sheets
(dollars in thousands, except share and per share data)
March 31, December 31,
2004 2003
---- ----
Assets (unaudited)
------
Current assets:
Cash and cash equivalents $ 28,937 $ 28,320
Marketable securities, available-for-sale -- 10,065
Accounts receivable, net of allowance for doubtful
accounts of $4,348 and $3,422, respectively 70,082 62,744
Income taxes receivable 4,659 --
Deferred tax assets 8,526 14,706
Other current assets 2,160 1,912
------- -------
Total current assets 114,364 117,747
Marketable securities, trading 3,751 3,665
Equipment and leasehold improvements, net 13,606 14,063
Excess cost over net assets acquired, net 58,241 48,729
Intangible assets, net 10,251 48
Assets held for sale -- 46,171
Investment in unconsolidated affiliate 39,647 --
Other 3,386 3,203
------- -------
Total assets $ 243,246 $233,626
======= =======
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current portion of long-term debt $ 720 $ --
Accounts payable 1,228 763
Accrued salaries and wages 25,364 24,035
Accrued expenses 18,983 14,800
Income taxes payable -- 1,197
------- -------
Total current liabilities 46,295 40,795
Long-term debt, less current portion 3,720 --
Deferred compensation 3,799 3,682
Deferred tax liabilities 5,638 1,423
Liabilities held for sale -- 9,771
------- -------
Total liabilities 59,452 55,671
------- -------
Stockholders' equity:
Preferred stock, $.10 par value, authorized
10,000,000 shares, none issued and outstanding -- --
Common stock, $.01 par value; authorized 60,000,000
shares, issued 20,192,627 shares and 20,144,577
shares as of March 31, 2004 and December 31,
2003, respectively 202 201
Additional paid-in capital 115,437 114,704
Retained earnings 122,859 117,753
Less common stock held in treasury at cost,
4,002,898 shares as of March 31, 2004 and
December 31, 2003 (54,704) (54,704)
Accumulated other comprehensive earnings -- 1
-------- -------
Total stockholders' equity 183,794 177,955
------- -------
Total liabilities and stockholders' equity $ 243,246 $233,626
======= =======
See accompanying notes to condensed consolidated financial statements.
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REHABCARE GROUP, INC.
Condensed Consolidated Statements of Earnings
(amounts in thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
2004 2003
---- ----
Operating revenues $104,497 $138,842
Costs and expenses:
Operating expenses 76,067 104,690
Selling, general & administrative
Divisions 9,673 18,290
Corporate 6,317 6,796
Restructuring 1,666 --
Gain on sale of business (485) --
Depreciation and amortization 1,768 2,239
------- -------
Total costs and expenses 95,006 132,015
------- -------
Operating earnings 9,491 6,827
Interest income 56 14
Interest expense (217) (165)
Other expense (7) (20)
------- -------
Earnings before income taxes and
equity in net loss of affiliate 9,323 6,656
Income taxes 3,864 2,612
Equity in net loss of affiliate (353) --
------- -------
Net earnings $ 5,106 $ 4,044
======= =======
Net earnings per common share:
Basic $ 0.32 $ 0.26
======= =======
Diluted $ 0.31 $ 0.25
======= =======
Weighted-average number of common shares
outstanding:
Basic 16,166 15,851
======= =======
Diluted 16,728 16,443
======= =======
See accompanying notes to condensed consolidated financial statements.
4 of 25
REHABCARE GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(Unaudited)
Three Months Ended
March 31,
2004 2003
---- ----
Cash flows from operating activities:
Net earnings $ 5,106 $ 4,044
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 1,768 2,239
Provision for doubtful accounts 992 559
Equity in net loss of affiliate 353 --
Income tax benefit realized on employee
stock option exercises 225 7
Restructuring 1,666 --
Gain on sale of business (485) --
Change in assets and liabilities:
Accounts receivable, net (5,353) (3,031)
Prepaid expenses and other current assets (248) (84)
Other assets (107) 118
Net assets held for sale 1,903 --
Accounts payable and accrued expenses 889 731
Accrued salaries and wages 610 (1,753)
Deferred compensation 114 (375)
Income taxes 1,468 1,946
------- -------
Net cash provided by operating activities 8,901 4,401
------- -------
Cash flows from investing activities:
Additions to equipment and leasehold improvements, net (1,211) (914)
Purchase of marketable securities (937) (77)
Proceeds from sale/maturities of marketable securities 10,919 497
Disposition of business (3,864) --
Purchase of businesses (13,293) --
Other, net (293) (249)
------- -------
Net cash used in investing activities (8,679) (743)
------- -------
Cash flows from financing activities:
Exercise of stock options 395 42
------- -------
Net cash provided by financing activities 395 42
------- -------
Net increase in cash
and cash equivalents 617 3,700
Cash and cash equivalents at beginning of period 28,320 9,580
------- -------
Cash and cash equivalents at end of period $ 28,937 $ 13,280
======= =======
See accompanying notes to condensed consolidated financial statements.
5 of 25
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Month Periods Ended March 31, 2004 and 2003
(Unaudited)
Note 1. - Basis of Presentation
The condensed consolidated balance sheets and related condensed
consolidated statements of earnings, and cash flows contained in this Form 10-Q,
which are unaudited, include the accounts of the Company and its wholly owned
subsidiaries. The Company accounts for its investment in a less than 50% owned
affiliate using the equity method. All significant intercompany accounts and
activity have been eliminated in consolidation. In the opinion of management,
all entries necessary for a fair presentation of such financial statements have
been included. The results of operations for the three months ended March 31,
2004, are not necessarily indicative of the results to be expected for the
fiscal year. Certain prior year amounts have been reclassified to conform to
current year presentation.
The condensed consolidated financial statements do not include all
information and footnotes necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with accounting
principles generally accepted in the United States of America. Reference is made
to the Company's audited consolidated financial statements and the related notes
as of December 31, 2003 and 2002 and for each of the years in the three-year
period ended December 31, 2003, included in the Annual Report on Form 10-K on
file with the Securities and Exchange Commission, which provide additional
disclosures and a further description of the Company's accounting policies.
Note 2. - Critical Accounting Policies and Estimates
The Company's condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America. Preparation of these statements requires management to
make judgments and estimates. Some accounting policies have a significant impact
on amounts reported in these financial statements. A summary of significant
accounting policies and a description of accounting policies that are considered
critical may be found in our 2003 Annual Report on Form 10-K, filed on March 12,
2004, in the Critical Accounting Policies and Estimates section of "Item 7. -
Managements Discussion and Analysis of Financial Condition and Results of
Operations."
6 of 25
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
Note 3. - Stock-Based Compensation
- ----------------------------------
The Company accounts for stock-based employee compensation plans using the
intrinsic value method under Accounting Principles Board (APB) Opinion No. 25
and related interpretations. Accordingly, stock-based employee compensation cost
is not reflected in net earnings, as all stock options granted under the plans
had an exercise price equal to the market value of the underlying common stock
on the date of grant. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the method of Statement No. 123,
"Accounting for Stock-Based Compensation," the Company's net earnings and
earnings per share would have been reduced to the pro forma amounts indicated
below:
Three Months Ended
March 31,
2004 2003
---- ----
(in thousands, except per share data)
Net earnings, as reported $5,106 $4,044
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects 836 1,098
------ ------
Pro forma net earnings $4,270 $2,946
====== ======
Basic net earnings per share: As reported $0.32 $0.26
===== =====
Pro forma $0.26 $0.19
===== =====
Diluted net earnings per share: As reported $0.31 $0.25
===== =====
Pro forma $0.26 $0.18
===== =====
Note 4. - Net earnings per share
- --------------------------------
Basic net earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted average common shares
outstanding for the period. Diluted net earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised and converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity (as
calculated utilizing the treasury stock method).
7 of 25
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
The following table sets forth the computation of basic and diluted net
earnings per share:
Three Months Ended
March 31,
2004 2003
---- ----
(in thousands, except per share data)
Numerator:
Numerator for basic/diluted net earnings
per share - net earnings available
to common stockholders $ 5,106 $ 4,044
====== ======
Denominator:
Denominator for basic net earnings per share -
weighted-average shares outstanding 16,166 15,851
Effect of dilutive securities:
Stock options 562 592
------ ------
Denominator for diluted net earnings per share -
adjusted weighted-average shares 16,728 16,443
====== ======
Basic net earnings per share $ 0.32 $ 0.26
====== ======
Diluted net earnings per share $ 0.31 $ 0.25
====== ======
Note 5. - Sale of Business
- --------------------------
On December 30, 2003, the Company announced that it had entered into a
Stock Purchase and Sale Agreement with InteliStaf Holdings, Inc. ("InteliStaf")
pursuant to which InteliStaf would acquire all of the outstanding common stock
of the StarMed staffing division in exchange for approximately 25% of the common
stock of InteliStaf on a fully diluted basis. This transaction subsequently
closed on February 2, 2004.
At December 31, 2003, the assets and liabilities of StarMed were reported
as assets and liabilities held for sale and were recorded at their estimated
fair market value less estimated costs to sell. Upon consummating the sale on
February 2, 2004, the Company recorded a gain of $485,000 as a result of
adjusting the estimated costs to sell for then current information, recording a
liability for the estimated fair market value of the indemnification provided to
InteliStaf in accordance with the sale agreement and as a result of changes in
the underlying asset and liability balances between December 31, 2003 and
February 2, 2004. This gain will be subject to further refinement once the
closing balance sheet has been agreed to by the parties and all costs to sell
have been finalized. These adjustments are not expected to be material.
As stated above, as part of the sale agreement, the Company indemnified
InteliStaf from certain obligations and liabilities, whether known or unknown,
which arose out of the operation of StarMed prior to February 2, 2004. As of
March 31, 2004, the Company has accrued approximately $1.1 million for this
indemnification.
8 of 25
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
Note 6. - Investment in Unconsolidated Affiliate
- ------------------------------------------------
As stated in note 5, the Company sold its StarMed staffing business to
InteliStaf on February 2, 2004 in exchange for a 25% interest in InteliStaf on a
fully diluted basis. The Company uses the equity method to account for its
investment in InteliStaf and recorded its initial investment at its fair value
of $40 million, as determined by a third party valuation firm. A summary of the
results of operations for the period from February 2, 2004 to March 31, 2004 and
financial position as of March 31, 2004 follows (dollars in thousands):
Net operating revenues $ 61,711
Operating loss (1,588)
Net loss (1,411)
Company share of net loss $ (353)
========
Current assets $ 71,629
Noncurrent assets 100,737
--------
Total assets $172,366
========
Current liabilities $ 38,851
Noncurrent liabilities 45,995
--------
Total liabilities $ 84,846
========
The value of the Company's investment in InteliStaf at the transaction date
exceeded its share of the book value of InteliStaf's stockholders' equity by
approximately $17.8 million. This excess has been accounted for as goodwill
(although reported as a component of investment in unconsolidated affiliate) and
will be reviewed for impairment in accordance with the terms of APB Opinion No.
18, "The Equity Method of Accounting for Investments in Common Stock."
Note 7. - Restructuring Costs
- -----------------------------
On July 30, 2003, the Company announced a comprehensive multifaceted
restructuring program to return the Company to growth and improved
profitability. As a result of the restructuring plan, the Company recognized a
pre-tax restructuring expense of $1.3 million for severance, outplacement and
exit costs.
As reported in note 5, the Company sold its StarMed staffing division to
InteliStaf on February 2, 2004. In connection with this sale, the Company
initiated a series of restructuring activities to reduce the cost of corporate
overhead that had previously been absorbed by the staffing division. These
activities included the elimination of approximately 40 positions, exiting a
portion of leased office space at the Company's corporate headquarters and the
write-off of certain abandoned leasehold improvements associated with the office
space consolidation. In addition, the Company modified the term of the stock
options of certain StarMed employees to allow them additional time to exercise
vested options after leaving the employment of the Company. This action
triggered a new measurement date for the modified options. The corresponding
expense has been included in the severance component of the restructuring
charge. As a result of these actions, the Company recorded a pre-tax
restructuring charge in the first quarter of 2004 of approximately $1.7 million.
9 of 25
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
The following table summarizes the first quarter 2004 activity with
respect to these restructuring activities:
(dollars in thousands)
Leasehold
Improvement
Severance Exit Costs Write-off Total
Balance at December 31, 2003 $ 351 $ 145 $ -- $ 496
Restructuring Charge 787 520 359 1,666
Cash payments and
non-cash utilization 629 35 359 1,023
----- ----- ----- -------
Balance March 31, 2004 $ 509 $ 630 $ -- $ 1,139
===== ===== ===== =======
Note 8. - Business Combinations
- -------------------------------
On February 2, 2004, the Company purchased the assets of CPR Therapies,
Inc. ("CPR") for cash and notes. CPR, headquartered in Denver, Colorado, is a
contract therapy services company for physical rehabilitation services in
skilled nursing and assisted living facilities with a significant market
presence in Colorado and California. CPR's annual operating revenues are
approximately $9 million. The initial purchase price, including direct
acquisition costs, of CPR has been allocated as follows (in thousands of
dollars):
Net property and equipment $ 16
Identifiable intangibles, principally
trade name, customer relationships
and noncompete agreements 1,660
Goodwill 2,414
-------
$ 4,090
=======
In accordance with the terms of the purchase agreement, the seller is
entitled to additional earn-out consideration up to, but not exceeding,
$799,000. The payment of this earn-out is contingent upon the execution of new
therapy contracts as defined in the agreement. Any contingent consideration paid
as a result of this contract provision will be recorded at the time the
contingency is resolved.
Effective March 1, 2004, the Company purchased from Health Net, Inc. (NYSE:
HNT) all of the outstanding common stock of American VitalCare, Inc. and its
sister company, Managed Alternative Care, Inc. (collectively "VitalCare") for
cash and notes. VitalCare provides management services to hospital based
specialty care units in the state of California generating annual operating
revenues of approximately $14 million.
10 of 25
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
The initial purchase price, including direct acquisition costs, of
VitalCare has been allocated as follows (in thousands of dollars):
Accounts receivable, net of allowance $ 2,978
Net property and equipment 39
Other long-term assets 12
Identifiable intangibles, principally
trade name, customer relationships,
contractual customer relationships
and noncompete agreements 8,720
Goodwill 7,098
Net deferred tax liabilities (3,072)
Accounts payable (251)
Accrued wages and salaries (483)
-------
$15,041
=======
In accordance with the terms of the purchase agreement, the final purchase
price is subject to modification. The purchase price may be increased or
decreased for the settlement of the final closing balance sheet and for an
adjustment, as defined in the agreement, related to the retention and/or
termination of customer contracts for a period of time after the purchase date.
The following pro forma information assumes the acquisitions of CPR and
VitalCare occurred at the beginning of each of the three month periods
presented. This information is not necessarily indicative either of results of
operations that would have occurred had the purchases actually been made at the
beginning of the periods presented, or of the future results of the Company.
Three Months Ended
March 31,
2004 2003
---- ----
(in thousands, except per share data)
Operating revenues $107,612 $144,562
Net earnings $ 5,155 $ 4,482
Diluted net earnings per share $ 0.31 $ 0.27
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REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
Note 9. - Goodwill and Other Intangible Assets
- ----------------------------------------------
At March 31, 2004 and 2003, the Company had the following goodwill and
other intangible asset balances:
(dollars in thousands)
March 31, 2004 March 31, 2003
-------------- --------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Amortized Intangible Assets:
Noncompete agreements $ 320 $ (40) $ -- $ --
Contractual customer
relationships 8,800 (189) 100 (33)
----- ---- --- ---
Total $9,120 $ (229) $ 100 $ (33)
===== ==== === ===
Unamortized Intangible Assets:
Trade names $1,360
=====
Amortization expense was $176,000 and $7,000 for the quarters ended March
31, 2004 and 2003, respectively. Estimated annual amortization expense for the
next 5 years is: 2004 - $1.5 million; 2005 - $1.7 million; 2006 - $1.7 million;
2007 - $1.0 million and 2008 - $0.8 million.
The changes in the carrying amount of goodwill for the quarter ended March
31, 2004 are as follows:
(dollars in thousands)
Hospital
Rehabilitation Contract
Services Therapy Total
-------- ------- -----
Balance at December 31, 2003 $ 35,739 $12,990 $ 48,729
Goodwill acquired 7,098 2,414 9,512
------- ------ -------
Balance March 31, 2004 $ 42,837 $15,404 $ 58,241
======= ====== =======
Note 10. - Long-term Debt
- -------------------------
As part of the purchases of CPR and VitalCare, the Company issued long-term
subordinated promissory notes to the respective selling parties. In the case of
CPR, the Company issued a promissory note with a face value of $1.44 million and
a stated interest rate of 8%. Interest is due quarterly, beginning on May 1,
2004, and the principal is due in eight equal quarterly installments starting on
May 1, 2004. In the VitalCare acquisition, the Company issued a promissory note
with a face value of $3 million and a stated interest rate of 7%. Interest is
payable on May 31, 2004, August 31, 2004, November 30, 2004 and August 31, 2005
and the principal is payable in full on August 31, 2005.
Note 11. - Industry Segment Information
- ---------------------------------------
Prior to February 2, 2004, when the Company sold its healthcare staffing
division, the Company operated in two business segments that were managed
separately based on fundamental differences in operations: program management
services and healthcare staffing services. Program management includes hospital
rehabilitation services (including inpatient acute rehabilitation and skilled
nursing units and outpatient therapy programs) and contract therapy programs.
All of the Company's services are provided in the United States. Summarized
information about the Company's operations for the three months ended March 31,
2004 and 2003 in each industry segment is as follows:
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REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
Operating revenues from
Unaffiliated Customers Operating Earnings
---------------------------- -----------------------
(in thousands) (in thousands)
Three months ended Three months ended
March 31, March 31,
2004 2003 2004 2003
---- ---- ---- ----
Program management:
Hospital
rehabilitation
services $ 47,087 $ 46,159 $ 8,797 $ 7,074
Contract therapy 40,754 30,926 2,438 1,739
-------- -------- ------- -------
Program
management total 87,841 77,085 11,235 8,813
Healthcare staffing 16,727 62,116 (78) (1,986)
-------- -------- ------- -------
Total 104,568 139,201 11,157 6,827
Less Intercompany
revenues* 71 359 N/A N/A
Restructuring charge N/A N/A (1,666) --
-------- -------- ------- -------
$104,497 $138,842 $ 9,491 $ 6,827
======== ======== ======= =======
*Intercompany revenues represent healthcare staffing sales made to hospital
rehabilitation services and contract therapy at market rates.
Depreciation and
Amortization Capital Expenditures
---------------------------- -----------------------
(in thousands) (in thousands)
Three months ended Three months ended
March 31, March 31,
2004 2003 2004 2003
---- ---- ---- ----
Program management:
Hospital
rehabilitation
services $ 1,026 $ 1,467 $ 660 $ 355
Contract therapy 742 318 551 276
------- ------- ------ ------
Program
management total 1,768 1,785 1,211 631
Healthcare staffing -- 454 -- 283
------- ------- ------ ------
Total $ 1,768 $ 2,239 $1,211 $ 914
======= ======= ====== ======
Total Assets Unamortized Goodwill
---------------------------- -----------------------
(in thousands) (in thousands)
as of March 31, as of March 31,
2004 2003 2004 2003
---- ---- ---- ----
Program management:
Hospital
rehabilitation
services $152,291 $109,546 $42,837 $ 35,739
Contract therapy 51,308 36,398 15,404 12,990
-------- -------- ------- --------
Program
management total 203,599 145,944 58,241 48,729
Healthcare staffing -- 93,044 -- 52,956
Corporate -
investment in
unconsolidated
affiliate 39,647 -- N/A N/A
-------- -------- -------- --------
Total $243,246 $238,988 $ 58,241 $101,685
======== ======== ======== ========
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REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
Note 12. - Related Party Transactions and Subsequent Event
- ----------------------------------------------------------
During the third quarter of 2003, the Board of Directors approved and the
Company entered into a contract with a software vendor to develop a new public
website for the Company. John H. Short, Interim CEO and a director of our
Company, and Theodore M. Wight, a director of our Company, are also directors of
the software vendor company. Messrs. Wight and Short and their affiliated
entities own 27.3% and 5.5% of the fully diluted capitalization of the software
company, respectively. The contract amount was for $320,000 and was later
modified for additional costs of $34,500. The work on this project is
substantially complete.
During the first quarter of 2004, the Company entered into an addendum to
the aforementioned contract with the same software vendor to identify and
document the actual costs and timeline required to complete the Company's
employee portal/HR center project. The addendum to the contract was for the
amount of $47,000 and the work is anticipated to be completed by the end of the
second quarter.
During 2003, the Company entered into an agreement with Phase 2 Consulting,
LLC ("Phase 2"). Per the terms of the agreement, Phase 2 will provide the
Company with management, consulting and advisory services, including having John
H. Short, Ph.D., the managing director of Phase 2 and a member of the Company's
Board of Directors, serve as Interim President and Chief Executive Officer of
the Company. A monthly consulting fee of $55,000 is being paid to Phase 2 during
the term of the agreement plus reimbursement of business expenses. In addition,
Phase 2 is entitled to an incentive fee capped at $1.3 million payable in cash
or shares of the Company's stock based on predetermined performance standards.
During the first quarter of 2004, the Company recorded approximately $400,000 of
expense under this agreement and made payments to Phase 2 of approximately
$253,000.
During the first quarter of 2004, the Company engaged Phase 2 for a
consulting project, separate from the agreement described above, to support the
development of the Company's long-term information technology strategy. The cost
of this project, which was paid in full during the quarter, was approximately
$15,000.
On May 3, 2004, the Company announced that it had hired Dr. Short as its
permanent President and CEO and had purchased Phase 2 for $5 million in cash. As
a result, the consulting agreement with Phase 2 was terminated effective April
30, 2004. A final payment will be made to Phase 2 during the second quarter for
the April monthly service fees and expenses and for any unpaid incentive.
In accordance with the terms of the Transition Services Agreement between
the Company and InteliStaf, the Company agreed to provide certain accounting and
back-office services to InteliStaf until such time as those activities were
fully integrated by InteliStaf. These services are being billed at cost. During
the period from February 2, 2004, to March 31, 2004, the Company performed
services under this agreement with an aggregate cost of approximately $0.7
million.
14 of 25
REHABCARE GROUP, INC.
Item 2. - Management's Discussion and Analysis of Financial Condition and
- --------------------------------------------------------------------------------
Results of Operations
- ---------------------
This Quarterly Report on Form 10-Q contains forward-looking statements that
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements involve known and
unknown risks and uncertainties that may cause the RehabCare's actual results in
future periods to differ materially from forecasted results. These risks and
uncertainties may include, but are not limited to, the ability of RehabCare to
integrate acquisitions and to implement client partnering relationships within
the expected timeframes and to achieve the revenue and earnings levels from such
acquisitions and relationships at or above the levels projected; the timing and
financial effect of the RehabCare's restructuring efforts with respect to the
RehabCare's current businesses; changes in and compliance with governmental
reimbursement rates and other regulations or policies affecting RehabCare's
current businesses; RehabCare's ability to attract new client relationships or
to retain and grow existing client relationships through expansion of
RehabCare's hospital rehabilitation and contract therapy service offerings and
the development of alternative product offerings; the future operating
performance of InteliStaf Holdings, Inc., and the rate of return that RehabCare
will be able to achieve from its equity interest in InteliStaf; the adequacy and
effectiveness of RehabCare's operating and administrative systems; RehabCare's
ability and the additional costs of attracting administrative, operational and
professional employees; significant increases in health, workers' compensation
and professional and general liability costs; litigation risks of RehabCare's
past and future business, including RehabCare's ability to predict the ultimate
costs and liabilities or the disruption of its operations; competitive and
regulatory effects on pricing and margins; and general economic conditions,
including efforts by governmental reimbursement programs, insurers, healthcare
providers and others to contain healthcare costs.
Results of Operations
- ---------------------
Prior to the divestiture of our StarMed Staffing division to InteliStaf
Holdings, Inc. on February 2, 2004, we derived our revenue from two business
segments: program management services for hospitals and skilled nursing
facilities and healthcare staffing services. The program management segment
includes hospital rehabilitation services (including inpatient acute
rehabilitation, skilled nursing units and outpatient therapy programs) and
contract therapy programs. The healthcare staffing segment included both
supplemental personnel and traveling personnel who are typically placed based on
hourly and 13-week assignments, respectively.
Selected Operating Statistics:
Three Months Ended
March 31,
2004 2003
---- ----
Hospital Rehabilitation Services
Operating Revenues (in thousands)
Inpatient $35,343 $34,137
Outpatient 11,744 12,022
------- -------
Total $47,087 $46,159
Average Number of Programs
Inpatient 130 138
Outpatient 43 50
--- ---
Total 173 188
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REHABCARE GROUP, INC.
Operating Statistics: (Continued)
- ---------------------------------
Three Months Ended
March 31,
2004 2003
---- ----
Contract Therapy
- ----------------
Operating Revenues (in thousands) $40,754 $30,926
Average Number of Locations 536 431
Healthcare Staffing**
Operating Revenues (in thousands)
Supplemental $10,231 $35,436
Travel 6,496 26,680
------- -------
Total* $16,727 $62,116
Gross Profit Margin
Supplemental 18.2% 20.3%
Travel 20.8% 19.8%
Total 19.2% 20.1%
Weeks Worked
Supplemental 7,472 25,134
Travel 3,296 13,607
------ ------
Total 10,768 38,741
Average Number of
Supplemental branches 61 82
* Includes intercompany revenues of $0.1 million and $0.4 million at market
rates from the healthcare staffing division to our hospital rehabilitation and
contract therapy divisions during the quarters ended March 31, 2004 and 2003,
respectively.
** All statistics for healthcare staffing are for the period form January 1,
2004 to February 2, 2004. On February 2, 2004, the healthcare staffing division
was sold to InteliStaf Holdings, Inc.
Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003
- -------------------------------------------------------------------------------
Operating Revenues
Operating revenues during the first quarter of 2004 decreased by $34.3
million, or 24.7%, to $104.5 million compared to $138.8 million in the first
quarter of 2003. The revenue decline was primarily due to the sale of the
healthcare staffing division in February 2004. Revenues for contract therapy and
hospital rehabilitation services increased 31.8% and 2.0%, respectively.
Hospital rehabilitation services revenues, consisting of hospital inpatient
and outpatient programs, increased by $0.9 million, or 2.0% from $46.2 million
in the first quarter of 2003 to $47.1 million in the first quarter of 2004.
Inpatient revenues increased $1.2 million, or 3.5% from $34.1 million in the
first quarter of 2003 to $35.3 million in the first quarter of 2004. This
increase was primarily the result of a 9.6% increase in revenue per program,
partially offset by a 5.6% decline in the average number of programs operated.
Growth in revenue per program is the result of same store growth in discharges
due to bed expansions in the second half of last year and greater maturity of
newer units this year. Outpatient revenues declined $0.3 million or 2.3%
year-over-year, reflecting a 13.9% decrease in the average number of programs
operated, partially offset by a 13.5% increase in average revenue per outpatient
program. Growth in outpatient revenue per location is a result of termination of
a number of smaller contracts with limited long-term opportunity, a focus on
larger contracts, and growth in existing contracts.
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REHABCARE GROUP, INC.
Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003
- --------------------------------------------------------------------------------
(Continued)
- -----------
Contract therapy revenue increased by 31.8% from $30.9 million in the first
quarter of 2003 to $40.8 million in the first quarter of 2004. A portion of the
revenue increase, $1.6 million, is attributable to the acquisition of CPR
Therapies, LLC in February of 2004. This acquisition of 60 facilities helped us
enter the Colorado market, and it enhanced our presence in the California and
Florida markets. Although the acquisition contributed to the division's growth
in the first quarter, the driving factors behind the revenue increase were the
continued success of the division's sales efforts, an improved long-term care
reimbursement environment and an increase in the average revenue per location.
Including the acquisition, the average number of contract therapy locations
managed by the division during the quarter increased 24.4% from 431 in the first
quarter of 2003 to 536 in the first quarter of 2004. The average revenue per
location increased 6.0% year-over-year from approximately $71,700 to
approximately $76,000 per location, resulting from same store growth, the
continued focus on opening larger locations and the benefits of the division's
target market strategy.
Cost and Expenses
The ratios of operating expenses and selling, general and administrative
expenses as a percentage of revenues were significantly affected by the sale of
our healthcare staffing division during the first quarter of 2004. Historically,
the healthcare staffing division's operating and selling, general and
administrative expenses as a percentage of revenues were higher than our other
two divisions. As a result, we experienced improvements in these ratios on a
year-over-year basis with the ratio of operating expenses to revenues improving
from 75.4% in the first quarter of 2003 to 72.8% in the first quarter of 2004
and the ratio of selling, general and administrative expense as a percentage of
revenues improving from 18.1% in the first quarter of 2003 to 15.3% in the first
quarter of 2004. Depreciation and amortization expense as a percent of operating
revenues remained relatively flat at 1.7% and 1.6% during the first quarters of
2004 and 2003, respectively.
In the hospital rehabilitation services division, direct operating expenses
(excluding provision for doubtful accounts) fell by 1.4% in the first quarter of
2004 compared to the first quarter of 2003, or $0.4 million, primarily
reflecting a lower number of operating units and lower salary-related expenses
in both the inpatient and outpatient divisions. Provision for doubtful accounts
as a percentage of operating revenues increased from 0.20% in the first quarter
of 2003 to 0.63% for the first quarter of 2004, primarily as a result of the
normal evaluation of the creditworthiness of our clients. Divisional selling,
general and administrative expenses decreased from 9.1% of revenues in the first
quarter of 2003 to 7.8% in the first quarter of 2004 principally as a result of
the benefits of the restructuring actions taken in 2003. Total selling, general,
and administrative expense, as a percent of revenue, decreased from 13.5% in the
first quarter of 2003 to 13.0% in the first quarter of 2004 despite the fact
that the division absorbed an additional amount of allocated corporate general
and administrative expenses following the sale of the staffing division and
absorbed the selling, general, and administrative expenses of VitalCare.
Previous reductions resulting from our 2003 restructuring activities were
partially offset by these increases. Corporate general and administrative
expenses allocated to the division increased $0.4 million, or 19.9%, to $2.5
million in the first quarter of 2004. The net effect of the revenue growth and
overall cost control improvements from the first quarter of 2003 to the first
quarter of 2004 was a $1.7 million or 24.4% increase in the hospital
rehabilitation division's operating earnings from $7.1 million to $8.8 million.
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REHABCARE GROUP, INC.
Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003
- --------------------------------------------------------------------------------
(Continued)
- -----------
Contract therapy operating expenses, including selling, general and
administrative expenses, increased 31.3% from $29.2 million in the first quarter
of 2003 to $38.3 million in the first quarter of 2004, due primarily to the rise
in direct operating expenses resulting from the increased number of contract
therapy locations being managed by the division. As a percentage of net
revenues, the division's direct operating expenses decreased from 76.2% to 75.6%
year-over-year as a result of incremental productivity improvements and reduced
utilization of higher cost contract labor. The provision for doubtful accounts
was 1.5% of operating revenues for both the first quarter of 2004 and the first
quarter of 2003. Contract therapy continued to improve the management of its
division selling, general and administrative expenses, which decreased as a
percentage of revenues from 9.2% in the first quarter of 2003 to 8.0% in the
first quarter of 2004, as the division was able to continue increasing revenues
at a rate faster than the rate of increase of its selling, general and
administrative expenses. The division's corporate general and administrative
expenses as a percentage of operating revenues increased from 6.4% in the first
quarter of 2003 to 7.1% in the first quarter of 2004 due to the fact that the
division absorbed an additional amount of allocated expenses following the sale
of the staffing division. Depreciation and amortization expense as a percentage
of operating revenues increased year-over-year from 1.0% of operating revenues
to 1.8%. The increased expense is due to the amortization of the division's
proprietary information system implemented in the third quarter of 2003, and the
amortization of certain intangible assets associated with the acquisition of CPR
Therapies, LLC. The net effect of the revenue growth and overall cost control
improvements from the first quarter of 2003 to the first quarter of 2004 was a
$0.7 million increase in contract therapy's operating earnings from $1.7 million
to $2.4 million.
During the first quarter of 2004, in connection with the sale of the
staffing division, we initiated a series of restructuring activities to reduce
the cost of corporate overhead that had previously been absorbed by the staffing
division. These activities included the elimination of approximately 40
positions, the exiting a portion of leased office space at our corporate
headquarters and the write-off of certain leasehold improvements associated with
the office space consolidation. As a result of these actions, we recorded a
pre-tax restructuring charge in the first quarter of 2004 in the amount of
approximately $1.7 million. This charge has been recorded as a separate
component of operating expenses.
Non-operating Items
Interest income increased marginally in the first quarter of 2004 compared
to the first quarter of 2003. The impact of higher average cash and investment
balances was partially offset by the effect of lower interest rates.
Interest expense primarily represents commitment fees paid on the unused
portion of our line of credit and was comparable for the periods reported. We
had no outstanding balance on the line of credit as of March 31, 2004 or March
31, 2003. During the first quarter of 2004, we issued subordinated promissory
notes with an aggregate face value of $4,440,000 at interest rates ranging from
7%-8% as partial consideration for the purchases of CPR Therapies, LLC and
American VitalCare, Inc. Interest expense on these notes was approximately
$40,000 for the quarter.
18 of 25
REHABCARE GROUP, INC.
Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003
- --------------------------------------------------------------------------------
(Continued)
- -----------
At December 31, 2003, the assets and liabilities of our healthcare staffing
division were reported as assets and liabilities held for sale and were reported
at their estimated fair market value less estimated costs to sell. Upon
consummating the sale of this business to InteliStaf on February 2, 2004, we
recorded a gain of $485,000 as a result of adjusting the estimated costs to sell
for then current information, recording a liability for the estimated fair
market value of the indemnification provided to InteliStaf in accordance with
the sale agreement and as a result of changes in the underlying asset and
liability balances between December 31, 2003 and February 2, 2004. In connection
with this transaction, we received in return a 25% equity interest in
InteliStaf. We account for this investment using the equity method. For the
period from February 2, 2004 to March 31, 2004, our share of InteliStaf's after
tax net loss was $353,000. The operating results of InteliStaf were adversely
impacted by costs incurred to integrate StarMed.
Earnings before income taxes increased by 40.1% to $9.3 million in the
first quarter of 2004 from $6.7 million in the first quarter of 2003. The
provision for income taxes was $3.9 million in the first quarter of 2004
compared to $2.6 million in the first quarter of 2003, reflecting effective
income tax rates of 41.5% and 39.2%, respectively. The effective tax rate
increase is primarily the result of the impact of non-deductible goodwill
associated with the sale of the staffing division during the first quarter of
2004.
Net earnings in the first quarter of 2004 increased 26.3% as compared to
the first quarter of 2003. Diluted net earnings per share increased by 24.1%
from $0.25 in the first quarter of 2003 to $0.31 in the first quarter of 2004.
Regulatory Update
On April 30, 2004, the Centers for Medicare and Medicaid Services announced
a final rule revising criteria for classifying hospitals as inpatient
rehabilitation facilities. We know this rule as the "modified 75% Rule." This
final rule, which is not a significant departure from the proposed rule issued
in September 2003, will be effective for cost reporting periods beginning on or
after July 1, 2004. The rule provides for a three-year transition period with
increasing percentages of the total patient population that will be required to
have one of the qualifying medical conditions. Commencing on July 1, 2004, the
annual percentage phase-in will be 50%, 60%, 65% and finally 75% after July 1,
2007, assuming no further regulatory action is taken. We are in the process of
analyzing the provisions of this new rule and the impact it will have on our
long-term financial results. For 2004, we expect the rule will have a minimal
impact on our financial results.
Liquidity and Capital Resources
As of March 31, 2004, we had $28.9 million in cash and cash equivalents and
a current ratio, the amount of current assets divided by current liabilities, of
2.5 to 1. Working capital decreased by $8.9 million to $68.1 million as of March
31, 2004 as compared to $77.0 million as of December 31, 2003 due to a decrease
in current assets of $3.4 million combined with an increase in current
liabilities of $5.5 million. The decrease in current assets was primarily due to
a decrease in cash and marketable securities balances as a result of cash paid
to purchase CPR Therapies and American VitalCare. The increase in current
liabilities was primarily attributable to accrued indemnification expenses for
the sale of the staffing division, accrued acquisition costs for CPR and
VitalCare, costs accrued for restructuring and increases in accrued insurance
reserves. Net accounts receivable were $70.1 million at March 31, 2004, compared
to $62.7 million at December 31, 2003. The number of days' average net revenue
in net receivables was 69.0 and 72.0 (adjusted to exclude receivables related to
the staffing division) at March 31, 2004 and December 31, 2003, respectively.
Deferred tax assets decreased approximately $6.2 million primarily due to the
sale of the staffing division, which created a significant current income tax
benefit for the tax loss on the sale.
Operating cash flows constitute our primary source of liquidity and
historically have been sufficient to fund working capital, capital expenditures,
internal business expansion and debt service requirements. We expect to meet our
future working capital, capital expenditures, internal and external business
expansion and debt service requirements from a combination of internal sources
and outside financing. We have a $125.0 million revolving line of credit with no
balance outstanding as of March 31, 2004. We have approximately $10.0 million in
19 of 25
REHABCARE GROUP, INC.
Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003
- --------------------------------------------------------------------------------
(Continued)
- -----------
letters of credit issued to insurance carriers as collateral for reimbursement
of claims. The letters of credit reduce the amount we may borrow under the line
of credit. We also have a $4.2 million promissory note issued to our workers
compensation carrier as additional collateral. The promissory note is not
recorded as a liability on the balance sheet as it only becomes payable upon an
event of default as defined in the security agreement with the workers
compensation carrier. Finally, as additional collateral, we have a trust
agreement with our professional and general liability insurance carrier under
which we are in the process of depositing $3.1 million for their benefit in an
escrow account. Our access to this cash will be restricted and the insurance
carrier may only draw on these funds in the event of a default as defined in the
trust agreement.
As part of the purchases of CPR Therapies and American VitalCare, we issued
long-term subordinated promissory notes to the respective selling parties. These
notes have an aggregate face value of $4.44 million and bear interest at rates
ranging from 7%-8%. In addition, as part of our arrangement with Signature
Healthcare Foundation, we extended a $2.0 million line of credit to Signature.
At March 31, 2004, Signature had drawn approximately $0.4 million against this
line of credit.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Our significant accounting policies,
including the use of estimates, were presented in the notes to consolidated
financial statements included in our 2003 Annual Report on Form 10-K, filed on
March 12, 2004.
Critical accounting policies are those that are considered most important
to the presentation of our financial condition and results of operations,
require management's most difficult, subjective and complex judgments, and
involve uncertainties. Our most critical accounting policies pertain to
allowance for doubtful accounts, goodwill and other intangible assets and
health, workers compensation and professional liability insurance accruals. Each
of these critical accounting policies was discussed in our 2003 Annual Report on
Form 10-K in the Critical Accounting Policies and Estimates section of "Item 7.
- - Management's Discussion and Analysis of Financial Condition and Results of
Operations." There were no significant changes in the application of critical
accounting policies during the first quarter of 2004.
Item 3. - Quantitative and Qualitative Disclosures About Market Risks
- ---------------------------------------------------------------------
There have been no material changes in the reported market risks since the
filing of the Company's Annual Report on Form 10-K for the year ended December
31, 2003.
Item 4. - Controls and Procedures
- ---------------------------------
As of March 31, 2004, the Company's Chief Executive Officer and Chief
Financial Officer have conducted an evaluation of the effectiveness of the
design and operation of the Company's disclosure controls and procedures (as
defined in Rule 13a-14 (c) and 15d-14 (c) under the Securities Exchange Act of
1934, as amended). Based on that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures are effective in making known in a timely fashion
material information required to be filed in this report. There have been no
significant changes in internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
20 of 25
REHABCARE GROUP, INC.
Part II. - Other Information
- ----------------------------
Item 1 - Legal Proceedings
- --------------------------
In May 2002, a lawsuit was filed in the United States District Court for
the Eastern District of Missouri against us and certain of our former and
current directors and officers. The plaintiffs allege violations of the federal
securities laws and are seeking to certify the suit as a class action. The
proposed class consists of persons that purchased shares of our common stock
between August 10, 2000 and January 21, 2002. The case alleges weaknesses in the
software systems selected by our recently sold StarMed Staffing Group, and the
purported negative effects of such systems on our business operations. The
Plaintiff filed a second amended complaint in November 2003, pursuant to the
District Court Judge's ruling that the Plaintiff must present its claims with
more focus and "sufficient particularity" before he could entertain a motion to
dismiss. On February 17, 2004, we filed a second motion to dismiss, which is
pending.
In August 2002, a derivative lawsuit was filed in the Circuit Court of St.
Louis County, Missouri against us and certain of our former and current
directors. The complaint, which is based upon substantially the same facts as
are alleged in the federal securities class action, was filed on behalf of the
derivative plaintiff by a law firm that had earlier filed suit in the federal
case. We filed a motion to dismiss based primarily on the derivative plaintiff's
failure to make a pre-suit demand, which is pending. The federal court hearing
the securities law class action has stayed discovery in the derivative
proceeding until discovery commences in the federal case.
In July 2003, a civil action was filed under the qui tam provisions of the
False Claims Act in the United States District Court for the Eastern District of
Arkansas, seeking treble damages, civil penalties, back pay, and special
damages. The allegations contained in the suit, brought by a former independent
contractor of ours and a former Baxter physical therapist, relate to the proper
clinical diagnoses of patients treated at the hospital's acute rehabilitation
unit for Medicare reimbursement purposes, in which Baxter received such
reimbursement in excess of $5,000,000. The original action was filed on August
21, 2000, under seal, and an investigation by the United States Department of
Justice resulted in a Department determination not to intervene. We and Baxter
also initiated an internal and external audit that concluded the allegations
were unfounded and that we and Baxter were in compliance with Medicare
regulations. We have agreed to indemnify Baxter for all fees and expenses on all
counts except one, arising out of the action. The court recently denied both
parties motions to dismiss and we expect discovery to commence shortly.
The Wage and Hour Division of the United States Department of Labor is
currently investigating whether persons employed as on-call coordinators at
certain staffing branch locations were properly compensated for all hours
worked, and whether the entire time they were on-call should be counted as hours
worked. We have advised the Wage and Hour Division that we believe on-call
coordinators paid a flat fee per shift were properly compensated in accordance
with applicable federal law. The inquiry is limited to a period from January 1,
2000 to the present. No final determination or position has been taken by the
Wage and Hour Division to date with respect to these matters.
21 of 25
REHABCARE GROUP, INC.
Item 1 - Legal Proceedings (Continued)
- --------------------------------------
A number of suits have been filed by certain on-call coordinators based
upon facts similar to those being investigated by the Wage and Hour Division. We
have filed and argued a motion with the Judicial Panel on MultiDistrict
Litigation to consolidate these cases based upon similar or common claims and
issues and to transfer these cases to a single district court for resolution.
Presently the judges in the two main cases have issued stays on the proceedings
pending the decision from the Panel. Although our recently sold StarMed
subsidiary is the named defendant in these cases, we will be responsible for any
liability, including attorney's fees and expenses incurred in connection with
these actions.
On February 9, 2004, Bond International Software Group, Inc. filed suit
against our former StarMed subsidiary in United States District Court for the
Eastern District of Virginia alleging breach of contract for licensed software
and related development, configuration, support and maintenance services. We
expect to file a counter claim asserting our right to a refund under the
termination and refund provisions of the contract. The parties are discussing
mediation as a means of resolving all disputes in this case.
In addition to above matters, we are a party to a number of other claims
and lawsuits. While these actions are being contested, the outcome of individual
matters is not predictable with assurance. From time to time, and depending upon
the particular facts and circumstances, we may be subject to indemnification
obligations under our contracts with our hospital and healthcare facility
clients relating to these matters. We do not believe that any liability
resulting from any of the above matters, after taking into consideration our
insurance coverage and amounts already provided for, will have a material
adverse effect on our consolidated financial position, cash flows or liquidity.
However, such matters could have a material effect on results of operations in a
particular quarter or fiscal year as they develop or as new issues are
identified.
Item 4. - Submission of Matters to Security Holders
- ---------------------------------------------------
At our Annual Meeting of Stockholders held on Tuesday, May 4, 2004, the
following matters were voted upon:
1. Election of William G. Anderson, Colleen Conway-Welch, C. Ray Holman, John
H. Short, H. Edwin Trusheim and Theodore M. Wight to serve as Directors of
the Company for terms expiring in 2005:
Name For Withheld Authority
- ---- --- ------------------
William G. Anderson 13,484,630 875,491
Colleen Conway-Welch 14,204,271 155,850
C. Ray Holman 14,259,835 100,286
John H. Short 12,496,015 1,864,106
H. Edwin Trusheim 13,492,915 867,206
Theodore M. Wight 12,414,353 1,945,768
22 of 25
REHABCARE GROUP, INC.
Item 4. - Submission of Matters to Security Holders (Continued)
- ---------------------------------------------------------------
2. Approval of the Second Amended and Restated 1996 Long-Term Performance Plan:
For 8,783,539
Against 2,951,267
Abstain 43,200
Non-Votes 2,582,115
3. Ratification of the appointment of KPMG LLP as independent auditors for the
fiscal year ending December 31, 2004:
For 14,053,229
Against 295,970
Abstain 10,922
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
See exhibit index
(b) Reports on Form 8-K
The Company has filed or provided to the Securities and Exchange
Commission the following Current Reports on Form 8-K during the
period ended March 31, 2004:
Filing Date Description of Event
----------- --------------------
January 9, 2004 Item 9 Regulation FD Disclosure -
Providing a press release dated January 9, 2004
announcing an agreement with Signature Healthcare
Foundation to provide staffing and other services
to the Foundation's rehabilitation program.
January 13, 2004 Item 9 Regulation FD Disclosure -
Providing slides to be used by RehabCare in
investor relations presentations.
February 3, 2004 Item 5 Other Events - Filing a press
release dated February 3, 2004 announcing the
completion of the sale of its StarMed Staffing
division to InteliStaf Holdings, Inc.
February 3, 2004 Item 9 Regulation FD Disclosure -
Providing a press release dated February 3, 2004
announcing the purchase of substantially all of
the assets of CPR Therapies, Inc.
February 5, 2004 Item 9 Regulation FD Disclosure -
Providing a press release dated February 4, 2004
announcing that RehabCare had signed an agreement
to acquire substantially all of the assets of the
Neurological Rehabilitation Research Unit of the
University of California and Los Angeles Medical
Center.
23 of 25
REHABCARE GROUP, INC.
Item 6 - Exhibits and Reports on Form 8-K (Continued)
- -----------------------------------------------------
February 5, 2004 Item 9 Regulation FD Disclosure and Item 12 Results
of Operations and Financial Condition - Providing a
press release dated February 5, 2004 announcing
fourth quarter and year end 2003 revenues and
earnings per share and guidance for 2004 and a
script for a conference call with analysts held on
February 5, 2004.
February 17, 2004 Item 2 Acquisitions or Dispositions of Assets and
Item 7 Financial Statements, Pro Forma Financial
Information and Exhibits - Disclosing information
regarding RehabCare's disposition of its StarMed
Staffing division to InteliStaf Holdings, Inc. and
filing of unaudited pro forma condensed consolidated
balance sheet as of September 30, 2003 and unaudited
condensed consolidated statements of earnings for
the nine months ended September 30, 2003 and the
year ended December 31, 2002.
February 17, 2004 Item 9 Regulation FD Disclosure -
Providing slides to be used by RehabCare in
investor relations presentations.
March 3, 2004 Item 9 Regulation FD Disclosure - Providing a press
release dated March 2, 2004 announcing that
RehabCare had completed the purchase of stock of
American VitalCare, Inc. and Managed Alternative
Care, Inc.
March 9, 2004 Item 9 Regulation FD Disclosure - Providing slides
to be used by RehabCare in investor relations
presentations.
24 of 25
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.
REHABCARE GROUP, INC.
May 10, 2004
By: /s/ Vincent L. Germanese
--------------------------------------
Vincent L. Germanese
Senior Vice President,
Chief Financial Officer
and Secretary
25 of 25
EXHIBIT INDEX
- -------------
3.1 Restated Certificate of Incorporation (filed as Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1, dated May 9, 1991
[Registration No. 33-40467], and incorporated herein by reference)
3.2 Certificate of Amendment of Certificate of Incorporation (filed as Exhibit
3.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
May 31, 1995 and incorporated herein by reference)
3.3 Amended and Restated Bylaws (filed as Exhibit 3.3 to the Registrant;
Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 and
incorporated herein by reference)
4.1 Rights Agreement, dated August 28, 2002, by and between the Registrant and
Computershare Trust Company, Inc. (filed as Exhibit 1 to the Registrant's
Registration Statement on Form 8-A filed September 5, 2002 and incorporated
herein by reference)
10.1 Asset Purchase Agreement dated May 3, 2004 by and among the Registrant,
Phase 2 Consulting, Inc., a Delaware corporation and a wholly owned
subsidiary of the Registrant, Phase 2 Consulting, Inc. a Utah corporation
and John H. Short, Peter F. Singer and Howard W. Salmon
10.2 Termination Compensation Agreement dated May 3, 2004 by and between the
Registrant and John H. Short
10.3 Second Amended and Restated 1996 Long-Term Performance Plan (filed as
Appendix B to the Registrant's Proxy Statement for the Annual Meeting of
Stockholders held on May 4, 2004 and incorporated herein by reference)
31.1 Certification by Chief Executive Officer pursuant to Rule 13a-14(a) under
the Securities Exchange Act of 1934, as amended
31.2 Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under
the Securities Exchange Act of 1934, as amended
32.1 Certification of periodic financial report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, U.S.C. Section 1350
32.2 Certification of periodic financial report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, U.S.C. Section 1350
- -------------------------
Exhibit 10.1
ASSET PURCHASE AGREEMENT
------------------------
THIS ASSET PURCHASE AGREEMENT (this "Agreement") is entered into as of this
3rd day of May, 2004, by and among REHABCARE GROUP, INC., a Delaware corporation
("Parent"), PHASE 2 CONSULTING, INC., a Delaware corporation and wholly-owned
subsidiary of Parent ("Buyer"), PHASE 2 CONSULTING, INC., a Utah corporation
("Seller") and each of JOHN H. SHORT, PETER F. SINGER and HOWARD W. SALMON
("Shareholders").
RECITALS
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WHEREAS, Shareholders own 100% of the issued and outstanding capital stock
of Seller; and
WHEREAS, Seller is in the business of providing healthcare management and
economic consulting to healthcare organizations, physician practices and long
term care and behavioral health providers and specializes in strategic planning,
clinical operations and productivity improvement, business planning, market and
financial feasibility studies and market research and analysis (the "Business");
and
WHEREAS, Seller and Shareholders desire to sell, assign, convey and
transfer to Buyer, and Buyer desires to acquire from Seller and Shareholders,
certain of Seller's assets associated with the Business pursuant to the terms
and conditions of this Agreement; and
WHEREAS, each of the parties hereto desires to set forth certain
representations, warranties, covenants and indemnity obligations, and to
establish certain closing conditions, made to induce the other to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
NOW, THEREFORE, in consideration of the premises, the covenants and
agreements herein contained, and other good and valuable consideration, the
receipt and sufficiency of which hereby are acknowledged, the parties hereto
agree as follows:
ARTICLE 1
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SALE AND PURCHASE OF ASSETS
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1.1 Description of Purchased Assets; Closing.
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(a) At the Closing on the Closing Date (each term as defined in Section
3.1 hereof), subject to the terms and conditions set forth in this
Agreement, Seller shall sell to Buyer, and Buyer shall purchase from
Seller, only those assets of Seller, tangible or intangible, wherever
located, used in the conduct of the Business, which are set forth in
this Section 1.1(a), free and clear of all liens, mortgages, security
interests and encumbrances (collectively, the "Purchased Assets"):
(i) All right, title and interest of Seller in and to all client
accounts and client contracts existing in connection with the
Business which are set forth on Schedule 1.1(a)(i), including,
but not limited to, all claims and rights under such client
contracts, written and oral, all claims and rights relating to
such clients served by Seller in the Business but not under
written contracts, all client lists, records, computer records
and other similar data relating to such client accounts
(collectively the "Client Contracts" and the Business clients the
"Client Accounts");
(ii) Subject to any required consents, all right, title and interest
in and to all Leases (as defined in Section 4.4(b)) of real and
personal property set forth on Schedule 1.1(a)(ii) attached
hereto, together with all deposits relating thereto;
(iii)All property and equipment and other tangible personal property
used or usable by Seller in the Business which are set forth on
Schedule 1.1(a)(iii), including, without limitation, leasehold
improvements, furniture, furnishings, machinery, equipment,
vehicles, office supplies, together with all manuals, records,
written warranties, licenses and similar documents and rights
relating thereto;
(iv) All right, title and interest in and to all written bids, sales
orders, purchase orders, sales contracts, supply contracts and
other contract rights, oral or written, of Seller related to the
Business which are set forth on Schedule 1.1(a)(iv) attached
hereto (collectively, the "Assumed Contracts");
(v) All accounts receivable, net of reserves for bad debt, with
current active clients arising from transactions of Seller in the
Business outstanding as of the Closing Date and those billed
after the Closing Date for services rendered by Seller prior to
the Closing Date whether such accounts receivable have been fully
reserved for as uncollected accounts receivable or written off as
uncollectible accounts (the "Accounts Receivable");
(vi) All right, title and interest of Seller in and to the following
intellectual property used in the Business: (i) all patents,
trademarks, service marks, artwork designs, trade dress, logos,
trade names, including the trade name "Phase 2 Consulting," and
corporate names, together with all translations, adaptations,
derivations and combinations thereof and including all goodwill
associated therewith and all applications, registrations and
renewals in connection therewith, (ii) all copyrightable works,
all copyrights and all applications, registrations and renewals
in connection therewith, and (iii) all trade secrets and
confidential business information (including technical data,
know-how, mailing lists, customer files and account histories,
customer and supply lists, pricing and cost information and
business and marketing plans and proposals) which are set forth
on Schedule 1.1(a)(vi) attached hereto (collectively, the
"Intellectual Property");
(vii)All files, books and records (including computer records) of
Seller relating to the foregoing items; and
(viii) The Business as a going concern, including all goodwill
thereof.
(b) Excluded Assets.
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Notwithstanding the provisions of Section 1.1(a), Buyer shall not be
entitled to purchase, nor shall Seller be required to sell, whether or
not relating to the Business, any other asset of Seller, including
without limitation, the following assets (collectively, the "Excluded
Assets"):
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(i) Income and franchise tax returns, information returns, reports,
elections and work papers of Seller (it being understood that
upon request, Buyer shall have reasonable access to copies of any
such documents relating to the Business subject to any applicable
confidentiality obligations of Seller with respect to such
documents imposed by applicable law), and any rights to income
tax refunds and prepaid income taxes;
(ii) Any right and interest of Seller in this Agreement and any other
agreements and instruments to be executed by Seller in connection
with the sale of the Purchased Assets and other transactions
contemplated by this Agreement;
(iii)Except as otherwise provided herein, any and all of Seller's
insurance policies, including all rights to coverage, all
proceeds and all prepaid insurance under such policies;
(iv) The cash, cash equivalents, investments and securities of Seller
and accounts receivables of Seller not related to the Business
(it being understood that Buyer is purchasing the Accounts
Receivable as set forth in Section 1.1(a)(v));
(v) All real property owned or leased by Seller and whether or not
relating to the Business, except as specifically set forth in
Section 1.1(a);
(vi) All of Seller's rights and liabilities under the Verus stock
purchase agreement, which shall include any subsequent investment
in Verus by Seller;
(vii)All contracts and agreements of Seller, whether or not relating
to the Business, other than the Client Contracts and the Assumed
Contracts set forth in Section 1.1(a);
(viii) Seller's corporate seal, charter and minutes and stock record
books;
(ix) All motor vehicles owned or leased by Seller whether or not
relating to the Business; and
(x) All assets and rights of Seller, whether used in the Business or
not, not set forth in Section 1.1(a).
1.2 Purchase Price.
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The aggregate consideration to be paid by Buyer to Seller for the Purchased
Assets shall be cash in the aggregate amount of Five Million and 00/100
Dollars ($5,000,000.00) (the "Purchase Price"), subject to adjustment as
set forth in Section 1.3, payable as follows:
(a) by delivery to Seller on the Closing Date the amount of $4,709,277.33
by wire transfer of immediately available funds pursuant to written
wire transfer instructions provided to Buyer by Seller at least two
(2) business days prior to the Closing Date; and
(b) by delivery to U.S Bank on the Closing Date the amount of $290,722.67
by wire transfer of immediately available funds pursuant to written
wire transfer instructions provided to Buyer by U.S. Bank.
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1.3 Purchase Price Adjustment for Closing Working Capital.
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(a) Subject to the adjustments set forth below in this Section 1.3(a),
Seller shall use its reasonable best efforts to have on the Closing
Date, Working Capital (as defined in this Section 1.3(a)) in an amount
equal to Eight Hundred Seventy-Four Thousand Dollars ($874,000.00)
(the "Agreed Working Capital"). For purposes of this Section 1.3(a),
the term Working Capital shall mean the amount by which the aggregate
book value of Seller's current assets exceeds the aggregate book value
of Seller's current liabilities, all as determined in accordance with
United States generally accepted accounting principles as in effect on
the date of this Agreement ("GAAP") applied on a consistent basis
throughout the periods covered by such statements, except for the
exclusion of deferred bonus and deferred partnership distribution
liabilities, and consistent with the presentation in the balance sheet
as of March 31, 2004 as attached hereto on Schedule 1.3(a) (the
"Reference Balance Sheet"), but notwithstanding any provision of GAAP
to the contrary, specifically including in Seller's current assets all
work-in-process as of the Closing Date and specifically including in
Seller's current liabilities the aggregate amount of all obligations
of Seller under any long-term capital leases and specifically
including in Seller's current assets any deposits associated with the
management retreat. For purposes of determining Seller's current
liabilities, in the event that the Closing shall occur on a date not
the end of the month the amount of each expense historically accrued
by Seller on a monthly or other non-daily basis, including any expense
for Taxes, shall, notwithstanding any provision of GAAP to the
contrary, be calculated by (i) dividing the aggregate amount of such
historical monthly accrual by 30, and (ii) multiplying such per diem
amount by the number of days expired in the month up to and including
the Closing Date. To the extent, if any, that the Actual Working
Capital (as defined in Section 1.3(b) below) is less than the Agreed
Working Capital, Seller and/or Shareholders shall, within the earlier
to occur of ninety (90) calendar days after the Closing or the final
determination (as set forth in Section 1.3(c) below) of the Actual
Working Capital, deliver to Buyer a check in the amount required to
bring the Actual Working Capital up to the Agreed Working Capital
level. In the event the Actual Working Capital exceeds the Agreed
Working Capital, Buyer shall deliver a check to Seller in an amount
equal to the Actual Working Capital in excess of the Agreed Working
Capital within the same timeframe.
(b) Not more than 60 days after the Closing Date, Buyer shall prepare and
deliver to Shareholders a balance sheet of Seller as of the Closing
Date (the "Closing Balance Sheet") indicating, among other things, the
Working Capital of Seller as of the Closing Date (the "Actual Working
Capital"). Such Closing Balance Sheet shall be prepared consistent
with the presentation in the Reference Balance Sheet and in accordance
with GAAP, applied on a consistent basis throughout the periods
covered by such statement, subject to the exceptions specifically set
forth in Section 1.3(a). Seller and/or Shareholders shall have thirty
(30) days after receipt of the Closing Balance Sheet to independently
verify that the information contained thereon is both accurate and
complete and to give written notice to Buyer of any discrepancies.
Buyer shall cooperate with Seller and Shareholders during the
verification period by providing documentation and other information
which Seller or Shareholders may reasonably request to assist in
verifying the information contained on the Closing Balance Sheet. The
costs and expenses related to the preparation and verification of the
Closing Balance Sheet as contemplated in this Section 1.3(b) shall be
borne by the party incurring such costs or expenses.
(c) The parties shall in good faith attempt to resolve the discrepancies,
if any, in the Closing Balance Sheet. Should the parties be unable to
agree within five (5) days after the end of the verification period,
then such dispute shall be submitted for resolution to the St. Louis
office of a nationally recognized public accounting firm acceptable to
the parties and the determination of such firm shall be binding upon
the parties. Buyer and Shareholders shall direct such firm to render a
determination on any submitted dispute within thirty (30) days after
its retention. Buyer, on the one hand, and Shareholders, on the other,
shall each pay one-half of such firm's fees and expenses in connection
with such services.
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1.4 Purchase Price Allocation.
--------------------------
Following the Closing, Buyer and Seller agree to use their best efforts to
allocate the Purchase Price between and among the Purchased Assets. Neither
Buyer nor Seller shall take a position in any Return (as defined in Section
4.3), examination or other administrative or judicial proceeding relating
to any Return, that is inconsistent with such allocation.
1.5 Further Assurances.
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At any time and from time to time before and after the Closing, at the
request of any party and without further consideration, each party promptly
shall execute and deliver such instruments of sale, transfer, conveyance,
assignment assumption and confirmation, and take such other action, as may
be reasonably requested to more effectively carry out the intent of this
Agreement.
ARTICLE 2
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ASSUMPTION OF CERTAIN LIABILITIES
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2.1 Assumed Liabilities.
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At the Closing, Seller shall assign, and Buyer shall assume and agree to
pay, discharge or perform, as applicable, pre-closing liabilities to the
extent that such liabilities are included in the Closing Balance Sheet as
current liabilities, and those obligations and liabilities accruing after
the Closing Date under the Client Contracts and Assumed Contracts
transferred and validly assigned to Buyer in accordance with Section 1.1(a)
hereof (collectively, the "Assumed Liabilities").
2.2 Excluded Liabilities.
---------------------
Notwithstanding the provisions of Section 2.1, Buyer shall not assume, and
Seller shall remain liable for, any and all liabilities, obligations,
claims and commitments of or against Seller which are not specifically set
forth herein as being expressly assumed by Buyer (and regardless of whether
set forth on any Schedule hereto), whether the same are known or unknown,
existing, contingent upon future events or circumstances, accrued, funded,
unfunded or otherwise (the "Excluded Liabilities"), including, without
limitation:
(a) any Taxes (as defined in Section 4.3) imposed on Seller (including
with respect to the Excluded Assets at any time) or relating to the
Business (including the Purchased Assets) for any period (or portion
thereof) ending on or prior to the Closing Date;
(b) any liability or obligation resulting from any formal or informal,
written or unwritten, agreement with respect to employee compensation,
severance pay, bonus, partner distributions, pension, retirement,
profit sharing, health or medical benefit, welfare plan, or any other
employee benefit or fringe benefit plan and any stock option
arrangements, warrants or employment agreements for services for
periods on or prior to the Closing Date;
(c) any liability or obligation relating to the Business or Purchased
Assets arising out of any event or occurrence or a claim arising prior
to the Closing Date;
(d) any liabilities or obligations of Seller relating to the Excluded
Assets;
(e) any liability or obligation of Seller arising or incurred in
connection with the negotiation, preparation and execution of this
Agreement and the consummation of the transactions contemplated
hereby, including without limitation, fees and expenses of its
counsel, accountants and other advisors;
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(f) any liabilities of Seller for commissions or fees owed to any finder
or broker retained by Seller or Shareholders in connection with the
transactions contemplated hereby;
(g) any obligation, liability, injury or damage arising, accruing or
existing prior to the Closing Date with respect to Seller's employees,
including without limitation any matters arising under laws governing
wages and hours, employment discrimination, sexual harassment,
occupational safety and health, workers' compensation, the payment and
withholding of employment taxes and any alleged violations of law;
(h) any liability of Seller or with respect to the Business for any
violations of any law, regulation or rule to the extent arising from
acts or omissions prior to the Closing Date, including, without
limitation, applicable health care laws, rules and regulations,
including those relating to the payment or receipt of illegal
remuneration, including 42 U.S.C. ss.1395nn (the Stark Statute), 42
U.S.C. ss.1320a-7a, 42 U.S.C. ss.1320a-7b(a), 42 U.S.C. ss.1320a-7b(c)
and any applicable state laws governing kickbacks and matters similar
to such federal statutes (collectively, the "Fraud and Abuse Laws");
and
(i) any liability that represents amounts owed by Seller that are past due
or contractually due on or prior to the Closing Date, including any
amounts owing by Seller under any of the Client Contracts on or prior
to Closing.
ARTICLE 3
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CLOSING AND CLOSING DATE
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3.1 Closing.
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The closing ("Closing") of the sale of the Purchased Assets and other
transactions contemplated by this Agreement shall take place at the offices
of Thompson Coburn LLP, One US Bank Plaza, St. Louis, Missouri 63101
commencing at 9:00 a.m., local time, on May 3, 2004 or on such other date
("Closing Date"), not later than June 30, 2004, or at such other place as
Buyer and Seller mutually shall agree.
3.2 Simultaneous Closing.
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All actions taken at the Closing shall be deemed to be performed
simultaneously and the Closing shall not be deemed to have occurred until
all required actions of the parties pursuant to this Agreement have been
performed. The parties shall deliver such additional documents and take
such additional actions as may reasonably be deemed necessary to complete
the transactions contemplated by this Agreement.
ARTICLE 4
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REPRESENTATIONS AND WARRANTIES OF SELLER AND SHAREHOLDERS
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Seller and Shareholders hereby jointly and severally represent and warrant
to Buyer on the date of this Agreement, and again on and as of the Closing Date,
as follows:
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4.1 Status of Seller.
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(a) Existence and Status.
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Seller is a corporation duly organized, entitled to conduct business
and validly existing in good standing under the laws of the State of
Utah.
(b) Articles of Incorporation and Bylaws of Seller.
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Attached to this Agreement as Exhibit A and Exhibit B, respectively,
are copies of: (i) the original Articles of Incorporation of Seller
and all amendments, restatements, articles of merger, or other filings
with respect thereto, and (ii) the currently effective Bylaws of
Seller. All amendments to, and articles of merger and other filings
with respect to, the Articles of Incorporation of Seller were made in
accordance with the Articles of Incorporation (as in effect before the
amendment of the articles or filings with respect thereto), and the
Bylaws and applicable law of Seller without violation of any
preemptive rights, and Seller has otherwise complied with its Articles
of Incorporation and Bylaws as in effect at the applicable time.
(c) Corporate Power of Seller.
--------------------------
Seller has the power to own and lease the Purchased Assets and
otherwise to conduct the Business as currently conducted.
(d) Ownership Interests.
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Seller has no subsidiaries or any equity securities of, investment in
or loans or advances to any business enterprise or person or any
agreements or commitments for such (other than trade terms extended to
customers in the ordinary course of business), or is subject to any
arrangement that could be treated as a partnership for federal income
tax purposes.
(e) Foreign Qualification.
----------------------
Schedule 4.1(e) lists the jurisdictions in which Seller is qualified
to do business as a foreign corporation, and nothing (including the
nature of or the manner in which Seller conducts its business, the
character or location of the properties which Seller owns, leases or
uses or the actions or location of employees or agents) either
requires Seller to be qualified in any other jurisdiction or subjects
Seller to any cost, restriction or penalty for failing to qualify.
(f) Authorization.
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(i) Seller and each Shareholder has the right, power and authority to
enter into this Agreement and each other agreement, instrument or
other document contemplated hereunder (collectively, the "Other
Agreements") to which they are a party, and to consummate the
transactions contemplated by, and otherwise to comply with and
perform their respective obligations under, this Agreement and
each of the Other Agreements referred to herein;
(ii) The execution and delivery by Seller of this Agreement and the
Other Agreements to which it is a party, and the consummation by
Seller of the transactions contemplated by, and other compliance
with and performance of its obligations under, this Agreement and
each of the Other Agreements, have been duly authorized by all
necessary corporate action on the part of Seller in compliance
with the Articles of Incorporation and Bylaws (each as amended)
of Seller and applicable law; and
(iii)This Agreement and each of the Other Agreements to which Seller
and each Shareholder are parties, constitute the valid and
binding agreement of Seller and each Shareholder, as the case may
be, that are enforceable against Seller and each Shareholder, as
the case may be, in accordance with its terms.
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(g) Absence of Violations or Conflicts.
-----------------------------------
Except as disclosed in Schedule 4.1(g), the execution and delivery of
this Agreement and the Other Agreements by Seller and Shareholders and
the consummation of the transactions contemplated by, or other
compliance with or performance under, this Agreement and the Other
Agreements do not and will not with the passage of time or giving of
notice or both:
(i) constitute a violation of, be in conflict with, constitute a
default or require any payment under, permit a termination of,
require any consent or approval under, or result in the creation
or imposition of any lien, encumbrance or other adverse claim or
interest upon any of the Purchased Assets under (A) any contract,
agreement, commitment, undertaking or understanding to which any
of the Purchased Assets are subject or bound, (B) any judgment,
decree or order of any governmental authority to which Seller,
any of Shareholders or any of the Purchased Assets are subject or
bound, (C) any applicable law, or (D) any governing or applicable
agreements, instruments or other documents to which Seller
(including its Articles of Incorporation and Bylaws (each as
amended)) is a party; or
(ii) create, result in a Material Adverse Change (as defined in
Section 4.2(c)(i)) to or cause the acceleration of the maturity
of, any Assumed Liabilities.
(h) No Governmental Consents Required.
----------------------------------
No consent, approval, order or authorization of, or registration,
declaration or filing with, any governmental authority on the part of
Seller is required in connection with the execution or delivery of
this Agreement, the Other Agreements or the consummation of the
transactions contemplated by, or other compliance with or performance
under, this Agreement or the Other Agreements.
4.2 Financial Matters.
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(a) Seller Financial Statements.
----------------------------
Copies of the unaudited financial statements of Seller as of and for
the fiscal years ended December 31, 2003 and 2002 and the three months
ended March 31, 2004 (all of which, including the notes thereto, are
collectively referred to in this Agreement as the "Seller Financial
Statements," with the balance sheet of Seller as of March 31, 2004
referred to separately as the "Seller Balance Sheet") are attached
hereto as Schedule 4.2. Seller Financial Statements were prepared in
accordance with the books and records of Seller and are complete and
accurate in all material respects, fairly present the financial
condition of Seller as of their respective dates and the results of
operations of Seller for the respective periods then ended and have
been prepared in accordance with GAAP applied on a consistent basis
throughout the periods covered by such statements, except for the
exclusion of deferred bonus and deferred partnership distribution
liabilities.
(b) Absence of Undisclosed Liabilities.
-----------------------------------
Except as and to the extent expressly reflected in Seller Financial
Statements or reserved against in Seller Balance Sheet, there are no
other liabilities of any nature relating to the Purchased Assets,
whether accrued, direct, indirect, absolute, contingent, changing,
known, unknown, determinable, indeterminable, liquidated, unliquidated
or otherwise and whether due or to become due, relating to any
existing or prior act, omission, condition or state of facts.
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(c) Absence of Certain Changes.
---------------------------
Since March 31, 2004, there has not been any activity with respect to
Seller other than in the ordinary course of business and, without
limiting the foregoing, there has not been:
(i) any material adverse change in or loss to the Purchased Assets or
the operations, liabilities, earnings, relationships with
existing clients, business or condition (financial or otherwise)
of the Business which have been or could reasonably be expected
to be, individually or in the aggregate with other changes,
materially adverse to the Business or the Purchased Assets (a
"Material Adverse Change");
(ii) any increase in the compensation payable by Seller to any officer
of Seller or Retained Employee (as defined herein) other than
routine increases made in the ordinary course of business
consistent with past practice and not in excess of five percent
(5%) of such Retained Employee's annual salary, or any bonus,
incentive compensation, service award or other like benefit,
granted, made or accrued, contingently or otherwise, to or for
the credit of any of such officer or Retained Employee, or any
employee welfare, pension, retirement or similar payment or
arrangement made or agreed to by Seller in which any such officer
or Retained Employee participates;
(iii)any capital expenditure or commitment to make a capital
expenditure with respect to the Purchased Assets (exclusive of
expenditures for repair or maintenance in the ordinary course of
business);
(iv) any incurrence of any extraordinary loss or knowing waiver of any
rights of value by Seller in connection with any aspect of the
Business, whether or not in the ordinary course of business;
(v) any cancellation, termination or amendment by Seller of any
contract or agreement included in the Purchased Assets and to
which Seller is a party or by which Seller is bound;
(vi) any failure on the part of Seller to operate the Business in the
ordinary course so as to preserve its business organization
intact, including the services of Seller's present officers,
professional staff and employees and the goodwill of Seller's
suppliers, customers and others having business relations with
Seller;
(vii)any sale, assignment or transfer (including, without limitation,
any collateral assignment or the granting or permitting of any
lien, encumbrance or other claim) of any of the Purchased Assets
other than in the ordinary course of business and consistent with
past practices;
(viii) any amendment, modification, waiver or cancellation of any debt
owed to, or claim of, Seller, or settlement by Seller of any
dispute involving any payment or other obligation due to or owed
by Seller to be made or performed after the Closing Date which
constitutes an Asset or an Assumed Liability; or
(ix) any agreement by or commitment of Seller to do or permit any of
the foregoing.
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4.3 Taxes.
------
Notwithstanding anything in this Agreement to the contrary, this Section
4.3 shall not apply with respect to any Tax or Taxes (as such terms are
defined in this Section 4.3) to the extent that from and after Closing, the
Purchased Assets are not subject to a lien for such Tax or Taxes, and Buyer
or its affiliates are not liable for such Tax or Taxes.
(a) Definitions. For purposes of this Agreement:
(i) the term "Code" shall mean the Internal Revenue Code of 1986, as
amended. All citations to the Code or to the regulations
promulgated thereunder shall include any amendments or any
substitute or successor provisions thereto;
(ii) the term "Returns" shall mean, collectively, all reports,
declarations, estimates, returns, information statements, and
similar documents relating to, or required to be filed in respect
of, any Taxes; and
(iii)the term "Taxes" shall mean (A) all income, net income, gross
income, gross receipts, sales, use, ad valorem, franchise,
profits, license, lease, service, service use, withholding,
employment, payroll, excise, severance, transfer, documentary,
mortgage, registration, stamp, occupation, environmental,
premium, property, windfall, profits, customs, duties, and other
taxes, fees, assessments or charges of any kind whatever,
together with any interest, penalties and other additions with
respect thereto, imposed by any federal, territorial, state,
local or foreign government; and (B) any penalties, interest, or
other additions to tax for the failure to collect, withhold, or
pay over any of the foregoing, or to accurately file any Return;
and the term "Tax" shall mean any one of the foregoing Taxes.
When used with reference to specified persons (for example and
without limitation, "Taxes of Seller"), the terms "Taxes" and
"Tax" shall include only amounts of, or in respect of, Taxes for
which such person is, or could become, liable in whole or part
(including, without limitation, any obligation in connection with
a duty to collect, withhold, or pay over any Taxes, any
obligation to contribute to the payment of any Taxes determined
on a consolidated, combined, or unitary basis, any liability as a
transferee, or any liability as a result of any express or
implied obligation to indemnify or pay the Tax obligations of
another person).
(b) Returns Filed and Taxes Paid.
-----------------------------
Except as set forth on Schedule 4.3(b), Seller duly filed or caused to
be filed, on or before the due date thereof (as appropriately
extended) with the appropriate taxing authorities, all Returns that it
is required to file, and each such Return (including any amendment
thereto) is true, correct, and complete in all material respects. All
Taxes of Seller due with respect to, or shown to be due on, each such
Return (or amendment) or subsequent assessment with regard thereto,
have been timely paid. There is no valid basis for the assessment of
any deficiency with regard to any such Return and except as set forth
on Schedule 4.3(b), there are no extensions of time to file which are
pending. No other Taxes of Seller are due with respect to any taxable
periods or portions of periods ending on or before the Closing Date.
There are no liens, attachments, or similar encumbrances on any of the
Purchased Assets of Seller with respect to any Taxes, other than liens
for Taxes that are not yet due and payable. Seller has collected or
withheld all Taxes that it is required to collect or withhold.
(c) Audit History and Other Proceedings.
------------------------------------
There are no pending or, to the Knowledge (as defined in Section
4.15(b)) of Seller and Shareholders, threatened (either in writing or
verbally, formally or informally) audits, investigations, claims,
suits or other proceedings for or relating to any material liability
in respect of Taxes of Seller. No material deficiencies for Taxes of
Seller have been claimed, proposed or assessed by any taxing or other
governmental authority and there are no matters under discussion with
any governmental authorities with respect to Taxes, that could result
in any additional amount of Taxes of Seller and that could reasonably
be expected to affect the Business or the Purchased Assets. No
extension of a statute of limitations (whether arising by reason of a
waiver, claim for refund, or otherwise) in respect of such Taxes is in
effect and there are no requests for rulings or determinations in
respect of Taxes of Seller pending with any governmental authority.
-10-
4.4 Title to and Condition of Purchased Assets.
-------------------------------------------
(a) Title to Purchased Assets.
--------------------------
Except as set forth on Schedule 4.4(a): (i) Seller has good and
marketable title to all of the Purchased Assets; and (ii) none of the
Purchased Assets is subject to any lien, claim or other encumbrance
whatsoever, except (A) liens for taxes not yet due and payable, (B)
liens shown and described in Seller Balance Sheet, (C) liens imposed
by law and incurred in the ordinary course of business for obligations
not yet due and payable to landlords, carriers, warehousemen,
laborers, materialmen and the like, and (D) liens to secure repayment
of the indebtedness of Seller under any of the Debt Instruments (as
defined in Section 4.6(a) and more fully described on Schedule 4.6(a)
hereto) (collectively, the "Permitted Liens").
(b) Leases; Subleases.
------------------
For purposes of this Agreement, "Lease" means any written or oral
lease, sublease or rental agreement (and any related contract and
agreement) included as part of the Purchased Assets, and all
amendments, modifications and supplements thereof and waivers and
consents thereunder pursuant to which Seller leases, subleases or
rents any real or personal property included in the Purchased Assets,
either as lessor, lessee, landlord or tenant. Schedule 1.1(a)(ii)
lists all Leases included in the Purchased Assets, except those which
(i) can be canceled by Seller upon 30 or fewer days' notice without
penalty or the acceleration of rentals, (ii) do not grant an option to
purchase the leased property, and (iii) involve an annual rental of
$15,000 or less. Schedule 1.1(a)(ii) describes all oral Leases
required to be disclosed in Schedule 1.1(a)(ii), and true and complete
copies of all written Leases required to be disclosed have been
heretofore delivered to Buyer. With respect to each of the Leases: (A)
neither Seller nor, to the best of Seller's and Shareholders'
Knowledge, any other party is in default in connection with such
Lease; (B) no act or event has occurred which, with notice or lapse of
time or both, would constitute a default under such Lease with respect
to Seller or, to the best of Seller's and Shareholders' Knowledge, any
other party; (C) there is no basis for any claim of default under such
Lease with respect to Seller or, to the best of Seller's and
Shareholders' Knowledge, any other party; (D) Seller has not given or
received any notice of cancellation or termination in connection with
such Lease; (E) such Lease is the valid and binding agreement of
Seller, and, to the best of Seller's and Shareholders' Knowledge, the
other party thereto which is in full force and effect and is
enforceable in accordance with its terms, except, with respect to such
other party, to the extent that such enforceability may be limited by,
or subject to: (i) the effect of any applicable bankruptcy,
insolvency, reorganization, fraudulent conveyance, moratorium or other
similar laws affecting the enforcement of creditors' rights generally;
(ii) the availability of the remedies of specific performance or
injunctive relief, which may be subject to the discretion of the court
before which any proceeding for such remedies may be brought; and
(iii) the exercise by any court of equitable judicial discretion
before which any proceeding may be brought; (F) except as disclosed on
Schedule 4.4(b), such Lease will not be affected by, or require the
consent of or payment to any other party to avoid an event of default,
an event of termination or other adverse effect with respect to such
by reason of the transactions contemplated by this Agreement; and (G)
such Lease is a "true" lease for federal income tax purposes.
-11-
(c) Adequacy; Condition.
--------------------
Except as set forth in Schedule 4.4(c): (i) the Purchased Assets are
fit for use in the business of Seller as presently conducted; (ii) the
Purchased Assets are in good repair and operating condition, normal
wear and tear excepted, and structurally and mechanically sound, as
applicable; (iii) Seller is in material compliance with all applicable
building, zoning, land use or other similar statutes, laws,
ordinances, regulations, permits, health and safety codes or other
requirements in respect of any of the Purchased Assets subject to a
Lease (and Seller's current use of such properties does not constitute
a nonconforming use) and Seller has not received any notice alleging
such a violation; (iv) to the Knowledge of Seller and Shareholders,
none of the Purchased Assets subject to a Lease has ever been used as
a landfill or otherwise been used for the disposal, storage or
treatment of any waste, trash, garbage, industrial by-product,
chemical or hazardous substance of any nature; (v) Seller has not
caused the installation of any of such property with asbestos
insulation or any electrical equipment containing polychlorinated
biphenyls and, to Seller's and Shareholders' Knowledge, none of the
Purchased Assets subject to a Lease contains asbestos insulation or
electrical equipment containing polychlorinated biphenyls; and (vi) to
Seller's and Shareholders' Knowledge, there are no outstanding
requirements or recommendations by fire underwriters or rating boards,
any insurance companies or holders of mortgages or other security
interests requiring or recommending any repairs or work to be done
with reference to any of the Purchased Assets subject to a Lease.
(d) All Necessary Properties.
-------------------------
The Purchased Assets (together with the intangible properties
disclosed, or not required to be disclosed, pursuant to Sections 4.5
and 4.6 of this Agreement) constitute all of the properties which
Seller uses in connection with the operation of the Business as
presently conducted and the consummation of the transactions
contemplated by this Agreement (provided that all consents relating to
the Purchased Assets have been obtained) will not alter the rights or
impair the ability of Seller to use such Purchased Assets in the
conduct of the Business as it is now being conducted.
4.5 Intellectual Property; Patents; Trademarks, Trade Names.
--------------------------------------------------------
All Intellectual Property and all contracts, agreements, commitments,
arrangements, undertakings and understandings relating to the use or
license of technology, know-how or processes by Seller that are part of the
Purchased Assets (the "Intellectual Property Licenses") are listed in
Schedule 1.1(a)(vi). Except as disclosed in Schedule 4.5 with respect to
all Intellectual Property that is included in the Purchased Assets; (a)
Seller owns, or has the sole and exclusive right to use, all Intellectual
Property, whether under Intellectual Property Licenses or otherwise, used
in or necessary for the ordinary conduct of its business; (b) the
consummation of the transactions contemplated by this Agreement will not
alter or impair any such rights; and (c) no Intellectual Property owned,
licensed or used by Seller, or Intellectual Property License of Seller is
the subject of a lawsuit or any other proceeding, nor has any party
challenged or, to Seller's and Shareholders' Knowledge, threatened to
challenge Seller's respective right to use such Intellectual Property or
Intellectual Property License or application for any of the foregoing; and,
to Seller's and Shareholders' Knowledge, there is no basis for any such
challenge.
4.6 Loans and Contracts.
--------------------
(a) Indebtedness.
-------------
Schedule 4.6(a) sets forth (i) a complete and accurate list or
description of all instruments or other documents ("Debt Instruments")
relating to any direct or indirect indebtedness for borrowed money of
Seller, as well as indebtedness by way of capital leases,
lease-purchase arrangements, guarantees, undertakings on which others
rely in extending credit and all conditional sales contracts, chattel
mortgages and other security arrangements with respect to personal
property used or owned by Seller and (ii) a list of all loans of money
to the respective officers, affiliates employees of Seller or
Shareholders (specifically excluding travel and similar advances in
the ordinary course of business).
-12-
(b) Client Contracts; Client Accounts.
----------------------------------
(i) Seller has delivered to Buyer true, complete and accurate copies
of all of the Client Contracts and Assumed Contracts. All Client
Contracts and Assumed Contracts are legal, valid, binding, in
full force and effect and enforceable against Seller, and, to the
Knowledge of Seller and Shareholders, against each other party
thereto. There does not exist under any Client Contract or
Assumed Contract any violation, breach or event of default, or
event or condition that, after notice or lapse of time or both,
would constitute a violation, breach or event of default
thereunder, on the part of Seller or, to the Knowledge of Seller
and Shareholders, any other person. The enforceability of all
Client Contracts and Assumed Contracts will not be affected in
any manner by the execution, delivery or performance of this
Agreement (except that any Client Contract and Assumed Contract
assumed by Buyer may be enforceable by Buyer and not Seller), and
no Client Contract or Assumed Contract contains any assignment or
change in control or similar terms or conditions that will become
applicable as a result of the consummation of the transactions
contemplated by this Agreement; provided, however, it is
understood that certain of the Client Contracts and/or Assumed
Contracts may require the consent of the other parties thereto to
assign the same, which consents Seller shall obtain prior to the
Closing.
(ii) Except as set forth on Schedule 4.6(b), no Client Account has
materially delayed or decreased or terminated, or to Seller's or
Shareholders' Knowledge, threatened to materially delay or
decrease or terminate, or given notice of its intention to
materially delay or decrease or terminate its usage of Seller's
services.
(iii)All consents (if they are required) from Seller's present
customers needed to enable Buyer to assume the Client Contracts
and the Assumed Contracts and continue the Business without
interruption shall be received prior to the Closing. Only those
Client Accounts listed on Schedule 4.6(b) hereto require consent
before the assignment of their Client Contract.
(c) Insurance.
----------
All insurance policies of Seller now in force (including comprehensive
general liability, personal and professional liability, comprehensive
general casualty and extended coverage, automobile, boiler and
machinery, fire and lightning, marine, endowment, life, and worker's
compensation) ("Insurance Policies") are listed in Schedule 4.6(c),
and such policies will be through Closing.
(d) Status.
-------
Except as disclosed on Schedule 4.6(d): (i) Seller has not assigned
any of its rights or obligations under (and is not otherwise
restricted for any reason from enjoying the full benefits under) any
Intellectual Property License, Debt Instrument, Client Contract or
Assumed Contract; (ii) neither Seller nor, to Seller's and
Shareholders' Knowledge, any other party is in material default in
connection with any Intellectual Property License, Debt Instrument,
Client Contract or Assumed Contract; (iii) to Seller's and
Shareholders' Knowledge, no act or event has occurred which, with
notice or lapse of time or both, would constitute a material default
under any Intellectual Property License, Debt Instrument, Client
Contract or Assumed Contract; (iv) to Seller's and Shareholders'
Knowledge, there is no basis for any claim of material default under
any Intellectual Property License, Debt Instrument, Client Contract or
Assumed Contract; (v) there is no outstanding notice of cancellation
or termination received by Seller in connection with any Intellectual
Property License, Debt Instrument, Client Contract or Assumed
Contract; (vi) each Intellectual Property License, Debt Instrument,
Client Contract and Assumed Contract is the valid and binding
agreement of the parties thereto which is in full force and effect and
is enforceable in accordance with its terms except, with respect to
such other party, to the extent that such enforceability may be
limited by, or subject to: (A) the effect of any applicable
bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium or other similar laws affecting the enforceability of
creditors' rights generally, (B) the availability of specific
performance or injunctive relief, which may be subject to the
discretion of the court before which any proceeding for such remedies
may be brought, and (C) the exercise by any court of equitable
judicial discretion before which any proceeding may be brought; and
(vii) neither Seller nor any of Shareholders has received any
communication proposing any termination, material amendment or change
to any Intellectual Property License, Debt Instrument, Client Contract
or Assumed Contract.
-13-
4.7 Officers and Managers; Employment Relationships.
------------------------------------------------
Schedule 4.7 sets forth a true and complete list of all of the officers and
managers of Seller, specifying their office and annual rate of
compensation, and a true and complete list of employees of Seller as of the
date of this Agreement, setting forth each such employee's title,
compensation and date of hire. Schedule 4.7 sets forth Seller's policies
and practices with respect to scheduling and eligibility of employee
compensation increases and bonuses. All compensation increases and bonuses
awarded by Seller during the twelve month period prior to the date hereof
have been in compliance with such policies and practices.
4.8 Employee and Fringe Benefit Plans.
----------------------------------
Except as set forth in Schedule 4.8, Seller, with respect to employees,
former employees or agents of Seller, does not maintain, is not required to
contribute to and does not otherwise participate in (and has not since its
inception maintained, contributed to or otherwise participated in) either:
(i) any employee pension benefit plan ("Pension/Profit Sharing Plan"), any
employee welfare benefit plan ("Welfare Plan") or any multi-employer plan
("Multi-Employer Plan") (as such terms are defined in the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")), including
any pension, profit sharing, retirement, thrift, stock purchase or stock
option plan; or (ii) any other compensation, welfare, fringe benefit or
retirement plan, program, policy, understanding or arrangement of any kind
whatsoever, whether formal or informal, providing for benefits for or the
welfare of any or all of the current or former employees or agents of
Seller or their beneficiaries or dependents.
True and complete copies of the following documents with respect to
the plans set forth on Schedule 4.8 have been delivered to Buyer: (i) the
most recent plan document and trust agreement (including any amendments
thereto and prior plan documents, if amended within the last three years),
(ii) the last five years IRS Form 5500 filings and schedules thereto, (iii)
the most recent IRS determination letter, (iv) all summary plan
descriptions, (v) each written communication to employees intended to
describe a plan or any benefit provided in such plans, and (vi) all
correspondence with the IRS or Department of Labor concerning any
controversy with respect to such plans.
Each plan listed on Schedule 4.8 is and has been maintained in
compliance in all material respects with applicable law, including but not
limited to ERISA and the Code and with any other applicable contractual
obligations.
Each plan listed on Schedule 4.8 that is intended to be tax qualified
under Code section 401(a) has been determined by the Internal Revenue
Service to be exempt from tax under the provisions of Code section 501(a)
and, to Seller's and Shareholders' Knowledge, nothing has occurred,
including the adoption or failure to adopt any plan amendment, which would
adversely affect its qualification or tax-exempt status.
Except as reflected on Schedule 4.10, there are no pending or, to
Seller's or Shareholders' Knowledge, threatened claims, actions or
lawsuits, other than routine claims for benefits in the ordinary course,
asserted or instituted against (i) any plan or its assets or (ii) any
fiduciary with respect to any plan for with Seller, it subsidiaries or
affiliates, may be directly liable through indemnification obligations or
otherwise.
-14-
4.9 Labor Relations.
----------------
Seller is (and, at all times, has been) in material compliance with all
federal, state, local and other applicable laws respecting employment and
employment practices, terms and conditions of employment and wages and
hours. There is (and, at all times, has been) no unfair labor practice,
complaint, charge or other matter against or involving employees, former
employees or agents of Seller pending or threatened before any Governmental
Authority. There is no (and, at all times, has not been) labor strike,
dispute, organizing effort, slow down, stoppage or other labor difficulty
pending, involving or, to Seller's and Shareholders' Knowledge, threatened,
against or affecting the employees, former employees or agents of Seller.
No grievance which might have an adverse effect on Seller or on the conduct
of the Business nor any arbitration proceeding arising out of or under
collective bargaining agreements relating to employees of Seller is
pending, and no claim therefor exists. There is (and, at all times, has
been) no collective bargaining agreement which is binding on Seller.
4.10 Litigation.
-----------
Except as set forth on Schedule 4.10, Seller is not (and, at all times, has
not been) (i) engaged in, a party to, subject to or, to Seller's and
Shareholders' Knowledge, threatened with any claim, legal or equitable
action, or other proceeding (whether as plaintiff, defendant or otherwise
and regardless of the forum or the nature of the opposing party) which
seeks damages, an injunction or other relief against Seller, which action,
individually or collectively with such other actions, would have a Material
Adverse Effect on the Business or the Purchased Assets; (ii) to Seller's
and Shareholders' Knowledge, subject to any unasserted claim, the assertion
of which is likely and which, if asserted, will seek damages, an injunction
or other relief against Seller which claim individually or collectively
with such other unasserted claims if made would have a Material Adverse
Effect on the Business or the Purchased Assets; or (iii) a party to or
subject to any judgment, order or decree against Seller or the Purchased
Assets. There has been no reservation of rights by any insurance carrier,
and, to Seller's and Shareholders' Knowledge, no such reservation is
threatened, concerning the coverage of Seller with respect to any matter
described in this Section 4.10.
4.11 Compliance with Laws.
---------------------
(a) Generally.
----------
Except as set forth in Schedule 4.11(a) attached hereto, and except
with respect to compliance with Environmental Laws which is addressed
under Section 4.11(c) below, Seller is in full compliance in all
material respects with all applicable laws, rules, regulations
including, without limitation, the Health Care Laws (as defined
below), ordinances or orders of any court or federal, state, county,
municipal or other governmental department, commission, board, bureau,
agency or instrumentality, and Seller has not received any notice,
written or otherwise, of noncompliance with respect thereto. All
financial records, patient records and other documents required to be
maintained by Seller have been continuously maintained by Seller for a
period of at least five (5) years from the date of creation of such
document. For purposes of this Agreement, the term "Health Care Laws"
shall mean all applicable federal, state or local health care laws,
rules and regulations, including without limitation those relating to
the payment or receipt of illegal remuneration, including 42 U.S.C.
ss. 1320a-7b(b) (the Medicare/Medicaid anti-kickback statute), 42
U.S.C. 1395nn (the Stark Statute), 42 U.S.C. ss. 1320a-7a, 42 U.S.C.
ss. 1320a-7b(a), 42 U.S.C. ss. 1320a-7b(c) and any applicable state
laws governing kickbacks and matters similar to such federal statutes.
(b) Permits.
--------
Without limiting the foregoing, except for those failures that would
not reasonably be expected to have a Material Adverse Effect: (i)
Seller has all material occupancy certificates and other licenses,
permits and certificates ("Permits") required in connection with its
ownership, possession, use, occupancy or operation of any of the
Purchased Assets owned, leased or used by it; (ii) all of the Permits
are in full force and effect; (iii) Seller is (and has been) in
material compliance with the Permits; and (iv) none of the Permits
will be materially affected by, or require the consent of any party by
reason of, the transactions contemplated by this Agreement. Schedule
4.11(b) sets forth a complete and accurate listing of all Permits
required for the conduct of Seller's business, except for those
Permits, the failure of which to obtain, would not reasonably be
expected to have a Material Adverse Effect.
-15-
(c) Environmental.
--------------
Except as set forth on Schedule 4.11(c), to Seller's and Shareholders'
Knowledge, no person or party (including, but not limited to, any
Governmental Authority) has asserted any claim or, to Seller's and
Shareholders' Knowledge, has any basis for any action or proceeding
against Seller relating to any violation of Environmental Law (as
defined below), relating to any existing or prior act, omission,
condition or state of facts. To Seller's and Shareholders' Knowledge,
Seller has not received oral or written notice of, nor does Seller or
Shareholders have reason to believe there is, any existing or pending
violation, citation, claim or complaint relating to the business of
Seller or any facility now or previously owned or operated by Seller
arising under any Environmental Law. For purposes of this Agreement,
the term "Environmental Law" means federal, state and local
environmental statutes, laws, ordinances, orders, rules, regulations,
moratoria, judgments and consent decrees, or any licenses,
authorizations, waivers, closures, or approvals required pursuant
thereto, relating to human health and the environment, including,
without limitation, the Clean Air Act, as amended; the Federal Water
Pollution Control Act, as amended; the Safe Drinking Water Act, as
amended; the Resource Conservation and Recovery Act, as amended; the
Hazardous Material Transportation Act, as amended; the Occupational
Safety and Health Act of 1970, as amended; the Comprehensive
Environmental Response, Compensation and Liability Act, as amended by
the Superfund Amendments and Reauthorization Act of 1986, as amended.
4.12 Transactions with Affiliates.
-----------------------------
Except as disclosed in Schedule 4.12, no Shareholder, officer or director
of Seller, nor any "affiliate" or "associate" (as such terms are defined in
the rules and regulations of the Securities and Exchange Commission under
the Securities Act of 1933, as amended) of any of the foregoing:
(a) has been a party to any lease, sublease, contract, agreement,
commitment, understanding or other arrangement of any kind whatsoever,
involving any such person and Seller;
(b) owns directly or indirectly, in whole or in part, any property that
Seller uses or otherwise has rights in respect of; or
(c) has any cause of action or other claim whatsoever against, or owes any
amount to, Seller other than (i) for compensation (including fringe
benefits) to officers and employees disclosed pursuant to Section 4.7
and for reimbursement of ordinary and necessary expenses incurred in
connection with employment by Seller; and (ii) as otherwise disclosed
pursuant to this Agreement.
4.13 Accounts Receivable.
--------------------
Schedule 4.13 attached hereto sets forth all Accounts Receivable in
existence as of March 31, 2004 for Seller and all such Accounts Receivable,
notes receivable and claims arising from such date through Closing,
represent or will represent, valid claims against the obligors thereof
which arose in the ordinary course of business and no entitlements to or
claims of offset or reduction have been made or exist except to the extent
specifically set forth in Schedule 4.13.
4.14 Commissions.
------------
No person, firm or corporation is entitled to any commission or broker's or
finder's fee in connection with the transactions contemplated by this
Agreement by reason of any act or omission of Seller or Shareholders.
-16-
4.15 Generally.
----------
(a) No representation or warranty by Seller or Shareholders in this
Agreement or in any Exhibit, Schedule or closing certificate furnished
or to be furnished to Buyer pursuant to this Agreement or in
connection with the transactions contemplated by this Agreement
contains or will contain any untrue statement of a material fact, or
omits or will omit to state a material fact, necessary to make the
statements herein or therein not misleading.
(b) As used in this Agreement, the term "Knowledge" shall mean, in the
case of each Shareholder, the Shareholder's actual awareness without
the duty to investigate beyond what a reasonably prudent shareholder
would be expected to discover, and in the case of Seller, the actual
awareness of the officers and directors of Seller without a duty to
investigate beyond what a reasonably prudent individual would be
expected to discover in the course of carrying out the duties of his
or her office.
ARTICLE 5
---------
REPRESENTATIONS AND WARRANTIES OF BUYER AND PARENT
--------------------------------------------------
Buyer and Parent hereby jointly and severally represent and warrant to
Seller and Shareholders as of the date of this Agreement as follows:
5.1 Status of Buyer.
----------------
(a) Corporate Existence and Status.
-------------------------------
Buyer is a corporation duly incorporated, organized, entitled to
conduct business and validly existing in good standing under the laws
of the State of Delaware.
(b) Corporate Power.
----------------
Buyer has the corporate power to own and lease its properties and
otherwise to conduct its business.
(c) Qualification.
--------------
Buyer is qualified to do business as a foreign corporation in each
jurisdiction in which the nature of or the manner in which Buyer
conducts its business, the character or location of the properties
which Buyer owns, leases or uses or the actions or location of Buyer's
employees or agents either requires Buyer to be qualified or subjects
Buyer to any cost, restriction or penalty for failing to qualify
(including assessment of taxes, fees or penalties for prior periods).
(d) Authorization.
--------------
(i) Buyer has the right, power and authority to enter into this
Agreement and the related agreements referred to herein to which
it is a party and to consummate the transactions contemplated by,
and otherwise to comply with and perform its obligations under,
this Agreement and the related agreements referred to herein;
(ii) The execution and delivery by Buyer of this Agreement and the
related agreements referred to herein to which Buyer is a party
and the consummation by Buyer of the transactions contemplated
by, and other compliance with and performance of its obligations
under, this Agreement and the related agreements referred to
herein have been duly authorized by all necessary corporate
action on the part of Buyer in compliance with governing or
applicable agreements, instruments or other documents (including
its Articles or Certificate of Incorporation and Bylaws (each as
amended)) and applicable law; and
-17-
(iii)Each of this Agreement and the related agreements referred to
herein to which Buyer is a party constitutes the valid and
binding agreement of Buyer that is enforceable against Buyer in
accordance with its terms.
(e) Absence of Violations or Conflicts.
-----------------------------------
The execution and delivery of this Agreement by Buyer and the
consummation of the transactions contemplated by, or other compliance
with or performance under, this Agreement and the related agreements
referred to herein do not and will not with the passage of time or
giving of notice or both:
(i) constitute a violation of, be in conflict with, constitute a
default or require any payment under, permit a termination of,
require any consent under, or result in the creation or
imposition of any lien, encumbrance or other adverse claim or
interest upon any of the properties of Buyer under (A) any
material contract, agreement, commitment, undertaking or
understanding to which Buyer is a party or to which Buyer or any
of its assets or properties are subject or bound, (B) any
judgment, decree or order of any governmental authority to which
Buyer or any of its properties are subject or bound, (C) any
applicable law, or (D) any governing or applicable agreements,
instruments or other documents to which Buyer is a party
(including Articles or Certificate of Incorporation and Bylaws
(each as amended)); or
(ii) create, or cause the acceleration of the maturity of, any debt,
obligation or liability of Buyer.
(f) No Governmental Consents Required.
----------------------------------
No consent, approval, order or authorization of, or registration,
declaration or filing with, any governmental authority on the part of
Buyer is required in connection with the execution or delivery of this
Agreement or the consummation of the transactions contemplated by, or
other compliance with or performance under, this Agreement by Buyer.
5.2 Commissions and Fees.
---------------------
Except for A.G. Edwards & Sons, Inc., whose fee will be paid by Parent, no
person, firm or corporation is entitled to any commission or broker's or
finder's fee in connection with the transactions contemplated by this
Agreement by reason of any act or omission of Buyer or Parent.
5.3 Generally.
----------
No representation or warranty by Buyer in this Agreement or in any Exhibit,
Schedule or closing certificate furnished or to be furnished to Seller
pursuant to this Agreement or in connection with the transactions
contemplated by this Agreement contains or will contain any untrue
statement of a material fact, or omits or will omit to state a material
fact, necessary to make the statements herein or therein not misleading.
-18-
ARTICLE 6
---------
COVENANTS OF SELLER
-------------------
6.1 Conduct of Business by Seller.
--------------------------------
From the date hereof to the Closing Date, except for transactions
contemplated by this Agreement or which are expressly approved in writing
by Buyer, Seller shall refrain from and Shareholders shall ensure that
Seller refrains from:
(a) subjecting any of the Purchased Assets to any lien, encumbrance or
other claim of any kind;
(b) modifying, amending, altering or terminating (whether by written or
oral agreement, or any manner of action or inaction) any of the Client
Contracts or Assumed Contracts; and
(c) taking or permitting any other action that, if taken or permitted
immediately prior to the execution of this Agreement, would constitute
a breach of or an exception to the representations and warranties in
ARTICLE 4 hereof or the covenants in ARTICLE 6 and ARTICLE 7 hereof.
6.2 Affirmative Covenants Relating to Seller and Shareholders.
----------------------------------------------------------
From the date hereof to the Closing Date, Seller and Shareholders shall use
their reasonable best efforts to ensure that Seller shall:
(a) maintain Seller's property and professional insurance in amounts and
with coverage at least as great as the amounts and coverage in effect
on the date of this Agreement;
(b) keep in Seller's employ the present officers and key employees,
including the professional staff, of Seller to preserve the goodwill
of those having business relations with Seller;
(c) maintain the books, accounts and records of Seller in a manner
consistent with past practice;
(d) allow, upon the prior consent of Seller, which consent shall not be
unreasonably withheld, Buyer and Buyer's employees, attorneys,
auditors, accountants and other authorized representatives, free and
full access during Seller's normal business hours to the facilities,
plants, properties, books, records, documents and correspondence of
Seller, including, but not limited to, historical financial
information with respect to the Client Contracts and Assumed Contracts
and employment records with respect to the Retained Employees, in
order that Buyer may have full opportunity to make such investigation
as Buyer may desire of the Business; provided, however, that such
access shall not unreasonably interfere with the operations of Seller,
and any contractual confidentiality requirements between Buyer and
Seller or Shareholders existing prior to this Agreement shall remain
in full force and effect, as supplemented hereby, except as otherwise
required by law (including any required disclosure of the execution of
this Agreement);
(e) (i) comply with all applicable law relating to Seller, or to the
conduct of the Business, and (ii) conduct such Business in such a
manner so that on the Closing Date the representations and warranties
contained in this Agreement shall be materially true as though such
representations and warranties were made on and as of such date,
except for changes permitted or contemplated by the terms of this
Agreement;
-19-
(f) provide Buyer with prompt written notice of any change in the assets,
operations, liabilities, earnings, business or condition (financial or
otherwise) of Seller which would have a Material Adverse Effect; and
(g) operate the Business only in the ordinary course with the objective of
preserving Seller's business organizations intact, including using its
best efforts to retain the services of Seller's present officers and
employees and the goodwill of its customers and others having business
relations with Seller.
6.3 Consents and Closing Conditions.
--------------------------------
Seller and Shareholders shall use their reasonable best efforts (a) to
obtain such third party and governmental consents, authorizations,
approvals, releases and terminations as may be required hereunder, and to
take such other actions as may be appropriate in order to fulfill the
closing conditions contained in Section 8.1 hereof, and (b) to cause the
representations and warranties of Seller in ARTICLE 4 to be true and
correct on and as of the Closing Date.
6.4 Obligations Concerning Employees.
---------------------------------
(a) From the date hereof through the Closing Date, Buyer shall have the
right upon reasonable notice to Seller during normal business hours
and without undue disruption of the operation of the Business, to
interview the employees of Seller, perform drug tests on said
employees and otherwise conduct hiring procedures with regard to its
possible hiring of the employees of Seller. Subject to the
satisfactory completion of Buyer's employment screening process, Buyer
shall offer employment at Closing to the employees of Seller listed on
Schedule 6.4(a) (the "Retained Employees").
(b) On or prior to the Closing Date, at such time as shall be reasonably
acceptable to Buyer, Seller shall notify all of the employees of
Seller that the assets of Seller are being sold to Buyer, that the
Retained Employees will be offered employment by Buyer, and that any
decisions by Buyer regarding its hiring procedures or the hiring of
Seller's employees will be communicated to the employees by Buyer.
(c) As soon as practicable after the Closing Date, Seller shall issue to
all employees of Seller as of the Closing Date payroll checks, for all
earned salary, wages, incentive bonuses, accrued sick pay, vacation or
paid time off and other compensation and benefits (net of usual
withholdings) owed or accruing to such employees for their services
rendered through 11:59 p.m. on the Closing Date.
(d) Seller shall comply with all provisions of federal and state law
relating to the continuation of health insurance benefits for
terminated employees. Seller shall be responsible for providing Worker
Adjustment and Retraining Notification Act, 29 U.S.C. ss. 2101 et.
seq. ("WARN Act") notices, if and to the extent required, in
connection with any terminations of Seller's employees effected
pursuant to this Agreement, and shall be solely responsible for, and
will, hold Buyer harmless from, any WARN Act liability arising as a
result of any employee termination(s) occurring on or after the
Closing Date.
-20-
6.5 Negotiations with Others.
-------------------------
During the period from the date of this Agreement to the Closing Date, or
until such date as this Agreement may be terminated in accordance with its
terms, neither Seller nor any of Seller's members, managers, officers,
counsel, accountants, auditors or other agents retained by or acting on
behalf of Seller, will (i) seek, solicit, initiate, encourage or otherwise
facilitate (including by way of furnishing information) the submission of
inquiries, proposals or offers from any corporation, partnership, person or
other entity or group (other than Buyer) relating to the possible
acquisition of stock or equity interests of Seller or the possible purchase
of all or substantially all of the Purchased Assets, or any tender or
exchange offer, merger, reverse merger, consolidation, business
combination, recapitalization, spin-off, liquidation, dissolution, or
similar transaction involving, directly or indirectly, Seller (each an
"Acquisition Proposal"), (ii) enter into, participate or cooperate in or
consider or pursue any discussions or negotiations regarding or that
reasonably may be expected to lead to an Acquisition Proposal or furnish to
any person or entity information concerning Seller for purposes of
facilitating any Acquisition Proposal, or (iii) otherwise solicit or
cooperate in any way with, or assist, participate in, facilitate or
encourage any effort or attempt by any person to make or enter into an
Acquisition Proposal. Seller shall notify Buyer in writing within 24 hours
following receipt of any unsolicited Acquisition Proposal or request for
information from any third party. Such written notification shall describe
in reasonable detail any such occurrence and identify the person or persons
involved.
6.6 Employment Agreements. John H. Short, Ph.D. shall enter into a Termination
Compensation Agreement with Parent on or before the Closing Date, such
agreement to be in substantially the form set forth as Exhibit C hereto and
incorporated herein by reference (the "Short Employment Agreement"). Each
other Shareholder and each associate partner of Seller shall enter into an
Employment Agreement with Buyer on the Closing Date in substantially the
form set forth as Exhibit D hereto and incorporated herein by reference
(the "Phase 2 Employment Agreements").
6.7 Disposition of Performance Bonus Pursuant to Consulting Agreement. Seller
and Shareholders, on the one hand, and Parent and Buyer, on the other,
agree that after the Closing Date, the performance bonus due Seller under
that certain letter agreement for consulting services effective as of June
3, 2003 by and between Seller and Parent (the "Consulting Letter") for the
first quarter 2004, if any, shall be computed and paid to Shareholders by
Parent as soon as practicable after such computation. No performance
bonuses for any period subsequent to the first quarter of 2004 shall be
computed or paid to Seller or Shareholders.
ARTICLE 7
---------
COVENANTS REGARDING TAX MATTERS
-------------------------------
7.1 Returns and Payment of Taxes.
-----------------------------
Each party shall be responsible for filing Forms W-2 with respect to the
2004 taxable year in accordance with the "Standard Procedure" described in
Rev. Proc. 96-60, 1996-2.C.B. 399. The responsibility for all other
information Returns shall be allocated similarly. Seller shall be
responsible for payment of any sales or use tax liability or other Taxes
resulting from the sale of the Purchased Assets as contemplated by this
Agreement.
7.2 Cooperation and Records Retention.
----------------------------------
Seller shall cause its accountants and other representatives to provide to
Buyer on a timely basis the information (including but not limited to all
work papers and records relating to Seller) that Seller or its accountants
or other representatives have within their control and that may be
reasonably necessary in connection with the preparation of any and all
Returns required to be filed by Buyer or any other examination by any
taxing authority or administrative proceeding relating to Taxes. Seller
agrees that it will cooperate with Buyer, its accountants and its other
representatives, in a prompt and timely manner, in connection with the
preparation and filing of any and all Returns required to be filed by Buyer
or any other examination by any taxing authority or administrative
proceeding relating to Taxes. Seller and Buyer shall retain or cause to be
retained, until the applicable statutes of limitations (including any
extensions and carryovers) have expired, copies of all Returns for all tax
periods beginning before the Closing Date, together with supporting work
schedules and other records or information that may be relevant to such
Returns.
-21-
7.3 Employee Benefit Plans.
-----------------------
(a) 401(k) Plan. The parties agree as follows with respect to the 401(k)
Plan: (i) Buyer shall (A) assume sponsorship of the 401(k) Plan
effective as of the Closing Date, (B) continue the 401(k) Plan for the
maximum period permitted under Code section 410(b)(6)(C), and (C) fund
the 401(k) Plan on substantially the same terms as past practice;
provided, however, in no event shall the 401(k) Plan be operated in a
manner that would cause the 401(k) Plan to lose its tax-qualified
status; (ii) the 401(k) Plan shall be amended to provide that (A)
Seller shall make a contribution to the 401(k) Plan for all eligible
employees of Seller who are employed by Seller as of the day
immediately preceding the Closing Date based on such eligible
employee's compensation paid during the current plan year up to and
including the day immediately prior to the Closing Date, (B) Buyer
shall make a contribution to the 401(k) Plan for all eligible
employees of Seller who are employed by Buyer as of December 31, 2004
based on the compensation of such eligible employees from the Closing
Date up to and including December 31, 2004; provided, however, that
the aggregate contribution for any participant for the plan years
commencing on January 1, 2004 and ending on December 31, 2005 shall be
substantially the same as past practice, (C) this transaction does not
constitute a severance of employment and will not permit participants
to receive a distribution from the 401(k) Plan, and (D) any other
modifications deemed necessary by Buyer or required by the IRS to
maintain the 401(k) Plan's tax-qualified status.
(b) Health Plan. Subject to the consent of the insurance company providing
benefits under the Health Plan, Buyer agrees to assume sponsorship of
the Health Plan and to continue its coverage for the plan year after
the current plan year, provided that the costs to Parent increase at
no greater rate than the costs associated with Parent's other health
care plans.
ARTICLE 8
---------
CONDITIONS TO CLOSING
---------------------
8.1 Buyer's Conditions to Closing.
------------------------------
The obligations of Buyer to consummate the transactions contemplated by
this Agreement shall be subject to the fulfillment to Buyer's reasonable
satisfaction of each of the following conditions on or prior to the Closing
Date:
(a) Continued Truth of Warranties.
------------------------------
The representations and warranties of each of Seller and Shareholders
contained herein shall be true in all respects on and as of the
Closing Date with the same force and effect as though made as of such
date, except for any variations permitted by this Agreement.
(b) Performance of Covenants.
-------------------------
Each of Seller and Shareholders shall have performed in all respects
all covenants and obligations and complied in all respects with all
conditions required by this Agreement to be performed or complied with
by it and them on or prior to the Closing Date.
(c) No Material Adverse Effect.
---------------------------
There shall have been no change in the assets, operations,
liabilities, earnings, business or condition (financial or otherwise)
of Seller having a Material Adverse Effect on the Purchased Assets or
the Business since the date of the Reference Balance Sheet.
-22-
(d) Permits and Consents.
---------------------
The parties hereto shall have secured all appropriate orders,
consents, approvals and clearances, in form and substance satisfactory
to Buyer, by and from all third parties reasonably requested by Buyer,
including but not limited to governmental authorities, whose order,
consent and approval or clearance is required by contract or
applicable law for the consummation of the transactions herein
contemplated.
(e) Action or Proceeding.
---------------------
No action or proceeding before a court of any other governmental
agency or body shall have been instituted or threatened which would
restrain or prohibit the transactions contemplated by this Agreement.
(f) Fairness Opinion.
-----------------
The disinterested members of the Parent's Board of Directors shall
have received a written opinion from their financial advisor for the
asset purchase transaction contemplated in this Agreement, A.G.
Edwards & Sons, Inc., to the effect that the consideration paid in
such transaction is fair to Parent from a financial point of view.
(g) Closing Documents.
-------------------
Each of Seller and Shareholders shall have delivered all documents
required to be delivered by it or them at the Closing, as more
specifically set forth in ARTICLE 9, in each case in form and
substance satisfactory to Buyer.
8.2 Seller's and Shareholders' Conditions to Closing.
--------------------------------------------------
The obligations of Seller and Shareholders to consummate the
transactions contemplated by this Agreement shall be subject to the
fulfillment to Seller's and Shareholders' reasonable satisfaction of
the following conditions on or prior to the Closing Date:
(a) Continued Truth of Warranties.
------------------------------
The representations and warranties of Buyer herein contained
shall be true in all material respects on and as of the Closing
Date with the same force and effect as though made as of such
date, except for any variations permitted by this Agreement.
(b) Performance of Covenants.
---------------------------
Buyer shall have performed in all material respects all covenants
and obligations and complied in all material respects with all
conditions required by this Agreement to be performed or complied
with by it on or prior to the Closing Date.
(c) Permits and Consents.
---------------------
The parties hereto shall have secured all appropriate orders,
consents, approvals and clearances, in form and substance
reasonably satisfactory to Seller and Shareholders, by and from
all third parties, including but not limited to governmental
authorities, whose order, consent, approval or clearance is
required by contract or applicable law for the consummation of
the transactions herein contemplated.
(d) Action or Proceeding.
---------------------
No action or proceeding before a court of any governmental agency
or body shall have been instituted or threatened which would
restrain or prohibit the transactions contemplated by this
Agreement.
(e) Closing Documents.
------------------
Buyer shall have delivered the Purchase Price and all documents
required to be delivered by it at the Closing, as more
specifically set forth in ARTICLE 9, in form and substance
reasonably satisfactory to each of Seller and Shareholders.
-23-
ARTICLE 9
---------
DOCUMENTS TO BE DELIVERED AT CLOSING
------------------------------------
9.1 Documents to be Delivered by Seller. At the Closing, Seller shall:
------------------------------------
(a) Execute and deliver to Buyer any and all instruments of sale,
assignment and transfer and other documents reasonably requested by
Buyer in order to effect the transfer of the Purchased Assets to
Buyer, to effect the assumption of the Assumed Liabilities by Buyer or
otherwise to facilitate the transactions contemplated hereby;
(b) Deliver to Buyer a certificate of incumbency and copies of the
resolutions adopted by the board of directors of Seller and
Shareholders, authorizing the execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby, duly
certified as of the Closing Date by the Secretary of Seller;
(c) Deliver to Buyer a certificate of Seller, dated as of the Closing
Date, to the effect that the representations and warranties of Seller
and Shareholders as contained in ARTICLE 4 of this Agreement are true
and correct as of such Closing Date, and that the covenants of Seller
as contained in ARTICLE 6 and ARTICLE 7 of this Agreement required to
be performed or complied with on or prior to the Closing Date have
been so performed or complied with;
(d) Deliver to Buyer a certificate of good standing or its equivalent,
dated not more than ten (10) days prior to the Closing Date, attesting
to the good standing of Seller as a corporation under the laws of the
State of Utah;
(e) To the extent any assignments, consents or approvals shall be
necessary to any of the transactions herein contemplated, including
but not limited to the transfer of the Contracts from Seller to Buyer,
deliver to Buyer copies of all such assignments, consents or
approvals; and
(f) Deliver to Buyer the definitive Short Employment Agreement and the
Phase 2 Employment Agreements duly executed by all parties thereto.
9.2 Documents to be Delivered by Buyer. At the Closing, Buyer shall:
-----------------------------------
(a) Execute and deliver to Seller any and all documents identified in
Section 9.1(a), to the extent appropriate in order to effect the
transactions contemplated hereby;
(b) Deliver to Seller a certificate of Buyer, dated as of the Closing
Date, to the effect that the representations and warranties of Buyer
as contained in ARTICLE 5 of this Agreement are true and correct as of
such Closing Date;
(c) To the extent any consents or approvals shall be necessary to any of
the transactions herein contemplated, Buyer shall deliver to Seller
upon request copies of all such consents or approvals as obtained by
Buyer;
(d) Deliver to Seller the Purchase Price;
(e) Deliver to Seller the definitive Short Employment Agreement and the
Phase 2 Employment Agreements duly executed by all parties thereto.
-24-
ARTICLE 10
----------
INDEMNIFICATION
---------------
10.1 Indemnification of Buyer.
--------------------------
Subject to the provisions of this Article 10, by execution of this
Agreement, Shareholders hereby acknowledge that each Shareholder shall
jointly and severally indemnify Buyer and its officers, directors,
employees, agents, representatives, affiliates, successors and assigns
(collectively, the "Buyer Parties") and hold each of them harmless from and
against and pay on behalf of or reimburse such Buyer Parties in respect of
the following:
(a) any and all loss, liability or damage (including judgments and
settlement payments) (a "Loss"), incurred by Buyer incident to,
arising in connection with or resulting from any misrepresentation,
breach, nonperformance or inaccuracy of any representation, warranty
or covenant of Seller or Shareholders made or contained in this
Agreement or in any Exhibit, Schedule, certificate or other document
executed and delivered to Buyer by Shareholders or by or on behalf of
Seller under or pursuant to this Agreement or the transactions
contemplated herein;
(b) any Excluded Liability;
(c) any and all reasonable costs and expenses and all other Losses
incurred in claiming, contesting or remedying any breach,
misrepresentation, nonperformance or inaccuracy described in this
Section 10.1, or in enforcing the Buyer Parties' rights to
indemnification hereunder, including, by way of illustration and not
limitation, all reasonable legal and accounting fees, other reasonable
professional expenses and all filing fees and reasonable collection
costs incident thereto and all such reasonable fees, costs and
expenses incurred in defending claims which, if successfully
prosecuted, would have resulted in a Loss.
Buyer's remedy for any indemnification of Losses hereunder may be
satisfied by proceeding against one or more of the Shareholders
individually for all or any portion of such Loss. Notwithstanding the
preceding sentence, Buyer agrees to use commercially reasonably
efforts to pursue its remedies against each of the Shareholders
individually in a manner consistent with the amount of the Purchase
Price distributed to each Shareholder by Seller hereunder.
10.2 Indemnification of Shareholders.
--------------------------------
Subject to the provisions of this Article 10, by execution of this
Agreement, Buyer hereby acknowledges that Buyer shall indemnify each
Shareholder and each of their respective agents, representatives,
affiliates, successors and assigns (collectively, the "Seller Parties") and
hold each of them harmless from and against and pay on behalf of or
reimburse such Seller Parties in respect of the following
(a) any and all Losses incurred by Shareholders incident to, arising in
connection with or resulting from any misrepresentation, breach,
nonperformance or inaccuracy of any representation, warranty or
covenant by Buyer made or contained in this Agreement or in any
Exhibit, Schedule, certificate or other document executed and
delivered to Shareholders by Buyer;
(b) the Assumed Liabilities;
(c) any liability or obligation relating to the Business or Purchased
Assets arising out of any event or occurrence arising after the
Closing Date; and
-25-
(d) any and all reasonable costs and expenses and all Losses incurred in
claiming, contesting or remedying any breach, misrepresentation,
nonperformance or inaccuracy described in this Section 10.2, or in
enforcing the Seller Parties' rights to indemnification hereunder,
including, by way of illustration and not limitation, all reasonable
legal and accounting fees, other reasonable professional expenses and
all filing fees and reasonable collection costs incident thereto and
all such reasonable fees, costs and expenses incurred in defending
claims which, if successfully prosecuted, would have resulted in a
Loss.
10.3 Notice of and Procedures for Collecting Indemnification.
--------------------------------------------------------
(a) Initial Claim Notice.
---------------------
When either Buyer, on the one hand, or Shareholders, on the other
hand, becomes aware of a situation which may result in damages for
which it or they would be entitled to be indemnified hereunder, Buyer,
on the one hand, or Shareholders, on the other (the "Indemnitee")
shall submit promptly a written notice (the "Initial Claim Notice") to
the other party from which indemnification may be forthcoming pursuant
to Section 10.1 or 10.2 (the "Indemnitor") to such effect after first
becoming aware of such matter and shall furnish the Indemnitor with
such information as is available demonstrating a right or possible
right to receive indemnity. If the potential claim is predicated on,
or later results in, the filing by a third party of any action at law
or in equity (a "Third Party Claim"), the Indemnitee shall provide
promptly to the Indemnitor a supplemental Initial Claim Notice not
later than twenty (20) calendar days prior to the date on which a
responsive pleading must be filed, and shall also furnish a copy of
such claim (if made in writing) and of all documents received from the
third party in support of such claim. In addition, each Initial Claim
Notice shall name, when known, the person or persons making the
assertions which are the basis for such claim. Failure by the
Indemnitee to deliver an Initial Claim Notice or an update thereof in
a timely manner shall not relieve the Indemnitor of any of its
obligations under this Agreement except to the extent of actual and
material prejudice to the Indemnitor.
(b) Rights of Indemnitor.
---------------------
If, prior to the expiration of 30 calendar days from the mailing of an
Initial Claim Notice (the "Claim Answer Period"), the Indemnitor shall
request in writing that such claim not be paid, the same shall not be
paid, and the Indemnitor shall settle, compromise or litigate in good
faith such claim, and employ attorneys of its choice to do so;
provided, however, that Indemnitee shall not be required to refrain
from paying any claim which has matured by court judgment or decree,
unless appeal is taken therefrom and proper appeal bond posted by the
Indemnitor, nor shall it be required to refrain from paying any claim
where such action would result in the foreclosure of a lien upon any
of its assets or a default in a lease or other contract except a lease
or other contract which is the subject of the dispute. The Indemnitee
shall cooperate fully to make available to the Indemnitor and its
attorneys, representatives and agents, all pertinent information under
its control. The Indemnitee shall have the right to elect to settle or
compromise all other contested claims with respect to which the
Indemnitor has not, within the Claim Answer Period, acknowledged in
writing (i) liability therefor, and (ii) its election to assume full
responsibility for the settlement, compromise, litigation and payment
of such claim.
(c) Final Claims Statement.
-----------------------
At such time as damages for which the Indemnitor is liable hereunder
are incurred by Indemnitee by actual payment thereof or by entry of a
final judgment, the Indemnitee shall forward a Final Claims Statement
to the Indemnitor setting forth the amount of such damages in
reasonable detail on an itemized basis. The Indemnitee shall
supplement the Final Claims Statement with such supporting proof of
loss (e.g. vouchers, canceled checks, accounting summaries, judgments,
settlement agreement, etc.) as the Indemnitor may reasonably request
in writing within thirty (30) calendar days after receipt by
Indemnitor of a Final Claims Statement. All amounts reflected on Final
Claims Statements shall be paid promptly by the Indemnitor to the
Indemnitee and the Indemnitee shall have the right to immediate
payment of proceeds from insurance policies paid to Indemnitor in
connection with the claim for which the indemnification right arose.
-26-
10.4 Payment of Claims for Indemnification.
--------------------------------------
Any amounts payable to Buyer Parties pursuant to the provisions of Section
10.1 shall be the responsibility of Shareholders. Any additional amounts
shall be paid promptly upon notice of Buyer to Shareholders of incurrence
of such loss, liability, cost, expense or damage and an explanation of the
losses for Buyer's demand for indemnification under Article 10 of this
Agreement. Any amounts payable to Seller Parties pursuant to the provisions
of Section 10.2 of this Agreement shall be the responsibility of Buyer and
shall be paid promptly upon notice of Shareholders to Buyer of incurrence
of such loss, liability, cost, expense or damage and an explanation of the
losses for Shareholders' demand for indemnification under Section 10.2 of
this Agreement.
10.5 Exclusive Remedy.
- ----------------------
The sole and exclusive remedy of the Buyer Parties and the Seller Parties
hereunder, under the Agreement or otherwise in connection with the
transactions contemplated hereby will be restricted to the indemnification
rights set forth in this Article 10.
10.6 Certain Limitations.
- --------------------------
(a) The representations and warranties contained in Sections 4.3 (Taxes),
4.8 (Employee And Fringe Benefits), and 4.11(a) and (c) (Compliance
with Laws) shall survive until ninety (90) days after the expiration
of the statute of limitations period applicable thereto. The
representations and warranties contained in Sections 4.1 (Status of
Seller), 4.14 (Commissions), 5.1 (Status of Buyer) and 5.2
(Commissions and Fees) shall survive indefinitely. There shall be no
time limitations on claims for indemnity based upon the payment by the
party seeking indemnification of any Excluded Liability or Assumed
Liability that is the obligation of the other party under this
Agreement. All other representations and warranties, covenants and
agreements contained in this Agreement shall survive until the first
anniversary of the Closing Date provided that any representation,
warranty, covenant or agreement with respect to which indemnity may be
sought under this Article 10 shall survive the time that it would
otherwise terminate if notice of the breach thereof giving rise to the
right to indemnity shall have been given to the party against which
indemnity is sought prior to such date.
(b) No damages shall be recoverable by the Seller Parties or Buyer Parties
pursuant to the provisions of this Article 10, and no claim therefor
will be asserted for any purpose whatsoever hereunder, unless the
amount of the Seller Parties' or Buyer Parties', as the case may be,
damages equals at least Fifty Thousand and 00/100 Dollars ($50,000.00)
in the aggregate but upon exceeding Fifty Thousand and 00/100 Dollars
($50,000.00) in the aggregate, the party seeking indemnification shall
be entitled to be indemnified from the first dollar.
(c) The aggregate amount of damages recoverable pursuant to this Article
10 for breaches of representations and warranties will be limited to
One Million Five Hundred Thousand and 00/100 Dollars ($1,500,000.00).
Such limitation shall not apply to claims for indemnity based upon the
payment by the party seeking indemnification of any Excluded Liability
or Assumed Liability that is the obligation of the other party under
this Agreement or to any claim in which the party seeking
indemnification has established fraud and/or intentional
misrepresentation.
-27-
(d) The amount which any Indemnitor is or may be required to pay any
Indemnitee pursuant to this Article 10 shall be reduced by any
insurance proceeds or other amounts actually recovered by or on behalf
of such Indemnitee in reduction of the related Loss. If an Indemnitee
shall have received the payment required by this Agreement from an
Indemnitor in respect of a Loss and shall subsequently actually
receive insurance proceeds or other amounts in respect of such Loss,
then such Indemnitee shall pay to such Indemnitor a sum equal to the
amount of such insurance proceeds or other amounts actually received
(net of any expenses in obtaining the same).
ARTICLE 11
----------
MISCELLANEOUS
-------------
11.1 Notices.
--------
Any notices or other communications required or permitted hereunder to any
party hereto shall be sufficiently given if delivered in person or sent by
certified or registered mail, postage prepaid, addressed as follows:
In the case of Buyer:
RehabCare Group, Inc.
7733 Forsyth Boulevard, Suite 2300
St. Louis, Missouri 63105
Attn: H. Edwin Trusheim, Chairman of the Board
With a copy to:
Thompson Coburn LLP
One US Bank Plaza
St. Louis, Missouri 63101
Attn: Robert M. LaRose, Esq.
In the case of Seller and Shareholders:
Phase 2 Consulting, Inc.
2120 South 2100 East, 3rd Floor
Salt Lake City, Utah 84101
Attn: John H. Short, Ph.D., Managing Director
With a copy to:
Jones, Waldo, Holbrook & McDonough
170 South Main Street, Suite 1500
Salt Lake City, Utah 84101
Attn: Bruce E. Babcock, Esq.
or such substituted address as any party shall have given notice to the others
in writing in the manner set forth in this Section 11.1.
-28-
11.2 Amendment.
----------
This Agreement may be amended or modified in whole or in part only by an
agreement in writing executed by all parties hereto and making specific
reference to this Agreement.
11.3 Waiver; Investigation.
----------------------
The parties hereto may, by written agreement: (a) extend the time for the
performance of any of the obligations or other acts of the parties hereto;
(b) waive any inaccuracies in the representations contained in this
Agreement; (c) waive compliance with, or modify, any of the covenants or
conditions contained in this Agreement; and (d) waive or modify performance
of any of the obligations of any of the parties hereto; provided, however,
that no such waiver or failure to insist upon strict compliance with such
obligation, covenant, agreement or condition shall operate as a waiver of,
or an estoppel with respect to, any subsequent insistence upon such strict
compliance other than with respect to the matter so waived or modified.
Buyer acknowledges that its officers, employees and authorized
representatives and agents have been given an opportunity to examine the
agreements, instruments, documents and other information relating to Seller
that they have requested to examine. Any inspection, preparation, or
compilation of information or Schedules, or audit of the receivables,
payables, properties, financial condition, or other matters relating to
Seller conducted by or on behalf of Buyer pursuant to this Agreement shall
in no way limit, affect, or impair the ability of Buyer to rely upon the
representations, warranties, covenants, and agreements of Seller set forth
herein or seek indemnification for any matter as set forth in ARTICLE 10
hereof.
11.4 Termination.
------------
This Agreement may be terminated by the parties hereto prior to Closing as
follows:
(a) by mutual written consent of Buyer, Seller and Shareholders;
(b) upon written notice from Buyer to Seller and Shareholders if any of
the conditions precedent to Buyer's obligations hereunder shall have
become incapable of fulfillment through no fault of Buyer;
(c) upon written notice from Shareholders to Buyer if any of the
conditions precedent to Seller's or Shareholders' obligations
hereunder shall have become incapable of fulfillment through no fault
of Seller or Shareholders, as the case may be;
(d) by Buyer, on the one hand, or Seller and Shareholders, on the other
hand, in the event of a breach by the other party to this Agreement of
any representation, warranty or agreement contained herein, which
breach is not cured to the reasonable satisfaction of the
non-breaching party within fifteen (15) business days after written
notice thereof is given to the breaching party by the non-breaching
party or is not waived by the non-breaching party during such period;
or
(e) at the election of Buyer or Seller and Shareholders if the Closing has
not occurred on or prior to June 30 2004.
In the event of such termination as provided above, this Agreement shall
forthwith terminate and there shall be no liability on the part of any of
Shareholders, Seller or Buyer or their respective officers and directors,
except for liabilities arising from a breach of this Agreement prior to
such termination; provided, however, that the provisions of the
confidentiality agreement between the parties shall continue in full force
and effect.
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11.5 Counterparts.
-------------
This Agreement may be executed in one or more counterparts, all of which
taken together shall constitute one instrument.
11.6 Binding on Successors and Assigns.
----------------------------------
This Agreement shall be binding upon, inure to the benefit of and be
enforceable by and against the parties hereto and their respective
successors and assigns in accordance with the terms hereof. No party hereto
may assign its interest under this Agreement without the prior written
consent of the other parties hereto; provided, however, that Buyer may
assign its interest herein to any affiliate or subsidiary of Buyer without
obtaining the prior consent of Seller or Shareholders.
11.7 Severability.
-------------
In the event that any one or more of the provisions contained in this
Agreement or any application thereof shall be invalid, illegal or
unenforceable in any respect, the validity, legality or enforceability of
the remaining provisions of this Agreement and any other application
thereof shall not in any way be affected or impaired thereby; provided,
however, that to the extent permitted by applicable law, any invalid,
illegal, or unenforceable provision may be considered for the purpose of
determining the intent of the parties in connection with the other
provisions of this Agreement.
11.8 Headings.
---------
The headings in the sections and subsections of this Agreement and in the
Schedules are inserted for convenience only and in no way alter, amend,
modify, limit or restrict the contractual obligations of the parties.
11.9 Expenses of Litigation.
-----------------------
In the event of any litigation arising from the breach of this Agreement,
the prevailing party in such litigation shall be entitled to recover
reasonable attorneys' fees and costs, including appeals.
11.10 List of Exhibits and Schedules.
-------------------------------
As mentioned in this Agreement, there are attached hereto or delivered
herewith, the following Exhibits and Schedules:
EXHIBITS
Section
Exhibit Document Reference
A Articles of Incorporation 4.1(b)
B Bylaws 4.1(b)
C Short Employment Agreement 6.6 and 9.1(f)
D Phase 2 Employment Agreements 6.6 and 9.1(f)
SCHEDULES
Schedule
No. Schedule Caption
1.1(a)(i) Client Accounts and Contracts
1.1(a)(ii) Leases
1.1(a)(iii) Personal Property
1.1(a)(iv) Assumed Contracts
1.1(a)(vi) Intellectual Property
1.3 Balance Sheet
4.1(e) Foreign Qualifications
4.1(g) Violations or Conflicts
4.2 Seller Financial Statements
4.3(b) Tax Matters
4.4(a) Title to Purchased Assets
4.4(b) Leases
4.4(c) Adequacy
4.5 Exceptions to Intellectual Property
4.6(a) Indebtedness
4.6(b) Client Account Notices
4.6(c) Insurance
4.6(d) Status
4.7 Officers and Directors
4.8 Employee and Fringe Benefit Plans
4.10 Litigation
4.11(a) Compliance with Laws
4.11(b) Permits
4.11(c) Environmental
4.12 Transactions With Affiliates
4.13 Accounts Receivable
6.4(a) Retained Employees
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Each of the foregoing Exhibits and Schedules is incorporated herein by this
reference and expressly made a part hereof.
11.11 Expenses.
---------
Each of the parties hereto shall bear its own expenses incurred in
connection with this Agreement and the transactions herein contemplated,
including, but not limited to, legal and accounting fees and expenses.
11.12 Further Assurances and Cooperation.
-----------------------------------
Seller and Shareholders shall execute, acknowledge and deliver to Buyer any
and all other assignments, consents, approvals, conveyances, assurances,
documents and instruments reasonably requested by Buyer at any time and
shall take any and all other actions reasonably requested by Buyer at any
time for the purpose of more effectively assigning, transferring, granting,
conveying and confirming to Buyer, the Purchased Assets. After consummation
of the transactions contemplated herein, the parties agree to cooperate
with each other in regard to all matters arising from the purchase by Buyer
of the Purchased Assets.
11.13 Confidentiality and Publicity.
------------------------------
The parties hereto shall hold in confidence the information contained in
this Agreement and all information related to this Agreement, which is not
otherwise known to the public, shall be held by each party hereto as
confidential and proprietary information and shall not be disclosed without
the prior written consent of the other parties. Accordingly, Buyer and
Shareholders shall not discuss with, or provide nonpublic information to,
any third party (except for such party's attorneys, accountants, directors
of an affiliate of any party hereto, and other consultants and professional
advisors) concerning this transaction prior to the Closing, except: (i) as
required in governmental filings, securities filing or judicial,
administrative or arbitration proceedings; or (ii) pursuant to public
announcements made with the prior written approval of Shareholders and
Buyer.
11.14 Fair Meaning.
-------------
This Agreement shall be construed according to its fair meaning and as if
prepared by all parties hereto.
11.15 Gender and Number and Construction.
-----------------------------------
All references to the neuter gender shall include the feminine or masculine
gender and vice versa, where applicable, and all references to the singular
shall include the plural and vice versa, where applicable. Unless otherwise
expressly provided, the word "including" followed by a listing does not
limit the preceding words or terms and shall mean "including, without
limitation."
-31-
11.16 Tax Effect.
- -----------------
Neither of the parties (nor such party's counsel or accountants) has made
or is making any representations to any other party (nor such party's
counsel or accountant) concerning any of the tax effects of the
transactions provided for in this Agreement and each party hereto
represents that it has obtained, or may obtain, independent tax advice with
respect thereto and upon which it, if so obtained, has solely relied.
11.17 Time is of the Essence.
- -----------------------------
Time is of the essence for all dates and time periods set forth in this
Agreement and each performance called for in this Agreement.
11.18 Entire Agreement.
- -----------------------
All prior negotiations and agreements among the parties hereto are
superseded by this Agreement, and there are no representations, warranties,
understandings or agreements other than those expressly set forth herein or
in an Exhibit or Schedule delivered pursuant hereto, except as modified in
writing concurrently herewith or subsequent hereto.
11.19 Governing Law.
- --------------------
This Agreement shall be governed by and construed and interpreted according
to the laws of the State of Missouri, determined without reference to
conflicts of law principles. To the extent permitted by law, each of the
parties hereto hereby irrevocably submits to the jurisdiction of any
Missouri state court or United States federal court, in either case sitting
in Missouri over any suit, action or other proceeding brought by any party
arising out of or relating to this Agreement, and each of the parties
hereto irrevocably agrees that all claims with respect to any such suit,
action or other proceeding shall be heard and determined in such courts.
[Remainder of page intentionally left blank.]
-32-
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized representatives on the day and year first
above written.
Buyer: Seller:
PHASE 2 CONSULTING, INC. PHASE 2 CONSULTING, INC.
By /s/ Vincent L. Germanese By /s/ John H. Short, Ph.D.
---------------------------------- ------------------------------------
Vincent L. Germanese John H. Short, Ph.D.
President
Parent: Shareholders:
/s/ John H. Short, Ph.D.
REHABCARE GROUP, INC. --------------------------------------
John H. Short, Ph.D.
By /s/ E. Edwin Trusheim /s/ Peter F. Singer
---------------------------------- --------------------------------------
H. Edwin Trusheim Peter F. Singer
Chairman of the Board
/s/ Howard W. Salmon
--------------------------------------
Howard W. Salmon
-33-
Exhibit 10.2
REHABCARE GROUP, INC.
TERMINATION COMPENSATION AGREEMENT
This agreement ("Agreement") has been entered into as of the 3rd day of
May, 2004, by and between RehabCare Group, Inc., a Delaware corporation (the
"Company"), and John H. Short, PhD, an individual (the "Executive").
RECITALS
The Board of Directors of the Company has determined that it is in the best
interests of the Company and its stockholders to reinforce and encourage the
continued attention and dedication of the Executive to the Company as the
Company's President and Chief Executive Officer and to assure that the Company
will have the continued dedication of the Executive, notwithstanding the
possibility or occurrence of a Change in Control (as defined below). The Board
desires to provide for the continued employment of the Executive as President
and Chief Executive Officer on terms competitive with those of other
corporations, and the Executive is willing to rededicate himself and continue to
serve the Company as its President and Chief Executive Officer. Additionally,
the Board believes it is imperative to diminish the inevitable distraction of
the Executive by virtue of the personal uncertainties and risks created by a
potential or pending Change in Control and to encourage the Executive's full
attention and dedication to the Company currently and in the event of any
potential or pending Change in Control, and to provide the Executive with
compensation and benefits arrangements upon any termination after a Change in
Control and certain terminations of employment prior to a Change in Control
which ensure that the compensation and benefits expectations of the Executive
will be satisfied. Therefore, in order to accomplish these objectives, the Board
has caused the Company to enter into this Agreement.
IT IS AGREED AS FOLLOWS:
Section 1: Definitions and Construction.
1.1 Definitions. For purposes of this Agreement, the following words
and phrases, whether or not capitalized, shall have the meanings specified
below, unless the context plainly requires a different meaning.
1.1(a) "Accrued Obligations" has the meaning set forth in Section
4.1(a) of this Agreement.
1.1(b) "Annual Base Salary" has the meaning set forth in Section
2.4(a) of this Agreement.
1.1(c) "Board" means the Board of Directors of the Company.
1.1(d) "Cause" has the meaning set forth in Section 3.3 of this
Agreement.
1.1(e) "Change in Control" means:
(i) The acquisition by any individual, entity or group, or
a Person (within the meaning of Section 13(d)(3) or
14(d)(2) of the Exchange Act) of ownership of twenty
percent (20%) or more of either (a) the then outstanding
shares of common stock of the Company (the "Outstanding
Company Common Stock") or (b) the combined voting power of
the then outstanding voting securities of the Company
entitled to vote generally in the election of directors
(the "Outstanding Company Voting Securities"); or
(ii) Individuals who, as the date hereof, constitute the
Board (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board; provided,
however, that any individual becoming a director subsequent
to the date hereof whose election, or nomination for
election, by the Company's stockholders was approved by a
vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as
though such individual were a member of the Incumbent
Board, but excluding, as a member of the Incumbent Board,
any such individual whose initial assumption of office
occurs as a result of either an actual or threatened
election contest (as such terms are used in Rule l4a-11 of
Regulation l4A promulgated under the Exchange Act) or other
actual or threatened solicitation of proxies or consents by
or on behalf of a Person other than the Board; or
(iii) Approval by the stockholders of the Company of a
reorganization, merger or consolidation, in each case,
unless, following such reorganization, merger or
consolidation, (a) more than fifty percent (50%) of,
respectively, the then outstanding shares of common stock
of the corporation resulting from such reorganization,
merger or consolidation and the combined voting power of
the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors is
then beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were
the beneficial owners, respectively, of the Outstanding
Company Common Stock and Outstanding Company Voting
Securities immediately prior to such reorganization, merger
or consolidation in substantially the same proportions as
their ownership, immediately prior to such reorganization,
merger or consolidation, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities, as the
case may be, (b) no Person beneficially owns, directly or
indirectly, twenty percent (20%) or more of, respectively,
the then outstanding shares of common stock of the
corporation resulting from such reorganization, merger or
consolidation or the combined voting power of the then
outstanding voting securities of such corporation, entitled
to vote generally in the election of directors and (c) at
least a majority of the members of the board of directors
of the corporation resulting from such reorganization,
merger or consolidation were members of the Incumbent Board
at the time of the execution of the initial agreement
providing for such reorganization, merger or consolidation;
-2-
(iv) Approval by the stockholders of the Company of (a) a
complete liquidation or dissolution of the Company or (b)
the sale or other disposition of all or substantially all
of the assets of the Company, other than to a corporation,
with respect to which following such sale or other
disposition, (1) more than forty percent (40%) of,
respectively, the then outstanding shares of common stock
of such corporation and the combined voting power of the
then outstanding voting securities of such corporation
entitled to vote generally in the election of directors is
then beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were
the beneficial owners, respectively, of the Outstanding
Company Common Stock and Outstanding Company Voting
Securities immediately prior to such sale or other
disposition in substantially the same proportion as their
ownership, immediately prior to such sale or other
disposition, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, as the case may be,
(2) no Person beneficially owns, directly or indirectly,
twenty percent (20%) or more of, respectively, the then
outstanding shares of common stock of such corporation and
the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally
in the election of directors and (3) at least a majority of
the members of the board of directors of such corporation
were members of the Incumbent Board at the time of the
execution of the initial agreement or action of the Board
providing for such sale or other disposition of assets of
the Company.
1.1(f) "Change in Control Date" means the date that the Change in
Control first occurs.
1.1(g) "Company" has the meaning set forth in the first paragraph
of this Agreement and, with regard to successors, in Section 5.2
of this Agreement.
1.1(h) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
1.1(i) "Date of Termination" has the meaning set forth in Section
3.6 of this Agreement.
1.1(j) "Disability" has the meaning set forth in Section 3.2 of
this Agreement.
-3-
1.1(k) "Disability Effective Date" has the meaning set forth in
Section 3.2 of this Agreement.
1.1(l) "Effective Date" means the date of this Agreement specified
in the first paragraph of this Agreement.
1.1(m) "Employment Period" means the period beginning on the
Effective Date and ending on the later of (i) December 31, 2007,
or (ii) December 31 of any succeeding year during which notice is
given by either party (as described in Section 2.1 of this
Agreement) of such party's intent not to renew this Agreement.
1.1(n) "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
1.1(o) "Excise Tax" has the meaning set forth in Section 4.2(e)(i)
of this Agreement.
1.1 (p)"Good Reason" means the Executive's right to terminate this
Agreement following a Change in Control based upon (1) the
assignment to the Executive of any duties inconsistent in any
respect with the position (including status, offices, titles and
reporting requirements), authority, duties and responsibilities
held by the Executive as of the date of the Change in Control or
any other action by the Company which results in a material
diminution in such position, authority, duties and
responsibilities; (b) the Company's requiring the Executive to
have any office arrangements for performing his duties which are
different than the arrangements in effect as of the Change in
Control; (c) any reduction in Executive's Annual Base Salary; or
(d) a material breach by the Company of any provision of this
Agreement. Any termination of the Executive's employment based
upon a good faith determination of "Good Reason" made by the
Executive shall be subject to a delivery of a Notice of
Termination by the Executive to the Company in the manner
prescribed in Section 3.5 and subject further to the ability of
the Company to remedy promptly any action not taken in bad faith
by the Company that may otherwise constitute Good Reason under
this Section 1.1 (p).
1.1(q) "Gross-Up Payment" has the meaning set forth in Section
4.2(i) of this Agreement.
1.1(r) "Incentive Bonus" has the meaning set forth in Section
2.4(b) of this Agreement.
1.1(s) "Incumbent Board" has the meaning set forth in Section
1.1(e)(ii) of this Agreement.
1.1(t) "Notice of Termination" has the meaning set forth in
Section 3.5 of this Agreement.
-4-
1.1(u) "Other Benefits" has the meaning set forth in Section
4.1(e) of this Agreement.
1.1(v) "Outstanding Company Common Stock" has the meaning set
forth in Section 1.1(e)(i) of this Agreement.
1.1(w) "Outstanding Company Voting Securities" has the meaning set
forth in Section 1.1(e)(i) of this Agreement.
1.1(x) "Payment" has the meaning set forth in Section 4.2(e)(i) of
this Agreement.
1.1(y) "Person" means any "person" within the meaning of Sections
13(d) and 14(d) of the Exchange Act.
1.1(z) "Prorated Target Bonus" has the meaning set forth in
Section 4.1(b) of this Agreement.
1.1(aa)"Severance Bonus Amount" has the meaning set forth in
Section 4.2(b) of this Agreement.
1.1(ab)"Term" means the period that begins on the Effective Date
and ends on the earlier of: (i) the Date of Termination, or (ii)
the close of business on the later of December 31, 2007 or
December 31 of any renewal term.
1.2 Gender and Number. When appropriate, pronouns in this Agreement
used in the masculine gender include the feminine gender, words in the singular
include the plural, and words in the plural include the singular.
1.3 Headings. All headings in this Agreement are included solely for
ease of reference and do not bear on the interpretation of the text.
Accordingly, as used in this Agreement, the terms "Article" and "Section" mean
the text that accompanies the specified Article or Section of the Agreement.
1.4 Applicable Law. This Agreement shall be governed by and construed
in accordance with the internal laws of the State of Missouri, without reference
to its conflict of law principles.
Section 2: Terms and Conditions of Employment.
2.1 Period of Employment. The Executive shall remain in the employ of
the Company throughout the Term of this Agreement in accordance with the terms
and provisions of this Agreement. This Agreement will automatically renew for
annual one-year periods unless either party gives the other written notice, by
September 30, 2006, or September 30 of any succeeding year, of such party's
intent not to renew this Agreement.
-5-
2.2 Positions and Duties.
2.2(a) Throughout the Term of this Agreement, the Executive shall
serve as President and Chief Executive Officer of the Company subject
to the reasonable directions of the Board. The Executive shall have
such authority and shall perform such duties as are specified by the
Bylaws of the Company and the Board for the office of President and
Chief Executive Officer, subject to the control exercised by the Board
from time to time. In addition, each year throughout the Term that the
Executive serves as the President and Chief Executive Officer of the
Company, the Executive shall be nominated by the Nominating Committee
and/or the Board for election as a director at the annual meeting of
stockholders of the Company.
2.2(b) Throughout the Term of this Agreement (but excluding any
periods of vacation and sick leave to which the Executive is
entitled), the Executive shall devote reasonable attention and time
during normal business hours to the business and affairs of the
Company and shall use his reasonable best efforts to perform
faithfully and efficiently such responsibilities as are assigned to
him under or in accordance with this Agreement; provided that, it
shall not be a violation of this Section 2.2(b) for the Executive to
(i) serve on corporate, civic or charitable boards or committees with
or without compensation, (ii) deliver lectures or fulfill speaking
engagements, with or without compensation, or (iii) manage personal
investments, so long as such activities do not significantly interfere
with the performance of the Executive's responsibilities as an
employee of the Company in accordance with this Agreement, violate the
terms of this Agreement or any other agreement between Executive and
the Company, or violate the Company's conflict of interest policy or
any applicable law.
2.3 Situs of Employment. Throughout the Term of this Agreement, the
Executive's services shall be performed at and out of the Company's executive
offices located in the greater St. Louis, Missouri metropolitan area. It is
understood and agreed that the President and CEO of the Company should be based
in and office and work out of the Company's executive offices in the St. Louis
metropolitan area. The Executive shall establish a permanent residence in the
St. Louis metropolitan area as soon as practicable after this Agreement is
effective. The Executive shall devote a predominant portion of the Executive's
in-office time at the Company's offices in the St. Louis metropolitan area, it
being understood that the current responsibilities of the Executive may require
the Executive to travel extensively on Company business.
2.4 Compensation.
2.4(a) Annual Base Salary. At the date of this Agreement, the
Executive will be paid a base salary ("Annual Base Salary") at an
annual rate of Five Hundred Fifteen Thousand Dollars ($515,000.00),
which shall be paid in equal or substantially equal semi-monthly
installments. During the Term of this Agreement, the Annual Base
Salary payable to the Executive shall be reviewed at least annually
after the end of the first calendar quarter (starting with calendar
year 2005) and shall be increased at the discretion of the Board or
the Compensation Committee of the Board but shall not be reduced.
-6-
2.4(b) Incentive Bonuses. In addition to Annual Base Salary, the
Executive shall be awarded the opportunity to earn an incentive bonus
on an annual basis ("Incentive Bonus") under any incentive
compensation plan which is generally available to other peer
executives of the Company, and which will provide the Executive an
opportunity to earn a target incentive award equal to fifty percent
(50%) of his Annual Base Salary paid during the plan year with a
maximum opportunity of 100% of such Annual Base Salary. The Board of
Directors shall be exclusively responsible for decisions relating to
administration of the executive incentive plans.
2.4(c) Incentive, Savings and Retirement Plans. Throughout the Term of
this Agreement, the Executive shall be entitled to participate in all
incentive, savings and retirement plans generally available to other
peer executives of the Company. In this regard, as soon as
administratively practicable after this Agreement is executed by the
parties and delivered, the Executive shall be awarded, on a one-time
basis, under and subject to the terms of the Company's nonqualified
stock option plan, a grant of a nonqualified option to purchase
250,000 shares of the Company's stock at current market value, with
such nonqualified options to vest monthly on a pro rata basis over a
four (4) year period from the date of the grant. The form of required
option award agreement utilized for such grant is the form required by
the stock option plan. Also, during the Term the Executive shall be
eligible to participate in the Company's long term cash incentive
plan. During the Term, the annual performance units granted to
Executive under that long term cash incentive plan and upon which an
potential award shall be based shall, for each of the 2004, 2005 and
2006 plan years, be 2625 units valued at $100 per unit; thereafter,
for any succeeding year during the Term the amount will be established
by the Board in its discretion. For each three (3) year performance
period during the Term and under the plan, the financial metrics for
receiving a payout will be established by the Board in its discretion
and otherwise determined by the terms of the plan. Payment of awards
under the long term cash incentive plan, and eligibility to receive
any payment, will be determined under and according to the terms of
that plan and based upon performance criteria established annually by
the Board under the plan. Nothing herein prevents the Company from
terminating or changing the long term cash incentive plan in its
discretion, subject to a participant's right under the plan as to any
incentive award which has already been earned.
2.4(d) Welfare Benefit Plans. Throughout the Term of this Agreement
(and thereafter, subject to Section 4.1(d) hereof), the Executive
and/or the Executive's family, as the case may be, shall be eligible
for participation in and shall receive all benefits under welfare
benefit plans, practices, policies and programs provided by the
Company (including, without limitation, medical, prescription, dental,
disability, salary continuance, employee life, group life, accidental
death and travel accident insurance plans and programs) to the extent
generally available to other peer executives of the Company.
Throughout the Term, the Executive also will be eligible to
participate in any nonqualified supplemental retirement program
hereafter established for senior executives of the Company generally,
subject to and on the same terms applicable to such other senior
executives generally.
-7-
2.4(e) Expenses. Throughout the Term of this Agreement, the Executive
shall be entitled to receive prompt reimbursement for all reasonable
business expenses incurred by the Executive in accordance with the
policies, practices and procedures of the Company.
2.4(f) Fringe Benefits. Throughout the Term of this Agreement, the
Executive shall be entitled to such fringe benefits as generally are
provided to other peer executives of the Company.
2.4(g) Office and Support Staff. Throughout the Term of this
Agreement, the Executive shall be entitled to an office or offices at
the Company's executive offices in the greater St. Louis, Missouri
metropolitan area of a size and with furnishings and other
appointments, and to personal secretarial and other assistance, as are
generally provided to other peer executives of the Company.
2.4(h) Vacation. Throughout the Term of this Agreement, the Executive
shall be entitled to paid vacation in accordance with the plans,
policies, programs and practices as are generally provided to other
peer executives of the Company.
2.4 (i) Relocation Fee. The Executive will be entitled to receive a
one-time payment of One Hundred Twenty Thousand Dollars ($120,000.00)
to cover any and all costs and expenses associated with Executive's
relocation to the St. Louis metropolitan area. This payment will be
made following Executive's acquisition of a personal residence in the
St. Louis metropolitan area.
Section 3: Termination of Employment.
3.1 Death. The Executive's employment shall terminate automatically
upon the Executive's death during the Employment Period.
3.2 Disability. If the Company determines in good faith that the
Disability of the Executive has occurred during the Employment Period (pursuant
to the definition of Disability set forth below), the Company may give to the
Executive written notice in accordance with Section 7.2 of its intention to
terminate the Executive's employment. In such event, the Executive's employment
with the Company shall terminate effective on the thirtieth (30th) day after
receipt of such notice by the Executive (the "Disability Effective Date"),
provided that, within the thirty (30) days after such receipt, the Executive
shall not have returned to full-time performance of the Executive's duties. For
purposes of this Agreement, "Disability" shall mean that the Executive has been
unable with reasonable accommodation to perform the services required of the
Executive hereunder on a full-time basis for a period of one hundred eighty
(180) consecutive business days by reason of a physical and/or mental condition.
"Disability" shall be deemed to exist when certified by a physician selected by
the Company and acceptable to the Executive or the Executive's legal
representative (such agreement as to acceptability not to be withheld
unreasonably). The Executive will submit to such medical or psychiatric
examinations and tests as such physician deems necessary to make any such
Disability determination.
-8-
3.3 Termination for Cause or without Cause. The Company may terminate
the Executive's employment during the Employment Period for "Cause," which shall
mean termination based upon: (i) the Executive's willful and continued failure
to substantially perform his duties with the Company (other than as a result of
incapacity due to physical or mental condition), after a written demand for
substantial performance is delivered to the Executive by the Company, which
specifically identifies the manner in which the Executive has not substantially
performed his duties, (ii) the Executive's commission of an act constituting a
criminal offense that would be classified as a felony under the applicable
criminal code or involving moral turpitude, dishonesty, or breach of trust, or
(iii) the Executive's material breach of any provision of this Agreement. For
purposes of this Section, no act or failure to act on the Executive's part shall
be considered "willful" unless done, or omitted to be done, without good faith
and without reasonable belief that the act or omission was in the best interest
of the Company. Notwithstanding the foregoing, the Executive shall not be deemed
to have been terminated for Cause unless and until (i) he receives a Notice of
Termination from the Company, (ii) he is given the opportunity, with counsel, to
be heard before the Board, and (iii) the Board finds, in its good faith opinion,
that the Executive was guilty of the conduct set forth in the Notice of
Termination. The Company also may terminate the Executive's employment at any
time during the Employment Period without Cause.
3.4 Voluntary Termination by the Executive. The Executive may
voluntarily terminate his employment with the Company for any reason or for no
reason at any time during the Employment Period.
3.5 Notice of Termination. Any termination by the Company for Cause,
without Cause, or Disability, or by the Executive for any reason or no reason,
shall be communicated by Notice of Termination to the other party, given in
accordance with Section 7.2. For purposes of this Agreement, a "Notice of
Termination" means a written notice which (i) indicates the specific termination
provision in this Agreement relied upon, (ii) to the extent applicable, sets
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Executive's employment under the provision so
indicated, and (iii) if the Date of Termination (as defined in Section 3.6
hereof) is other than the date of receipt of such notice, specifies the
termination date (which date shall be not more than fifteen (15) days after the
giving of such notice). The failure of the Company to set forth in the Notice of
Termination any fact or circumstance which contributes to a showing of Cause
shall not waive any right of the Company hereunder or preclude the Company from
asserting such fact or circumstance in enforcing the Company's rights hereunder.
3.6 Date of Termination. "Date of Termination" means (i) if the
Executive's employment is terminated by the Company for Cause, the Date of
Termination shall be the date of receipt by the Executive of the Notice of
Termination or any later date specified therein, as the case may be, (ii) if the
Executive's employment is terminated by reason of death or Disability, the Date
of Termination shall be the date of death of the Executive or the Disability
Effective Date, as the case may be, or (iii) if the Executive's employment is
voluntarily terminated by the Executive for any reason or no reason, the Date of
Termination shall be a date specified in the Notice of Termination, (iv) if the
Executive's employment is terminated by the Company other than for Cause, death,
or Disability, the Date of Termination shall be the date of receipt by the
Executive of the Notice of Termination.
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Section 4: Certain Benefits Upon Termination.
4.1 Termination Without Cause Prior to a Change in Control. If, prior
to a Change in Control during the Employment Period, the Company terminates the
Executive's employment without Cause, the Executive shall be entitled to the
payment of the benefits provided below:
4.1(a) Accrued Obligations.
--------------------
Within thirty (30) days after the Date of Termination, the Company
shall pay to the Executive the sum of (1) the Executive's accrued
salary through the Date of Termination, (2) the accrued benefit
payable to the Executive under any deferred compensation plan, program
or arrangement in which the Executive is a participant subject to the
computation of benefits provisions of such plan, program or
arrangement, and (3) any accrued and unused paid days off; in each
case to the extent not previously paid (the "Accrued Obligations").
4.1(b) Annual Base Salary and Target Bonus Continuation.
-------------------------------------------------
For a period of twelve (12) months beginning in the month after the
Date of Termination, the Company shall pay to the Executive on a
monthly basis one-twelfth of an amount equal the Executive's
then-current Annual Base Salary and Prorated Target Bonus. For
purposes of this Agreement, the term "Prorated Target Bonus" means an
amount determined by multiplying the actual percentage of the
Executive's base salary paid to the Executive as an Incentive Bonus in
the year prior to the year in which the Date of Termination occurs by
the Executive's then-current Annual Base Salary as of the Date of
Termination and prorating this amount by multiplying it by a fraction,
the numerator of which is the number of days during the then-current
calendar year that the Executive was employed by the Company up to and
including the Date of Termination and the denominator of which is 365.
The Company at any time may elect to pay the balance of such payments
then remaining in a lump sum. Payments under any long term cash
incentive plan are not part of or included in this calculation.
4.1(c) Stock-Based Awards.
-------------------
To the extent not otherwise provided for or prohibited under the terms
of the Company's stock-based benefit plans or the Executive's grant
agreement, all stock-based awards held by the Executive that have not
expired and are scheduled to vest and/or become exercisable within six
(6) months after the Date of Termination in accordance with their
respective terms, shall vest and/or become exercisable as of the Date
of Termination and shall remain exercisable after the Date of
Termination in accordance with the original terms of their respective
grant agreements.
4.1(d) Medical and Health Benefit Continuation.
----------------------------------------
For a period of twelve (12) months beginning in the month the Date of
Termination occurs, the Company shall pay the costs of medical and
health benefits to the Executive and/or the Executive's family at
least equal to those which would have been provided to them in
accordance with the Company's plans, programs, practices and policies
if the Executive's employment had not been terminated; provided,
however, that if the Executive becomes reemployed with another
employer and is eligible to receive medical or health benefits under
another employer-provided plan, program, practice or policy the
medical and health benefits described herein shall be immediately
terminated upon the commencement of coverage under the new employer's
plan, program, practice or policy.
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4.1(e) Other Benefits. To the extent not previously paid or provided,
the Company shall timely pay or provide to the Executive and/or the
Executive's family any other amounts or benefits required to be paid
or provided for which the Executive and/or the Executive's family is
eligible to receive pursuant to this Agreement and under any plan,
program, policy or practice or contract or agreement of the Company as
those provided generally to other peer executives and their families
("Other Benefits"). Payment under any long term cash incentive plan or
other incentive compensation plan shall be determined and governed
solely by the terms of the applicable plan.
4.2 Benefits Upon a Change in Control. If a Change in Control occurs
during the Employment Period and within two (2) years after the Change in
Control Date (a) the Company terminates the Executive's employment without
Cause, or (b) the Executive voluntarily terminates employment with the Company
for any reason or no reason, then the Executive shall become entitled to the
payment of the benefits as provided below:
4.2(a) Accrued Obligations.
---------------------------
Within thirty (30) days after the Date of Termination, the Company
shall pay to the Executive the Accrued Obligations and the Prorated
Target Bonus.
4.2(b) Severance Amount.
------------------------
Within thirty (30) days after the Date of Termination, the Company
shall pay to the Executive as severance pay in a lump sum, in cash, an
amount equal to 2.99 times the sum of the Executive's then-current
Annual Base Salary and Severance Bonus Amount. For purposes of this
Agreement, the term "Severance Bonus Amount" means an amount
determined by averaging the percentages of the Executive's base salary
that were actually paid to the Executive as an Incentive Bonus during
the five (5) most recently completed years prior to the year in which
the Date of Termination occurs (or, if the Executive has then been
employed less than five (5) years, then during the total number of
completed years of employment prior to the year in which the Date of
Termination occurs) and multiplying such average percentage by the
Executive's then-current Annual Base Salary. Payments under any long
term cash incentive plan are not part of or included in this
calculation.
4.2(c) Stock-Based Awards.
--------------------------
To the extent not otherwise provided for or prohibited under the terms
of the Company's stock-based benefit plans or the Executive's grant
agreements, all stock-based awards held by the Executive that have not
expired in accordance with their respective terms shall vest and/or
become fully exercisable as of the Change in Control Date and shall
remain exercisable after the Change in Control Date in accordance with
the original terms of the respective grant agreements.
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4.2(d) Other Benefits.
----------------------
To the extent not previously paid or provided, the Company shall
timely pay or provide to the Executive and/or the Executive's family
any Other Benefits. Payment under any long term cash incentive plan or
other incentive compensation plan shall be determined and governed
solely by the terms of the applicable plan.
4.2(e) Gross-up Payments.
-------------------------
(i) Anything in this Agreement to the contrary
notwithstanding, in the event that it shall be determined that
any payment by the Company to or for the benefit of the
Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or
otherwise but determined without regard to any additional
payments required under this Section 4.2(e)) (a "Payment")
would be subject to the excise tax imposed by Code Section
4999 (or any successor provision) or any interest or penalties
are incurred by the Executive with respect to such excise tax
(such excise tax, together with any such interest and
penalties, are hereinafter collectively referred to as the
"Excise Tax"), then the Executive shall be entitled to receive
an additional payment (a "Gross-Up Payment") in an amount such
that after payment by the Executive of all taxes (including
any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any
interest or penalties imposed with respect thereto) and Excise
Tax imposed upon the Gross-Up Payment, the Executive retains
an amount of the Gross-Up Payment on an after-tax basis equal
to the Excise Tax imposed upon the Payment. The intent of the
parties is that the Company shall be responsible in full for,
and shall pay, any and all Excise Tax on any Payments and
Gross-up Payment(s) and any income and all excise and
employment taxes (including, without limitation, penalties and
interest) imposed on any Gross-up Payment(s) as well as any
loss of deduction caused by or related to the Gross-up
Payment(s).
(ii) Subject to the provisions of Section 4.2(e)(iii), all
determinations required to be made under this Section 4.2(e),
including whether and when a Gross-up Payment is required and
the amount of such Gross-Up Payment and the assumptions to be
utilized in arriving at such determinations, shall be made by
the outside accounting firm that then audits the Company's
financial statements (the "Accounting Firm"), which Accounting
Firm shall provide detailed supporting calculations both to
the Company and to the Executive within fifteen (15) business
days of receipt of notice from the Company or the Executive
that there has been or will be a Payment. In the event that
the Accounting Firm is serving as the accountant or auditor
for the Person effecting the Change in Control, the Executive
shall appoint another nationally recognized accounting firm to
make the determinations required hereunder (which accounting
firm shall then be referred to as the "Accounting Firm"
hereunder). All fees and expenses of the Accounting Firm shall
be paid solely by the Company. Any Gross-Up Payment, as
determined pursuant to this Section 4.2(e), shall be paid by
the Company to the Executive within five (5) days after the
receipt of the Accounting Firm's determination. If the
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Accounting Firm determines that no Excise Tax is payable by
the Executive, it shall furnish the Executive with a written
opinion that failure to report the Excise Tax on the
Executive's applicable federal income tax return would not
result in the imposition of a negligence or similar penalty.
Any determination by the Accounting Firm shall be binding upon
the Company and the Executive in the absence of a material
mathematical or legal error. As a result of the uncertainty in
the application of Section 4999 of the Code at the time of the
initial determination by the Accounting Firm hereunder, it is
possible that the Gross-Up Payments will not have been made by
the Company that should have been made or that the Gross-Up
Payments will have been made that should not have been made,
in each case consistent with the calculations required to be
made hereunder. In the event that the Company exhausts its
remedies pursuant to Section 4.2(e)(iii) below and the
Executive is thereafter required to make a payment of any
Excise Tax or any interest, penalty or addition to tax related
thereto, the Accounting Firm shall determine the amount of the
underpayment of Excise Taxes that has occurred and such
underpayment and interest, penalty or addition to tax shall be
promptly paid by the Company to the Executive, along with such
additional amounts described in Section 4.2(e)(i). In the
event that the Accounting Firm determines that an overpayment
of Gross-Up Payment(s) has occurred, any such overpayment
shall be treated for all purposes as a loan to the Executive
with interest at the applicable federal rate provided for in
Section 7872(f)(2) of the Code, due and payable within ninety
(90) days after written demand to the Executive by the
Company; provided, however, that the Executive shall have no
duty or obligation whatsoever to repay such overpayment if
Executive's receipt of the overpayment, or any portion
thereof, is included in the Executive's income and the
Executive's repayment of the same is not deductible by the
Executive for federal or state income tax purposes.
(iii) The Executive shall notify the Company in writing of any
claim by the Internal Revenue Service that, if successful,
would require the payment by the Company of the Gross-Up
Payment. Such notification shall be given as soon as
practicable but no later than ten (10) business days after the
Executive is informed in writing of such claim by the Internal
Revenue Service and the notification shall apprise the Company
of the nature of the claim and the date on which such claim is
required to be paid. The Executive shall not pay such claim
prior to the expiration of a 30-day period following the date
on which the Executive has given such notification to the
Company (or such shorter period ending on the date that any
payment of taxes with respect to such claim is required). If
the Company notifies the Executive in writing prior to the
expiration of such period that it desires to contest such
claim, the Executive shall:
(A) give the Company any information reasonably requested
by the Company relating to such claim;
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(B) take such action in connection with contesting such
claim as the Company shall reasonably request in writing
from time to time, including without limitation, accepting
legal representation with respect to such claim by an
attorney reasonably selected by the Company;
(C) cooperate with the Company in good faith in order to
effectively contest such claim; and
(D) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay all
costs and expenses (including additional interest and
penalties) incurred in connection with such contest, and shall
indemnify and hold the Executive harmless, on an after-tax
basis to the Executive, for any Excise Tax or income tax
(including interest and penalties with respect thereto)
imposed as a result of such contest. Without limitation on the
foregoing provisions of this Section 4.2(e), the Company shall
control all proceedings taken in connection with such contest
and, at its sole option, may pursue or forgo any and all
administrative appeals, proceedings, hearings and conferences
with the taxing authority in respect of such claim and may, at
its sole option, either direct the Executive to pay the tax
claimed and sue for a refund or contest the claim in any
permissible manner, and the Executive agrees to prosecute such
contest to a determination before any administrative tribunal,
in a court of initial jurisdiction or in one or more appellate
courts, as the Company shall determine; provided, however,
that if the Company directs the Executive to pay such claim
and sue for a refund, the Company shall advance the amount of
such payment to the Executive, on an interest-free basis, and
shall indemnify and hold the Executive harmless, on an
after-tax basis, from any Excise Tax or income tax (including
interest or penalties with respect thereto) imposed with
respect to such advance; and provided further that any
extension of the statute of limitations relating to payment of
taxes for the taxable year of the Executive with respect to
which such contested amount is claimed to be due is limited
solely to such contested amount. Furthermore, the Company's
control of the contest shall be limited to issues with respect
to which a Gross-Up Payment would be payable hereunder and the
Executive shall be entitled to settle or contest, as the case
may be, any other issue raised by the Internal Revenue Service
or any other taxing authority.
(iv) If after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 4.2(e)(iii), the
Executive becomes entitled to receive any refund with respect
to such claim, the Executive shall (subject to the Company's
complying with the requirements of Section 4.2(e)(iii))
promptly pay to the Company the amount of such refund
(together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by the
Executive of an amount advanced by the Company pursuant to
Section 4.2(e)(iii), a determination is made that the
Executive shall not be entitled to a refund with respect to
such claim and the Company does not notify the Executive in
writing of its intent to contest such denial or refund prior
to the expiration of thirty (30) days after such
determination, then such advance shall be forgiven and shall
not be required to be repaid and the amount of such advance
shall offset, to the extent thereof, the amount of the
Gross-Up Payment required to be paid by the Company to the
Executive.
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4.3 Death. If the Executive's employment is terminated by reason of
the Executive's death during the Employment Period (either prior or subsequent
to a Change in Control), this Agreement shall terminate without further
obligations to the Executive's legal representatives under this Agreement, other
than for (i) payment of Accrued Obligations (as defined in Section 4.1(a))
(which shall be paid to the Executive's estate or beneficiary, as applicable, in
a lump sum in cash within thirty (30) days of the Date of Termination) and (ii)
the timely payment or provision of Other Benefits (as defined in Section
4.1(e)), including death benefits pursuant to the terms of any plan, policy, or
arrangement of the Company. Payment under any long term cash incentive plan or
other incentive compensation plan shall be determined and governed solely by the
terms of the applicable plan.
4.4 Disability. If the Executive's employment is terminated by reason
of the Executive's Disability during the Employment Period (either prior or
subsequent to a Change in Control), this Agreement shall terminate without
further obligations to the Executive, other than for (i) payment of Accrued
Obligations (as defined in Section 4.1(a)) (which shall be paid to the Executive
in a lump sum in cash within thirty (30) days of the Date of Termination) and
(ii) the timely payment or provision of Other Benefits (as defined in Section
4.1(e)) including Disability benefits pursuant to the terms of any plan, policy
or arrangement of the Company. Payment under any long term cash incentive plan
or other incentive compensation plan shall be determined and governed solely by
the terms of the applicable plan.
4.5 Termination by the Company for Cause or Voluntarily by the
Executive Prior to a Change in Control. If the Executive's employment shall be
terminated by the Company for Cause during the Employment Period (either prior
or subsequent to a Change in Control) or voluntarily by the Executive for any
reason or for no reason prior to a Change in Control, this Agreement shall
terminate without further obligations to the Executive, other than for (i)
payment of the Executive's Accrued Obligations (as defined in Section 4.1(a))
(which shall be paid to the Executive in a lump sum in cash within thirty (30)
days of the Date of Termination), and (ii) the timely payment or provision of
Other Benefits (as defined in Section 4.1(e)), as applicable for such
termination. Payment under any long term cash incentive plan or other incentive
compensation plan shall be determined and governed solely by the terms of the
applicable plan.
4.6 Non-Exclusivity of Rights. Except as provided in Section 4.1(d),
nothing in this Agreement shall prevent or limit the Executive's continuing or
future participation in any plan, program, policy or practice provided by the
Company and for which the Executive may qualify, nor shall anything herein limit
or otherwise affect such rights as the Executive may have under any other
contract or agreement with the Company. Amounts which are vested benefits of
which the Executive is otherwise entitled to receive under any plan, policy,
practice or program of, or any other contract or agreement with, the Company at
or subsequent to the Date of Termination, shall be payable in accordance with
such plan, policy, practice or program or contract or agreement.
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4.7 Full Settlement. The Company's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against the
Executive or others. In no event shall the Executive be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to the Executive under any of the provisions of this Agreement and, except as
provided in Section 4.1(d), such amounts shall not be reduced whether or not the
Executive obtains other employment. The Company agrees to pay promptly as
incurred, to the full extent permitted by law, all legal fees and expenses which
the Executive may reasonably incur as a result of any contest (regardless of the
outcome thereof) by the Company, the Executive or others of the validity or
enforceability of, or liability under, any provision of this Agreement or any
guarantee of performance thereof (including as a result of any contest by the
Executive regarding the amount of any payment pursuant to this Agreement), plus
in each case interest on any delayed payment at the applicable Federal rate
provided for in Code Section 7872(f)(2)(A).
4.8 Conditions To Payments. To be eligible to receive (and continue to
receive) and retain the payments and benefits described in Section 4.1 (b) - (d)
or Section 4.2 (b) - (c), the Executive must comply with the terms of paragraph
5, and must execute and deliver to the Company an agreement, in form and
substance satisfactory to the Company, effectively releasing and giving up all
claims the Executive may have against the Company and its subsidiaries,
shareholders, successors and affiliates (and each of their respective employees,
officers, plans and agents) arising out of or based upon any facts or conduct
occurring prior to that date, and reaffirming and agreeing to comply with the
terms of this Agreement and any other agreement signed by the Executive in favor
of the Company or any of its subsidiaries or affiliates. The agreement will be
prepared by the Company and provided to the Executive at the time the
Executive's employment is terminated or as soon as administratively practicable
thereafter. The agreement also will require the Executive, among other things,
to consult with Company representatives, and voluntarily appear as a witness for
trial or deposition (and to prepare for any such testimony) in connection with,
any claim which may be asserted by or against the Company, or any business
matter concerning the Company or any of its transactions or operations. The
Company will have no obligations to make the payments and/or provide the
benefits specified in Section 4.1 (b) - (d) or Section 4.2 (b) - (c) specified
above, when applicable, unless and until the Executive signs and delivers the
agreement described in this Section 4.8 and all conditions to the effectiveness
of the release and waiver (including but not limited to the expiration of any
applicable time period to consider signing the agreement or to revoke acceptance
without any action being taken to revoke acceptance or otherwise invalidate the
agreement) have been satisfied.
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Section 5: Non-Competition. The provisions of this Section 5 and any related
provisions shall survive termination of this Agreement and/or Executive's
employment with the Company and do not supersede, but are in addition to and not
in lieu of, any other agreements signed by Executive concerning non competition,
confidentiality, solicitation of employees, or trade secrets (whether included
in a stock option agreement or otherwise), and are included in consideration for
the Company entering into this Agreement. Executive's right to receive and
retain the benefits specified in Section 4.1(b) or Section 4.2 (b) are
conditioned upon Executive's compliance with the terms of this Section 5:
5.1 Non-Compete Agreement.
5.1(a) During the Executive's employment with the Company and
during the period beginning on the date the Executive's
employment with the Company terminates and ending one (1)
year thereafter (i.e., on the anniversary of the date the
Executive's employment terminates), the Executive shall
not, without prior written approval of the Board, become an
officer, employee, agent, partner, or director of, or
provide any services or advice to or for, any business
enterprise in substantial direct competition (as defined in
Section 5.1(b)) with the Company; provided that (i) if the
Executive terminates Executive's employment for Good Reason
after a Change in Control, then Executive will not be
subject to the restrictions of this Section 5.1(a), and
(ii) if after a Change in Control the Executive's
employment is terminated by the Company, the Executive's
employment terminates by reason of a Disability, or the
Executive's employment is terminated by the Executive other
than for Good Reason, then the period of the post
employment restriction set out above shall be a period of
two (2) years from the date the Executive's employment
terminates rather than a period of one (1) year. The above
constraint shall not prevent the Executive from making
passive investments, not to exceed five percent (5%), in
any enterprise where Executive's services or advice is not
required or provided.
5.1(b) For purposes of Section 5.1, a business enterprise with
which the Executive becomes associated as an officer,
employee, agent, partner, or director shall be considered
in substantial direct competition, if such entity competes
with the Company in any business in which the Company or
any of its direct or indirect subsidiaries is engaged or
provides services or products of a type which is marketed,
sold or provided by the Company or any of its subsidiaries
or affiliates (including but not limited to any product or
service which the Company or any such other entity is
developing) within any State or country where the Company
or any such affiliate or subsidiary then provides or
markets (or plans to provide or market) any service or
product as of the date the Executive's Company employment
terminates.
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5.1(c) During the Executive's employment with the Company and
during the period beginning on the date the Executive's
employment with the Company terminates and ending one (1)
year thereafter (i.e., on the anniversary of the date the
Executive's employment terminates), the Executive shall
not, without prior written approval of the Board, directly
or indirectly, solicit, provide to, take away, or attempt
to take away or provide to any customer or solicited
prospect of the Company or any of its subsidiaries any
business of a type which the Company or such subsidiary
provides or markets or which is competitive with any
business then engaged in (or product or services marketed
or planned to be marketed) by the Company or any of its
subsidiaries; or induce or attempt to induce any such
customer to reduce such customer's business with that
business entity, or divert any such customer's business
from the Company and its subsidiaries; or discuss that
subject with any such customer. However, if after a Change
in Control the Executive's employment is terminated by the
Company, the Executive's employment terminates by reason of
a Disability, or Executive's employment is terminated by
the Executive other than for Good Reason, then the period
of the post employment restriction set out above shall be a
period of two (2) years from the date the Executive's
employment terminates rather than a period of one (1) year.
5.1(d) During the Executive's employment with the Company and
during the period beginning on the date the Executive's
employment with the Company terminates and ending one (1)
year thereafter (i.e., on the first anniversary of the date
Executive's employment terminates), the Executive shall
not, without prior written approval of the Board, directly
or indirectly solicit the employment of, recruit, employ,
hire, cause to be employed or hired, entice away, or
establish a business with, any then current officer, office
manager, staffing coordinator or other employee or agent of
the Company or any of its subsidiaries or affiliates (other
than non-supervisory or non-managerial personnel who are
employed in a clerical or maintenance position) or any
other such person who was employed by the Company or any of
its subsidiaries or affiliates within the twelve (12)
months immediately prior to the date the Executive's
employment with the Company terminated; or suggest to or
discuss with any such employee the discontinuation of that
person's status or employment with the Company or any of
its subsidiaries and affiliates, or such person's
employment or participation in any activity in competition
with the Company or any of its subsidiaries or affiliates.
5.2 Confidential Information. The Executive has received (and will
receive) under a relationship of trust and confidence, and shall hold in a
fiduciary capacity for the benefit of the Company, all "Confidential
Information" and secret or confidential information, knowledge or data relating
to the Company or any of its affiliated companies or direct or indirect
subsidiaries, and their respective businesses, which shall have been obtained by
the Executive during the Executive's employment by the Company and which shall
not be or become public knowledge (other than by acts by the Executive or
representatives of the Executive in violation of this Agreement). During the
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Executive's employment with the Company and after termination of the Executive's
employment with the Company, the Executive shall never, without the prior
written consent of the Company, or as may otherwise be required by law or legal
process, use (other than during Executive's employment with the Company for the
benefit of the Company), or communicate, reveal, or divulge any such
information, knowledge or data, to anyone other than the Company and those
designated by it. In no event shall an asserted violation of the provisions of
this Section 5.2 constitute a basis for deferring or withholding any amounts
otherwise payable to the Executive under this Agreement. "Confidential
Information" means confidential and/or proprietary information and trade secrets
of or relating to the Company or any of its subsidiaries and affiliates (and
includes information the disclosure of which might be injurious to those
companies), including but not limited to information concerning personnel of the
Company or any of its subsidiaries and affiliates, confidential financial
information, customer or customer prospect information, information concerning
temporary staffing candidates, temporary employees, and personnel, temporary
employee and customer lists and data, methods and formulas for estimating costs
and setting prices, research results (such as marketing surveys, or trials),
software, programming, and programming architecture, enhancements and
developments, cost data (such as billing, equipment and programming cost
projection models), compensation information and models, business or marketing
plans or strategies, new products or marketing strategies, deal or business
terms, budgets, vendor names, programming operations, information on proposed
acquisitions or dispositions, actual performance compared to budgeted
performance, long-range plans, results of internal analyses, computer programs
and programming information, techniques and designs, business and marketing
plans, acquisition plans and strategies, divestiture plans and strategies,
internal valuations of Company assets, and trade secrets, but does not include
information generally known in the marketplace. In addition, Confidential
Information includes information of another company given to the Company with
the understanding that it will be kept information confidential. All
Confidential Information described herein is and constitutes trade secret
information (regardless of whether the same is legally determined to be a trade
secret) and is not the property of the Executive.
5.3 Non Disparagement. The Executive will never criticize,
denigrate, disparage, or make any derogatory statements about the Company or its
respective business plans, policies and practices, or about any of the Company's
officers, employees or former officers or employees, to customers, competitors,
suppliers, employees, former employees, members of the public, members of the
media, or any other person; nor shall the Executive harm or in any way adversely
affect the reputation and goodwill of the Company. Nothing in this paragraph
shall preclude or prevent the Executive from giving truthful testimony or
information to law enforcement entities, administrative agencies or courts or in
any other legal proceedings as required by law.
5.4 Provisions Relating To Non Competition, Non Solicitation And
Confidentiality. The provisions of this Section 5 survive the termination of
Executive's employment and this Agreement and shall not be affected by any
subsequent changes in employment terms, positions, duties, responsibilities,
authority, or employment termination, permitted or contemplated by this
Agreement. To the extent that any covenant set forth in this Section 5 of this
Agreement shall be determined to be invalid or unenforceable in any respect or
to any extent, the covenant shall not be void or rendered invalid, but instead
shall be automatically amended for such lesser term, to such lesser extent, or
in such other lesser degree, as will grant the Company the maximum protection
and restrictions on the Executive's activities permitted by applicable law in
such circumstances. In cases where there is a dispute as to the right to
-19-
terminate the Executive's employment or the basis for such termination, the term
of any covenant set forth in Section 5 shall commence as of the date specified
in the Notice of Termination and shall not be deemed to be tolled or delayed by
reason of the provisions of this Agreement. The Company shall have the right to
injunctive relief to restrain any breach or threatened breach of any provisions
in this Section 5 in addition to and not in lieu of any rights to recover
damages or cease making payments under this Agreement. The Company shall have
the right to advise any prospective or then current employer of Executive of the
provisions of this Agreement without liability. The Company's right to enforce
the provisions of this Agreement shall not be affected by the existence, or
non-existence, of any other similar agreement for any other executive, or by the
Company's failure to exercise any of its rights under this Agreement or any
other similar agreement or to have in effect a similar agreement for any other
employee.
Section 6: Successors.
6.1 Successors of Executive. This Agreement is personal to the
Executive and, without the prior written consent of the Company, the rights (but
not the obligations) shall not be assignable by the Executive otherwise than by
will or the laws of descent and distribution. This Agreement shall inure to the
benefit of and be enforceable by the Executive's legal representatives.
6.2 Successors of Company. This Agreement is freely assignable by the
Company and its successors/assignees. The Company will require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Company or the
division in which the Executive is employed, as the case may be, to assume
expressly and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such agreement prior to the
effectiveness of any such succession shall be a breach of this Agreement and
shall entitle the Executive to terminate the Agreement at his option on or after
the Change in Control Date for Good Reason.
Section 7: Miscellaneous.
7.1 Other Agreements. This Agreement supersedes all prior dated
agreements, letters and understandings concerning employment or severance
benefits payable to the Executive, either before or after a Change in Control.
The Board may, from time to time in the future, provide other incentive programs
and bonus arrangements to the Executive with respect to the occurrence of a
Change in Control that will be in addition to the benefits required to be paid
in the designated circumstances in connection with the occurrence of a Change in
Control. Such additional incentive programs and/or bonus arrangements will
affect or abrogate the benefits to be paid under this Agreement only in the
manner and to the extent explicitly agreed to by the Executive in any such
subsequent program or arrangement. This Agreement does not supersede or affect
in any way the validity of any agreement signed by Executive concerning
confidentiality, stock options, post-employment competition, non solicitation of
business, accounts or employees, or agreements of a similar type or nature; and
any provisions of this Agreement shall be in addition to and not in lieu of (or
replace) any such other agreements.
-20-
7.2 Notice. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by certified or
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses as set forth below; provided that all notices to the
Company shall be directed to the attention of the Board of Directors, or to such
other address as one party may have furnished to the other in writing in
accordance herewith, except that notice of change of address shall be effective
only upon receipt.
Notice to the Executive:
------------------------
John H. Short, PhD
c/o Phase2 Consulting
2120 South 1300 East
Third Floor
Salt Lake City, Utah 84106
Notice to the Company:
----------------------
RehabCare Group, Inc.
7733 Forsyth Boulevard
Suite 1700
St. Louis, Missouri 63105
Att: Board of Directors
7.3 Validity. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement.
7.4 Withholding. The Company may withhold from any amounts payable
under this Agreement such Federal, state or local taxes as shall be required to
be withheld pursuant to any applicable law or regulation.
7.5 Waiver. The Executive's or the Company's failure to insist upon
strict compliance with any provision hereof or any other provision of this
Agreement or the failure to assert any right the Executive or the Company may
have hereunder, shall not be deemed to be a waiver of such provision or right or
any other provision or right of this Agreement.
[SIGNATURE PAGE FOLLOWS]
-21-
IN WITNESS WHEREOF, the Executive and the Company, pursuant to the
authorization from its Board, have caused this Agreement to be executed in its
name on its behalf, all as of the day and year first above written.
/s/ John H. Short, Ph.D.
-------------------------------------------------
John H. Short, Ph.D.
REHABCARE GROUP, INC.
By /s/ H. Edwin Trusheim
----------------------------------------
Name: H. Edwin Trusheim
Title: Chairman of the Board
-22-
EXHIBIT 31.1
CERTIFICATION
I, John H. Short, certify that:
1. I have reviewed this quarterly report on Form 10-Q of RehabCare Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this quarterly report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 10, 2004
By: /s/ John H. Short
------------------------
John H. Short
President and
Chief Executive Officer
RehabCare Group, Inc.
EXHIBIT 31.2
CERTIFICATION
I, Vincent L. Germanese, certify that:
1. I have reviewed this quarterly report on Form 10-Q of RehabCare Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this quarterly report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 10, 2004
By: /s/ Vincent L. Germanese
--------------------------
Vincent L. Germanese
Senior Vice President,
Chief Financial Officer
and Secretary
RehabCare Group, Inc.
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of RehabCare Group, Inc. (the "Company")
on Form 10-Q for the period ending March 31, 2004 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, John H. Short,
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350,
as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
By: /s/ John H. Short
------------------------
John H. Short
President and
Chief Executive Officer
RehabCare Group, Inc.
May 10, 2004
* A signed original of the written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of RehabCare Group, Inc. (the "Company")
on Form 10-Q for the period ending March 31, 2004 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Vincent L.
Germanese, Senior Vice President Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
By: /s/ Vincent L. Germanese
--------------------------
Vincent L. Germanese
Senior Vice President,
Chief Financial Officer
and Secretary
RehabCare Group, Inc.
May 10, 2004
* A signed original of the written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.