STOCK PURCHASE AGREEMENT

Exhibit 10.4

 

EXECUTION COPY

 

STOCK PURCHASE AGREEMENT

 

by and among

 

HHC RIVER PARK, INC.

 

as Purchaser,

 

SCOTT C. STAMM AND PATRICK D. BURROWS

 

as the Shareholders

 

and

 

PSYCHMANAGEMENT GROUP, INC.

 

Dated as of June 9, 2005

 

TABLE OF CONTENTS

 

 

- i -

 

- ii -

 

- iii -

 

LIST OF EXHIBITS

 

 

- 1 -

 

LIST OF SCHEDULES

 

 

- 1 -

 

TABLE OF DEFINED TERMS

 

 

- 1 -

 

- 2 -

 

STOCK PURCHASE AGREEMENT

 

This STOCK PURCHASE AGREEMENT (this “Agreement”) is made and entered into as of the 9 ^th day of June, 2005 (the “Execution Date”) by and between SCOTT C. STAMM AND PATRICK D. BURROWS (each a “Shareholder” and collectively, the “Shareholders”), HHC RIVER PARK, INC. , a West Virginia corporation (“Purchaser”) and PSYCHMANAGEMENT GROUP, INC. , a West Virginia corporation (the “Company”). The Shareholders, the Company and Purchaser are sometimes collectively referred to herein as the “Parties” and individually referred to herein as a “Party.”

 

RECITALS:

 

A. The Shareholders collectively own One Thousand (1,000) shares of Common Stock, $1.00 par value, of the Company (collectively, the “Shares”), and the Shares constitute all the issued and outstanding capital stock of the Company; and

 

B. Purchaser desires to purchase the Shares from the Shareholders, and the Shareholders desire to sell the Shares to Purchaser, for the consideration and upon the terms and conditions contained in this Agreement.

 

AGREEMENT:

 

NOW, THEREFORE, in consideration of the foregoing premises and the mutual promises and covenants contained in this Agreement, the Parties hereto agree as follows:

 

ARTICLE 1

DEFINITIONS; SALE AND TRANSFER OF SHARES;

CONSIDERATION; CLOSING

 

1.1 Definitions . For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires,

 

(a) The defined terms used in this Agreement shall include the plural as well as the singular.

 

(b) All accounting terms not otherwise defined herein have the meanings assigned under GAAP.

 

(c) All references in this Agreement to designated “Articles,” “Sections” and other subdivisions are to the designated Articles, Sections and other subdivisions of the body of this Agreement.

 

(d) Pronouns of either gender or neuter shall include, as appropriate, the other pronoun forms.

 

(e) The words “including” and “include” shall be deemed to mean in each instance “including, without limitation,” except as stated otherwise herein.

 

STOCK PURCHASE AGREEMENT – Page 1

(f) The words “herein,” “hereof” and “hereunder” and other words of similar import refer to this Agreement as a whole, including the Exhibits and Schedules attached hereto, and not to any particular Article, Section or other subdivision.

 

(g) “Disclosure Schedules” shall mean the schedules attached to and constituting a part of this Agreement.

 

(h) “Knowledge of Purchaser,” and similar variations thereof, shall mean the actual knowledge, as of the relevant date, of Donald Thayer, Peter Kavanaugh, Dave White, Tony Vadella, David Meyercord or Matt Lisagor after reasonable inquiry of employees or agents of Purchaser that were involved in its due diligence review of the Shareholders and the Company.

 

(i) “Knowledge of the Shareholders,” and similar variations thereof, shall mean the actual knowledge, as of the relevant date, of Scott C. Stamm or Patrick D. Burrows after reasonable inquiry of all employees of the Company responsible for the relevant matters.

 

(j) “Material Adverse Change” or “Material Adverse Effect,” when used with respect to the Company, shall mean any material adverse change in or effect on the Company taken as a whole, other than changes or effects that are or result from occurrences relating to the United States economy generally or the United States health care industry generally.

 

(k) Any reference in this Agreement to an “Affiliate” shall mean any Person directly or indirectly controlling, controlled by or under common control with a second Person. The term “Control” (including the terms “controlled by” and “under common control with”) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. A “Person” shall mean any natural person, partnership, corporation, limited liability company, association, trust or other legal entity.

 

Capitalized terms used in this Agreement shall have the definitions assigned to such terms elsewhere in this Agreement. For ease of reference, the section containing the definition of each such capitalized term is set forth in the table of defined terms included elsewhere as a part of this Agreement.

 

1.2 Agreement to Sell and Purchase . Subject to the terms and conditions of this Agreement and in reliance on the representations, warranties and covenants herein set forth, at the Closing the Shareholders shall sell to Purchaser, and Purchaser shall purchase from the Shareholders, the Shares, free and clear of any and all liens, claims, options, charges, pledges, security interests, voting agreements or trusts, proxies, preemptive rights, rights of first refusal, encumbrances or other restrictions or interests of any kind or nature whatsoever (collectively, “Encumbrances”).

 

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1.3 Purchase Price . Subject to the terms and conditions of this Agreement, the aggregate purchase price to be paid by Purchaser to the Shareholders for the purchase of the Shares (the “Purchase Price”) shall consist of:

 

(a) Three Million Three Hundred Sixty-five Thousand and 00/100 Dollars ($3,365,000.00) (the “Closing Purchase Price Payment”) which shall be payable in cash at the Closing;

 

(b) The Net Assets Payment, which shall be the payment delivered as set forth in Section 1.10 and shall, as applicable, be added to or be deducted from the Closing Purchase Price Payment at Closing, as set forth in Section 1.10;

 

(c) Variable Payment A described in Section 1.8(a);

 

(d) Variable Payment B described in Section 1.8(b);

 

(e) Variable Payment C described in Section 1.9(a); and

 

(f) Variable Payment D described in Section 1.9(b).

 

1.4 Closing Date . The consummation of the transactions contemplated by this Agreement (the “Closing”) shall take place at 10:00 a.m. at the offices of Strasburger & Price, L.L.P., located at 901 Main Street, Suite 4300, Dallas, Texas, on or before five (5) business days after all conditions precedent and other matters required to be completed as of the Closing Date have been or will be completed on such date or such other date, time and place as the Parties shall mutually agree (the “Closing Date”). The Closing with respect to the transfer of the Shares, shall be deemed to have occurred and to be effective as between the Parties as of 12:01 a.m., Eastern Daylight Time, on the Closing Date (the “Effective Time”).

 

1.5 Items to be Delivered by Shareholders at Closing . At or before the Closing, the Shareholders shall deliver to Purchaser the following, duly executed by the Shareholders (and/or the Company) where appropriate and in the form attached hereto as an Exhibit:

 

(a) The original certificates representing the Shares, duly endorsed for immediate transfer, or with appropriate stock powers with respect thereto, duly endorsed in blank by the Shareholders;

 

(b) Post-Closing Escrow Agreement in the form of Exhibit A attached hereto (the “Escrow Agreement”);

 

(c) original certificates of good standing, or comparable status, of the Company, issued by the State of West Virginia, dated no earlier than a date which is fourteen (14) calendar days prior to the Closing Date;

 

(d) a certificate executed by each Shareholder certifying to Purchaser (i) that all the representations and warranties of the Shareholders and the Company contained herein are true as of the Closing Date with the same effect as though made at such time, except to the extent such representations and warranties expressly relate to an earlier date, in which case such representations and warranties are true on and as of such earlier date, (ii) that the Shareholders and the Company have in all material respects performed or complied with the covenants and agreements required of the Shareholders and the Company set forth in this Agreement to be

 

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satisfied by the Closing Date, and (iii) that all of the conditions contained in Article 6 have been satisfied except those, if any, waived in writing by the Shareholders;

 

(e) a certificate of the corporate Secretary of the Company certifying to Purchaser (i) the incumbency of the officers of the Company on the Execution Date and on the Closing Date and bearing the authentic signatures of all such officers who shall execute this Agreement and any additional documents contemplated by this Agreement, and (ii) the due adoption and text of the resolutions of the directors of the Company, authorizing the execution, delivery and performance of this Agreement and all ancillary documents and instruments by the Company, and that such resolutions have not been amended or rescinded and remain in full force and effect on the Closing Date;

 

(f) releases of liens and mortgages and UCC termination statements for any and all liens, mortgages, security interests, restrictions and financing statements with respect to any of the assets of the Company (other than those exclusively relating to any of the Contracts and any Permitted Encumbrances) by the holders of such liens or mortgages or the secured parties named in such financing statements or written understandings to provide same to Purchaser upon payment of the amounts secured thereby;

 

(g) all consents to the change in control of the Company from the third parties listed in Schedule 1.5(g) required to approve the change in control of the Company (the “Contract Consents”);

 

(h) all governmental approvals and authorizations that are required for the consummation of the transactions contemplated by this Agreement (the “Governmental Approvals”);

 

(i) the Asset Purchase Agreement by and between Purchaser and Mountain State Behavioral Health Services, LLC, a West Virginia limited liability company (the “Asset Purchase Agreement”), and all items and documents required to be delivered therewith; and

 

(j) such other instruments, certificates, consents or other documents which are reasonably necessary to carry out the transactions contemplated by this Agreement and to comply with the terms hereof.

 

1.6 Items to be Delivered by Purchaser at Closing . At or before the Closing, Purchaser shall execute and deliver or cause to be delivered to the Shareholders the following, duly executed by Purchaser where appropriate:

 

(a) payment of the Closing Purchase Price Payment on the Closing Date by wire transfer of immediately available funds to the Shareholders to the accounts specified by the Shareholders, which accounts the Shareholders shall specify to Purchaser not less than three (3) business days prior to the Closing Date in writing;

 

(b) a certificate of Purchaser, executed by the President or any Vice President of Purchaser, certifying to the Shareholders (i) that all the representations and warranties of Purchaser contained herein are true as of the Closing Date with the same effect as though made at such time, except to the extent such representations and warranties expressly relate to an

 

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earlier date, in which case such representations and warranties are true on and as of such earlier date, (ii) that Purchaser has in all material respects performed or complied with the covenants and agreements required of Purchaser set forth in this Agreement required to be satisfied by the Closing Date and (iii) that all of the conditions contained in Article 7 have been satisfied except those, if any, waived in writing by Purchaser;

 

(c) a certificate of the corporate Secretary of Purchaser certifying to the Shareholders (i) the incumbency of the officers of Purchaser on the Execution Date and on the Closing Date and bearing the authentic signatures of all such officers who shall execute this Agreement and any additional documents contemplated by this Agreement and (ii) the due adoption and text of the resolutions of the directors of Purchaser authorizing the execution, delivery and performance of this Agreement and all ancillary documents and instruments by Purchaser, and that such resolutions have not been amended or rescinded and remain in full force and effect on the Closing Date;

 

(d) original certificate of good standing, or comparable status, of Purchaser, issued by the West Virginia Secretary of State dated no earlier than a date which is fourteen (14) calendar days prior to the Closing Date;

 

(e) the Escrow Agreement;

 

(f) the Asset Purchase Agreement and all items and documents required to be delivered therewith;

 

(g) such other instruments, certificates, consents or other documents which are reasonably necessary to carry out the transactions contemplated by this Agreement and to comply with the terms hereof; and

 

(h) the Guaranty and Suretyship Agreement of Horizon Health Corporation attached to this Agreement as Exhibit B (the “Parent Guaranty”).

 

1.7 Termination of Mountain State Management Agreement . Notwithstanding any provision to the contrary contained in this Agreement, the Parties agree that, as of the Effective Time, that certain Management Agreement dated October 31, 2000 (the “Mountain State Management Agreement”) by and between the Company and Mountain State Behavioral Health Services, LLC (“Mountain State”) shall terminate; provided, however , that all amounts owed by Mountain State to the Company as of the Effective Time under the Mountain State Management Agreement shall remain payable by Mountain State.

 

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1.8 Variable Payments A and B .

 

(a) On or before ninety (90) days after the end of the twelve month period described below (the “First Variable Payment Date”), Purchaser shall make an additional payment to the Shareholders (“Variable Payment A”) pro rata in accordance with the percentage of the total Shares held by each Shareholder in an amount equal to $498,778.00 subject, however, to the following adjustments:

 

(i) In the event that the Contribution to EBITDA for the 12-month period commencing as of the first day of the month after the month in which the Closing occurs is less than $600,000.00 (the “Year 1 Existing Contract EBITDA Target”) then Variable Payment A shall be decreased by six times (6x) the amount that the Contribution to EBITDA for such 12-month period is less than the Year 1 Existing Contract EBITDA Target; or

 

(ii) In the event that the Contribution to EBITDA for such 12-month period is more than the Year 1 Existing Contract EBITDA Target, then, subject to the provisions of subsection 1.8(f) below, Variable Payment A shall be increased by six times (6x) the amount that the actual Contribution to EBITDA for such 12-month period is in excess of the Year 1 Existing Contract EBITDA Target.

 

(b) On or before ninety (90) days after the end of the twelve month period described below (the “Second Variable Payment Date”), Purchaser shall make an additional payment to the Shareholders (“Variable Payment B”) pro rata in accordance with the percentage of the total Shares held by each Shareholder in an amount equal to $335,300.00 subject, however, to the following adjustments:

 

(i) In the event that the Contribution to EBITDA for the second 12-month period commencing after the first twelve month period referenced in Section 1.8(a) above is less than $937,500.00 (the “Year 2 Existing Contract EBITDA Target”) then Variable Payment B shall be decreased by six times (6x) the amount that the actual Contribution to EBITDA for such 12-month period is less than the Year 2 Existing Contract EBITDA Target; or

 

(ii) In the event that the Contribution to EBITDA for such 12-month period is more than the Year 2 Existing Contract EBITDA Target, then, subject to the provisions of subsection 1.8(f) below, Variable Payment B shall be increased by six times (6x) the amount that the actual Contribution to EBITDA for such 12-month period is in excess of the Year 2 Existing Contract EBITDA Target.

 

(c) For the purposes of this Section 1.8, the term “Contribution to EBITDA” shall mean the operating margin earned by the Company on that certain Management Agreement dated November 1, 2003, by and between St. Mary’s Medical Center, Inc. and the Company for the applicable period, all as determined by Purchaser in accordance with generally accepted accounting principles consistently applied (“GAAP”), including the methods and practices as historically applied by the Company prior to the Closing and as are reflected in the unaudited balance sheet of the Company as of April 30, 2005 (“Company Historical GAAP”). As specified in Section 9.4, Purchaser shall maintain its separate corporate existence until the Second Variable Payment Date. The principles and methodologies for determining the Contribution to EBITDA and other terms and conditions relating to the payment of Variable Payment A and Variable Payment B hereunder shall be as specified in Schedule 1.8 .

 

(d) Purchaser shall deliver to the Shareholders its determination of the applicable Contribution to EBITDA with each of Variable Payment A and B. The Shareholders may dispute such determination and have such determination finally resolved in accordance with the procedures provided in Section 1.8(e).

 

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(e) Should the Shareholders disagree with Purchaser’s determination of Contribution to EBITDA, the Shareholders shall notify Purchaser within fifteen (15) days after Purchaser’s delivery of its determination of Contribution to EBITDA and the applicable Variable Payment to the Shareholders. In the event that the Shareholders and Purchaser are not able to agree on the actual Contribution to EBITDA within thirty (30) days after the Shareholders’ delivery of notice of disagreement, the Shareholders and Purchaser shall each have the right to require that such disputed determination be submitted to Arnett & Foster, PLLC, or if Arnett & Foster, PLLC is not available for any reason or does not maintain its independent status, such other independent certified public accounting firm as the Shareholders and Purchaser may then promptly mutually agree upon in writing (the “Accounting Firm”) for computation or verification in accordance with the provisions of this Agreement. The Accounting Firm shall review the matters in dispute and, acting as arbitrators, shall promptly decide the proper amounts of such disputed entries (which decision shall also include a final calculation of Contribution to EBITDA). The submission of the disputed matter to the Accounting Firm shall be the exclusive remedy for resolving disputes relative to the determination of Contribution to EBITDA. The Accounting Firm’s determination shall be binding upon the Shareholders and Purchaser. The Accounting Firm’s fees and expenses shall be borne equally by the Shareholders and Purchaser.

 

(f) Notwithstanding any provision of this Agreement to the contrary, the cumulative total amount of Variable Payment A, Variable Payment B, Variable Payment C and Variable Payment D shall be capped and not exceed Four Million Two Hundred Fifteen Thousand Dollars ($4,215,000) in the aggregate.

 

1.9 Variable Payments C and D .

 

(a) Subject to the satisfaction of the contingency described in Section 1.9(c), on or before the First Variable Payment Date, Purchaser shall make an additional payment to the Shareholders (“Variable Payment C”) pro rata in accordance with the percentage of the total Shares held by each Shareholder in an amount equal to $800,000.00 subject, however, to the following adjustments:

 

(i) In the event that the Contribution to EBITDA for the 12-month period commencing as of the first day of the month after the month of the effective date of the Additional Contract is less than $403,000.00 (the “Year 1 Additional Contract Contribution Target”) then Variable Payment C shall be decreased by six times (6x) the amount that the actual Contribution to EBITDA for such 12-month period is less than the Year 1 Additional Contract Contribution Target; or

 

(ii) In the event that the Contribution to EBITDA for such 12-month period is more than the Year 1 Additional Contract Contribution Target, then, subject to the provisions of subsection 1.8(f) above, Variable Payment C shall be increased by six times (6x) the amount that the actual Contribution to EBITDA for such 12-month period is in excess of the Year 1 Additional Contract Contribution Target.

 

(b) Subject to the satisfaction of the contingency described in Section 1.9(c), on or before the Second Variable Payment Date, Purchaser shall make an additional payment to the Shareholders (“Variable Payment D”) pro rata in accordance with the percentage of the total

 

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Shares held by each Shareholder in an amount equal to $800,000.00 subject, however, to the following adjustments:

 

(i) In the event that the Contribution to EBITDA for the 12-month period commencing after the first 12-month period referenced in Section 1.9(a) above is less than $390,000.00 (the “Year 2 Additional Contract Contribution Target”) then Variable Payment D shall be decreased by six times (6x) the amount that the actual Contribution to EBITDA for such 12-month period is less than the Year 2 Additional Contract Contribution Target; or

 

(ii) In the event that the Contribution to EBITDA for such second 12-month period is more than the Year 2 Additional Contract Contribution Target, then, subject to the provisions of subsection 1.8(f) above, Variable Payment D shall be increased by six times (6x) the amount that the actual Contribution to EBITDA for such 12-month period is in excess of the Year 2 Additional Contract Contribution Target.

 

(c) Neither Variable Payment C nor Variable Payment D will be due or be paid by Purchaser to the Shareholders unless the Company shall have executed and commenced services under either the Camden Clark Memorial Hospital Management Agreement or some other management agreement of similar form and structure and having a term of not less than five (5) years (the “Additional Contract”) on or prior to March 31, 2006, in a form reasonable and acceptable to Purchaser. No Variable Payment C or Variable Payment D shall be due if the Additional Contract is not signed and commenced on or before March 31, 2006.

 

(d) For the purposes of this Section 1.9, the term “Contribution to EBITDA” shall mean the operating margin earned by the Company on the Additional Contract for the applicable period, all as determined by Purchaser in accordance with Company Historical GAAP. The principles and methodologies for determining the Contribution to EBITDA and other terms and conditions relating to the payment of Variable Payments hereunder shall be as specified in Schedule 1.8 .

 

(e) Purchaser shall deliver to the Shareholders its determination of the applicable Contribution to EBITDA with each Variable Payment. The Shareholders may dispute such determination and have such determination finally resolved in the same manner and within the same time periods as are applicable under Section 1.8(e).

 

1.10 Net Assets Settlement .

 

(a) As used herein, the term “Net Assets,” as determined in accordance with Company Historical GAAP, shall mean the current assets of the Company, less (i) the outstanding liabilities of the Company (including the amount of accrued paid time off liability for the employees listed in Schedule 2.5(a) as described below), and (ii) 16% of the amount of accrued ESL of all employees of the Company. Except as set forth below, in the event an accounting principle, including the methods and practices as historically applied by the Company is not in accordance with GAAP, it shall not constitute Company Historical GAAP for any purpose under this Agreement and shall not be followed in the determination of Net Assets under this Section 1.10 or the determination of EBITDA of the Company under Sections 1.8 or 1.9 hereof. Notwithstanding the provisions set forth above, the Parties understand and agree that the Company’s historical practice of not recording accrued employee paid time off liability,

 

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including the accrued paid time off liability listed in Schedule 2.5(a) relating to certain of the Company’s employees, is not in accordance with GAAP, and that such accrued paid time off liability shall nevertheless be taken into account for all purposes under this Agreement, including in connection with the determination of the Net Assets of the Company under this Section 1.10.

 

(b) At least ten (10) business days prior to the Closing, the Shareholders shall in good faith deliver to Purchaser a reasonable estimate of Net Assets as of the end of the most recently ended calendar month prior to the Closing Date for which financial statements are available (“Estimated Net Assets”) and containing reasonable detail and supporting documents showing the derivation of such estimate. The “Net Assets Payment” shall equal the difference between the Estimated Net Assets and $0.00. If Estimated Net Assets exceeds $0.00, the Net Assets Payment shall be added to the Closing Purchase Price Payment. If Estimated Net Assets is less than $0.00, the Closing Purchase Price Payment shall be reduced by the amount of the Net Assets Payment. Within ninety (90) days after the Closing, Purchaser shall deliver to the Shareholders its determination of the Net Assets as of the Effective Time. Each Party shall have full access to the financial books and records pertaining to the Company to confirm or audit Net Assets computations. Should the Shareholders disagree with Purchaser’s determination of Net Assets, the Shareholders shall notify Purchaser in writing within fifteen (15) days after Purchaser’s delivery of its determination of Net Assets and state the basis for their disagreement. If the Shareholders and Purchaser fail to agree within thirty (30) days after the Shareholders’ delivery of notice of disagreement on the amount of Net Assets, such disagreement shall be resolved in accordance with the procedures set forth in Section 1.10(c), which shall be the sole and exclusive remedy for resolving disputes relative to the determination of Net Assets. The Purchase Price shall be increased or decreased based on the difference between the actual Net Assets as of the Effective Time and the Estimated Net Assets calculated at the Closing and, within five (5) business days after determination thereof, any excess of actual Net Assets over Estimated Net Assets shall be paid in cash to the Shareholders, and any deficiency in actual Net Assets versus Estimated Net Assets shall be paid in cash to Purchaser pursuant to the Escrow Agreement, in either case without interest on such amount.

 

(c) Dispute of Adjustments . In the event that the Shareholders and Purchaser are not able to agree on the actual Net Assets within thirty (30) days after the Shareholders’ delivery of notice of disagreement in accordance with Section 1.10(b) hereof, the Shareholders and Purchaser shall each have the right to require that such disputed determination be submitted to the Accounting Firm for computation or verification in accordance with the provisions of this Agreement. The Accounting Firm shall review the matters in dispute and, acting as arbitrators, shall promptly decide the proper amounts of such disputed entries (which decision shall also include a final calculation of Net Assets). The submission of the disputed matter to the Accounting Firm shall be the exclusive remedy for resolving disputes relative to the determination of Net Assets. The Accounting Firm’s determination shall be binding upon the Shareholders and Purchaser. The Accounting Firm’s fees and expenses shall be borne equally by the Shareholders and Purchaser.

 

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ARTICLE 2

REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS

 

Except as otherwise indicated on the applicable Disclosure Schedules expressly related to the particular representation or warranty stated below in this Article 2, the Shareholders hereby jointly and severally represent and warrant to Purchaser as to the following matters as of the Execution Date. Except as otherwise provided herein, the Shareholders shall be deemed to remake all of the following representations and warranties jointly and severally as of the Closing Date and the Effective Time:

 

2.1 Authority . The Company has full corporate power and authority to enter into this Agreement and all documents required to be delivered hereunder and full corporate power and authority to carry out and perform the transactions contemplated herein.

 

2.2 Authorization/Execution . All corporate and other actions required to be taken by the Shareholders and the Company to authorize the execution, delivery and performance of this Agreement, all documents executed by the Shareholders and the Company which are necessary to give effect to this Agreement, and all transactions contemplated hereby have been duly and properly taken or obtained by the Shareholders and the Company. No other corporate or other action on the part of the Shareholders or the Company is necessary to authorize the execution, delivery and performance of this Agreement, all documents necessary to give effect to this Agreement and all transactions contemplated herein. This Agreement and all documents delivered hereunder have been duly and validly executed and delivered by the Shareholders and the Company and, assuming due and valid execution by, and enforceability against, Purchaser, this Agreement and all documents delivered hereunder constitute valid and binding obligations of the Shareholders and the Company enforceable in accordance with their respective terms subject to (a) applicable bankruptcy, reorganization, insolvency, moratorium and other laws affecting creditors’ rights generally from time to time in effect and (b) limitations on the enforcement of equitable remedies.

 

2.3 Organization and Good Standing; No Subsidiaries; No Conflicts .

 

(a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of West Virginia. The Company has full power and authority to own, operate and lease its properties and to carry on its business as now conducted.

 

(b) The Company has no subsidiaries, whether direct or indirect. The Company has no equity interest or investment in, and does not have any other right or obligation to purchase any equity interest or other investment in, and is not a partner of or joint venturer with, any other person or entity.

 

(c) Except as provided in Schedule 2.3(c) , the execution and delivery of this Agreement and the performance of the transactions contemplated by this Agreement and all other instruments, agreements, and certificates referenced herein to which the Shareholders and the Company are or will be a Party do not (i) violate any decree or judgment of any court or governmental authority which is applicable to or binding upon the Shareholders or the Company; (ii) violate any law, rule or regulation applicable to the Shareholders or the Company; (iii) violate or conflict with, or result in a breach of, or constitute a default (or an event which,

 

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with or without notice or lapse of time or both, would constitute a default) under, or permit cancellation of, or result in the creation of any encumbrance upon any of the assets of the Company or the Shares under, any Material Contract, lease, sales order, purchase order, indenture, mortgage, note, bond or license to which the Company is a Party, or by which the Company is bound; (iv) permit the acceleration of the maturity of any indebtedness of the Company; or (v) violate or conflict with any provision of the Articles of Incorporation or Bylaws of the Company.

 

2.4 Title to Shares . The Shareholders are the unconditional sole legal, beneficial, record and equitable owner of the Shares, free and clear of any and all Encumbrances. The Shareholders have not granted and are not a party to any agreement granting preemptive rights, rights of first refusal or any similar or comparable rights with respect to the Shares. At the Closing, the Shareholders will convey to Purchaser good and valid title to the Shares, free and clear of any and all Encumbrances.

 

2.5 Financial Statements; Changes .

 

(a) The Shareholders have delivered to Purchaser the unaudited balance sheets for the Company at December 31, 2004, 2003 and 2002, and the related statements of operations for the periods then ended. All such financial statements have been prepared in conformity with Company Historical GAAP applied on a consistent basis throughout such periods. Such statements of operations present fairly in all material respects the results of operations of the Company for the respective periods covered, and the balance sheets present fairly in all material respects the financial condition of the Company as of their respective dates. Except as set forth in Schedule 2.5(a) , since December 31, 2004, there has been no change in any of the significant accounting policies, practices or procedures of the Company.

 

(b) The Shareholders have delivered to Purchaser an unaudited balance sheet for the Company at April 30, 2005 (the “Interim Balance Sheet Date”) and the related statement of operations for the four-month period then ended. Such interim financial statements have been prepared in conformity with Company Historical GAAP. The interim statement of operations presents fairly in all material respects the results of the operations of the Company for the period covered, and the interim balance sheet presents fairly in all material respects the financial condition of the Company at the Interim Balance Sheet Date. Such interim financial statements reflect all adjustments necessary for a fair presentation of the financial information contained therein other than normal year-end adjustments which are not material in amount in the aggregate. At the Interim Balance Sheet Date, the Company had no material liability (actual, contingent or accrued) that, in accordance with Company Historical GAAP applied on a consistent basis, should have been shown or reflected on the interim balance sheet but was not.

 

(c) Except as set forth in Schedule 2.5 , since the Interim Balance Sheet Date, whether or not in the ordinary course of business, there has not been, occurred or arisen:

 

(i) any change in or event affecting the Company or the Shareholders, that has had or would reasonably be expected to have a Material Adverse Effect; or

 

(ii) any strike or other labor dispute; or

 

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(iii) any casualty, loss, damage or destruction (whether or not covered by insurance) of any property of the Company that is material or that has involved or may involve a material loss to the Company in excess of applicable insurance coverage.

 

2.6 Tax and Other Returns and Reports . Except as set forth in Schedule 2.6 :

 

(a) For purposes of this Agreement, “Tax” or “Taxes” shall be defined as set forth below in Section 2.6(c) and shall include (i) any obligations under any agreements or arrangements with any other Person with respect to such amounts and including any liability for Taxes of any predecessor or previously owned entity and (ii) any liability for any Taxes as a result of being a member of an affiliated, consolidated, combined or unitary group. For purposes of this Section 2.6 and Schedule 2.6 , with respect to matters pertaining to this Section 2.6, the terms “Company,” “Subsidiary” and “Subsidiaries” shall include all entities currently or previously owned, directly or indirectly, by the Company.

 

(b) Tax Returns and Audits .

 

(i) The Company has timely filed (taking into account valid extensions of the time for filing) all Tax returns required to have been filed and all such Tax returns were true, correct and complete in all material respects. All Taxes owed by the Company (whether or not shown on any Tax return) (A) for all tax years of periods that ended on or before December 31, 2004 will have been timely paid in full on or prior to the Closing Date and (B) for all tax years or periods that began prior to, on or after December 31, 2004 and end on or before the Closing Date and, with respect to any tax year or period beginning prior to, on or after December 31, 2004 and ending after the Closing Date, the portion of such taxable year or period ending on and including the Closing Date if due and payable prior to the Closing Date, will have been timely paid in full on or prior to the Closing Date, or in the case of either (A) or (B) above, will have been accrued and adequately disclosed and fully provided for on the books and records of the Company in accordance with GAAP. The Company is not currently the beneficiary of any extension of time within which to file any Tax return. No claim has ever been made by an authority in a jurisdiction where the Company does not file Tax returns that it is or may be subject to taxation by that jurisdiction.

 

(ii) The Company has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, member, or other third party.

 

(iii) The Company and the Shareholders have made available (or will make available through the date of Closing) to Purchaser (i) correct and complete copies of all Tax returns of the Company and (ii) any examination reports, statements of deficiencies and assessments by any governmental authority against or agreed to by the Company since the Company’s formation. The Company does not expect any authority to assess additional Taxes for any period for which Tax returns have been filed. There is no dispute or claim concerning any Tax liability of the Company claimed, threatened or otherwise raised by any authority. The Company has not waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency.

 

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(iv) All material liabilities of the Company for any unpaid Taxes (whether or not shown to be due on any Tax return) have either (A) been accrued for or reserved on the Company financial statements in accordance with GAAP or (B) with respect to material unpaid Taxes that may have accrued since the Interim Balance Sheet Date in connection with the operation of the business of the Company have been recorded on the books of the Company in the ordinary course.

 

(v) There are no liens or security interests on any of the assets of the Company or the Shares that arose in connection with any failure (or alleged failure) to pay any Tax.

 

(vi) The Company has not filed any consent agreement under Section 341(f) of the Internal Revenue Code of 1986 (the “Code”) or agreed to have Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as defined in Section 341(f)(2) of the Code) owned by the Company. No property owned by the Company is “tax-exempt use property” within the meaning of Section 168(h) of the Code. The Company is not a party to any lease made pursuant to former Section 168(f)(8) of the Internal Revenue Code of 1954.

 

(vii) The Company is not under any obligation to make a payment that will not be deductible because of the application of Sections 280G, 404, 162(m) and/or 4999 of the Code. The Company has disclosed on its Tax returns all positions taken therein that could give rise to a substantial understatement (i) of federal income tax under Code Section 6662 or (ii) of any Tax under a similar provision of state, local or foreign Tax law. The Company has not engaged in any transaction which would be treated as a “reportable transaction” within the meaning of Treasury Regulations Section 1.6011-4 or otherwise been involved in a transaction which would require it to disclose a “reportable transaction.” The Company has not been a member of an affiliated group filing a consolidated federal income Tax return and does not have any liability for the Taxes of any Person (other than the Company) under Treasury Regulations Section 1.1502-6, or any similar provision of state, local or foreign law, as a transferee or successor, by contract, or otherwise. The Company has not been a party to any Tax allocation or sharing agreement. Neither the Company nor its Subsidiaries is currently or has been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code.

 

(viii) The Company is and has been in full compliance with all terms and conditions of any Tax exemptions, Tax holidays or other Tax reduction agreements. The consummation of the transactions contemplated herein will not have any material adverse effect on the continued validity and effectiveness of any such Tax exemption, Tax holiday or other Tax reduction agreement or order.

 

(ix) Neither the Company nor any of its Subsidiaries has constituted either a “distribution corporation” or a “controlled corporation” in a distribution of stock qualifying for tax-free treatment under Code Section 355 (a) in the two year prior to the date of this Agreement or (b) in a distribution which could otherwise constitute part of a “plan” or “series of related transactions” (within the meaning of Code Section 355(c)).

 

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(x) The Company has not, with respect to any open taxable period, applied for and been granted permission to adopt a change in its method of accounting requiring adjustments under Section 481 of the Code or comparable state or foreign law.

 

(xi) The Company is not a partner in any entity classified as a partnership for federal income tax purposes.

 

(xii) The Company has not made an election under Treasury Regulations Section 301.7701-3 with respect to any entity.

 

(xiii) The Company will not be required to include any item of income in, or exclude any item of deduction from, taxable income for any taxable period (or portion thereof) ending prior to, on, or after the Closing Date as a result of any deferred intercompany gain or any excess loss account described in Treasury Regulations under Code Section 1502 (or any corresponding or similar provision of federal state, local or foreign income Tax law).

 

(xiv) During the time it has been in existence, the Company has been a validly electing S corporation within the meaning of Sections 1361 and 1362 of the Code. Schedule 2.6 identifies each Subsidiary of the Company that is a “qualified subchapter S subsidiary” within the meaning of Section 1361(b)(3)(B) of the Code. Each Subsidiary so identified has been a qualified subchapter S subsidiary at all times from the date shown on Schedule 2.6 through the Closing Date.

 

(c) “Tax” and “Taxes” means any federal, state, local or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental (including taxes under Code Section 59A), customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated or other tax of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not.

 

(d) The Company shall not be liable for any Tax under Code Section 1374 in connection with the deemed sale of the Company’s assets (including the assets of any qualified subchapter S subsidiary) caused by the Code Section 338(h)(10) election. Neither the Company nor any qualified subchapter S subsidiary of the Company has, in the past 10 years, (A) acquired assets from another corporation in a transaction in which the Company’s tax basis for the acquired assets was determined, in whole or in part, by reference to the Tax basis of the acquired assets (or any other property) in the hands of the transferor or (B) acquired the stock of any corporation that is a qualified subchapter S subsidiary.

 

2.7 Contracts . Schedule 2.7 lists each contract or agreement to which the Company is a party or to which any of its properties are subject or by which any thereof is bound. Unless otherwise so noted in Schedule 2.7 , each such Contract was entered into in the ordinary course of business. As used herein, “Contract” means any contract that (a) after the Interim Balance Sheet Date obligates the Company to pay any amount, requires the Company to perform any services or otherwise obligates the Company in any manner, (b) has an unexpired term as of the Interim Balance Sheet Date in excess of twelve (12) months that is not terminable upon ninety (90) days or less notice by the Company at any time during the term, without penalty, (c) contains a

 

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covenant not to compete or otherwise significantly restricts business activities, (d) limits the ability of the Company to conduct its business, including as to manner or place, (e) grants a power of attorney, agency or similar authority to another person or entity, (f) contains a right of first refusal, (g) constitutes a collective bargaining agreement including any collective bargaining agreement with physicians or any other referral source, (h) constitutes an employment or severance agreement with any director, officer or employee of the Company or the Shareholders, (i) represents a contract upon which the business of the Company is substantially dependent or a contract which is otherwise material to the business of the Company, (j) represents a contract with a physician or an immediate family member of a physician (as that term is defined in 42 C.F.R. § 411.351) or any other referral source, including any contract with a pharmacy or any other supplier of medical products, (k) represents a contract with an entity in which a referring physician (as that term is defined in 42 U.S.C. § 1395m(h)(7)) or a referring physician’s immediate family member has an ownership or investment interest, (l) represents a third party payor, managed care or preferred provider organization contract, or (m) was not made in the ordinary course of business. True, correct and complete copies of the Contracts and any other contracts of the Company, including all amendments and supplements, have been made available to Purchaser. Each Contract is valid and subsisting; except as set forth in Schedule 2.7 , the Company has duly performed in all material respects all its obligations thereunder to the extent that such obligations to perform have accrued; and, except as set forth in Schedule 2.7 , no breach or default, alleged breach or default, or event which would (with the passage of time, notice or both) constitute a material breach or default thereunder by the Company (or any other party or obligor with respect thereto), has occurred or as a result of the execution of this Agreement or its performance will occur.

 

2.8 Real and Personal Property; Title to Property; Leases . The Company does not own or lease any real property. The Company does not lease any personal property. All assets of the Company are listed in Schedule 2.8 .

 

2.9 Capitalization of the Company . The authorized capital stock of the Company consists of One Thousand (1,000) shares of Common Stock, $1.00 par value, of which One Thousand (1,000) shares are validly issued and outstanding. All such outstanding shares of capital stock of the Company are fully paid and nonassessable. All of the issued and outstanding shares of capital stock of the Company are owned of record and beneficially by the Shareholders. As of the Execution Date and immediately prior to Closing, Scott C. Stamm owns 667 shares of the Company’s Common Stock and Patrick D. Burrows owns 333 shares of the Company’s Common Stock. The Company has provided to Purchaser a correct and complete copy of the stock registry and stock transfer records of the Company listing all Shareholders of the Company and the outstanding share certificates and total number of shares issued to each stockholder of the Company since its inception. The Company has no other capital stock authorized for issuance and has no treasury shares. The Company has not purchased any shares of its capital stock from Shareholders within the three (3) year period prior to the Execution Date. There are no outstanding options, warrants, convertible instruments, or other rights, agreements, or commitments to issue or acquire any shares of common stock of the Company or any other security constituting, or convertible or exchangeable into, capital stock of the Company. The Company has not granted and is not a party to any agreement granting preemptive rights, rights of first refusal, or registration rights with respect to its outstanding or authorized capital stock or any capital stock of the Company to be issued in the future. The Company is not bound by any

 

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exclusive agency or indemnity agreement applicable to the issuance of shares of its capital stock after the Execution Date or the Closing Date.

 

2.10 Intangible Property . Schedule 2.10 lists any and all marks and other material items of intangible property in which the Company has an interest and the nature of such interest (the “Intangible Property”). Except as shown in Schedule 2.10 , the Intangible Property includes all permits or other rights with respect to any of the foregoing. The Company has complete rights to use or ownership of all Intangible Property required for use in connection with the business of the Company. Except as disclosed in Schedule 2.10 , the Company does not use any Intangible Property by consent of any other person and is not required to and does not make any payments to others with respect thereto. Except as shown in Schedule 2.10 , and except for any lien for Taxes not yet due and payable (collectively, “Permitted Encumbrances”), the Intangible Property of the Company is fully assignable free and clear of any encumbrances. The Company has in all material respects performed all obligations required to be performed by, and the Company is not in default in any material respect under, any contract relating to any of the foregoing. The Company has not received any notice to the effect (or otherwise has Knowledge) that such intangible property or any use thereof by the Company conflicts with or infringes (or allegedly conflicts with or infringes upon) the rights of any Person.

 

2.11 Legal Proceedings . Except as set forth in Schedule 2.11 , there is no order or action pending, or, to the Knowledge of the Shareholders threatened, against or affecting the Company, or any of its respective properties or assets that involves a claim of aggregate liability in excess of $25,000 against the Company. Schedule 2.11 lists each order and each action that involves claim of aggregate liability in excess of $25,000 against, or that enjoins or seeks to enjoin or excludes or seeks to exclude the conduct of any activity by, the Company.

 

2.12 Accounting Records; Internal Controls .

 

(a) Accounting Records . The Company has records that accurately and validly reflect its respective transactions, and accounting controls sufficient to insure that such transactions are (i) executed in accordance with management’s general or specific authorization and (ii) recorded in conformity with Company Historical GAAP so as to maintain accountability for assets.

 

(b) Data Processing; Access . Such records, to the extent they contain important information that is not easily and readily available elsewhere, have been duplicated, and such duplicates are stored safely and securely pursuant to procedures and techniques utilized by companies of comparable size in similar lines of business.

 

2.13 Insurance . Schedule 2.13 lists all insurance policies and bonds that are maintained by the Company and indicates the type of insurance, policy number, term, identity of insurer, premiums and coverage amounts for the previous five (5) years and b