<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 10, 1998
REGISTRATION NO. 333-44175
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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HEALTHCOR HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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<TABLE>
<C> <C> <C>
DELAWARE 75-2294072
(State or Other Jurisdiction 8090 (I.R.S. Employer
of (Primary Standard Industrial Identification No.)
Incorporation or Organization) Classification Code Number)
</TABLE>
8150 NORTH CENTRAL EXPRESSWAY, SUITE M-2000
DALLAS, TEXAS 75206
(214) 692-4663
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
S. WAYNE BAZZLE
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
8150 NORTH CENTRAL EXPRESSWAY, SUITE M-2000
DALLAS, TEXAS 75206
(214) 692-4663
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
---------------------
Copies to:
J. KENNETH MENGES, JR., P.C.
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
1700 PACIFIC AVENUE, SUITE 4100
DALLAS, TEXAS 75201-4675
(214) 969-2800
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the registration statement becomes effective.
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If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
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<PAGE> 2
PROSPECTUS
HEALTHCOR HOLDINGS, INC.
OFFER TO EXCHANGE
11% SENIOR NOTES DUE 2004 [HEALTHCOR LOGO]
($80,000,000 PRINCIPAL AMOUNT OUTSTANDING)
FOR
11% SENIOR NOTES DUE 2004,
($80,000,000 PRINCIPAL AMOUNT)
---------------------
The Exchange Offer will expire at 5:00 p.m., E.S.T., on March 25, 1998,
unless extended.
HealthCor Holdings, Inc., a Delaware corporation (the "Company"), hereby
offers (the "Exchange Offer"), upon the terms and subject to the conditions set
forth in this Prospectus and the accompanying Letter of Transmittal (the "Letter
of Transmittal"), to exchange up to an aggregate principal amount of $80,000,000
of its outstanding 11% Senior Notes due 2004 (the "Outstanding Notes") for an
equal principal amount of its 11% Senior Notes due 2004 in integral multiples of
$1,000 (the "Exchange Notes" and, together with the Outstanding Notes, the
"Notes"). The Exchange Notes will be general unsecured obligations of the
Company and are substantially identical (including principal amount, interest
rate, maturity and redemption rights) to the Outstanding Notes for which they
may be exchanged pursuant to this Exchange Offer, except for certain transfer
restrictions and registration rights relating to the Outstanding Notes. The
Outstanding Notes have been, and the Exchange Notes will be, issued under an
Indenture dated as of December 1, 1997, as amended by the First Supplemental
Indenture dated as of December 2, 1997 (the "Indenture"), among the Company,
certain of its subsidiaries and Norwest Bank Minnesota, National Association, as
trustee (the "Trustee"). See "Description of the Exchange Notes." There will be
no proceeds to the Company from the Exchange Offer; however, pursuant to a
Registration Rights Agreement dated as of December 1, 1997 (the "Registration
Rights Agreement") among the Company and the Initial Purchasers (as defined) of
the Outstanding Notes, the Company will bear certain offering expenses.
The Company will accept for exchange any and all validly tendered
Outstanding Notes on or prior to 5:00 p.m., E.S.T., on March 25, 1998, unless
extended (the "Expiration Date"). Tenders of Outstanding Notes may be withdrawn
at any time prior to 5:00 p.m., E.S.T., on the Expiration Date; otherwise such
tenders are irrevocable. Norwest Bank Minnesota, National Association is acting
as Exchange Agent (the "Exchange Agent") in connection with the Exchange Offer.
The minimum period of time that the Exchange Offer will remain open is 30
business days from the date the Registration Statement is declared effective.
The Exchange Offer is not conditioned upon any minimum principal amount of
Outstanding Notes being tendered for exchange, but is otherwise subject to
certain customary conditions.
(Cover text continued on next page)
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR A DISCUSSION OF CERTAIN RISKS
TO BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER AND IN EVALUATING AN
INVESTMENT IN THE EXCHANGE NOTES.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COM-
MISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
The date of this Prospectus is February 10, 1998
<PAGE> 3
(Continued from Cover Page)
Interest on the Exchange Notes will accrue at a rate equal to 11% per annum
and will be payable semiannually in arrears on June 1 and December 1 of each
year commencing June 1, 1998. Interest on the Exchange Notes will accrue from
the most recent date to which interest has been paid on the Outstanding Notes
or, if no interest has been paid, from the date of original issuance of the
Outstanding Notes.
The Outstanding Notes in an aggregate principal amount of $80,000,000 were
sold by the Company as of December 1, 1997 (the "Initial Offering"), to Bear,
Stearns & Co. Inc. and Chase Securities Inc. (the "Initial Purchasers") pursuant
to a Purchase Agreement among the parties dated November 24, 1997 (the "Purchase
Agreement") in a transaction not registered under the Securities Act of 1933, as
amended (the "Securities Act"), in reliance upon the exemption provided in
Section 4(2) of the Securities Act. The Initial Purchasers subsequently placed
the Outstanding Notes with qualified institutional buyers in reliance upon Rule
144A under the Securities Act. Accordingly, the Outstanding Notes may not be
re-offered, resold or otherwise transferred in the United States unless so
registered or unless an applicable exemption from the registration requirements
of the Securities Act is available. The Exchange Notes are being offered
hereunder in order to satisfy the obligations of the Company under the
Registration Rights Agreement. See "The Exchange Offer."
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties (including Exxon Capital Holdings Corporation (available April 13,
1989), Morgan Stanley & Co., Inc. (available June 5, 1991), Mary Kay Cosmetics,
Inc. (available June 5, 1991) and Sherman & Sterling (available July 2, 1993)),
the Company believes that Exchange Notes issued pursuant to this Exchange Offer
may be offered for resale, resold and otherwise transferred by a holder who is
not an affiliate of the Company without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that the holder
is acquiring the Exchange Notes in its ordinary course of business and is not
participating in and has no arrangement or understanding with any person to
participate in the distribution (within the meaning of the Securities Act) of
the Exchange Notes. Persons wishing to exchange Outstanding Notes in the
Exchange Offer must represent to the Company that such conditions have been met.
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer (a "Participating Broker-Dealer") must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. The Letter of Transmittal states that by so acknowledging
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Outstanding Notes where such Outstanding Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 180 days after the
Expiration Date, it will make this Prospectus available to any Participating
Broker-Dealer for use in connection with any such resale. In addition, until 25
days after the Expiration Date, all dealers effecting transactions in the
Exchange Notes may be required to deliver a prospectus. See "Plan of
Distribution."
The Company does not intend to list the Exchange Notes on any national
securities exchange or to seek the admission thereof to trading on the Nasdaq
Stock Market, Inc. National Market. The Outstanding Notes are currently eligible
for trading in the Private Offering, Resales and Trading through Automated
Linkages ("PORTAL") Market of the Nasdaq Stock Market, Inc. Following
commencement of the Exchange Offer, the Outstanding Notes may continue to be
traded in the PORTAL Market. Following consummation of the Exchange Offer, the
Exchange Notes will not be eligible for trading in the PORTAL Market. The
Initial Purchasers are not obligated to make a market in the Exchange Notes and
any market-making may be discontinued at any time without notice. Accordingly,
no assurance can be given that an active public or other market will develop for
the Exchange Notes or as to the liquidity of or the trading market for the
Exchange Notes.
Any Outstanding Notes not tendered and accepted in the Exchange Offer will
remain outstanding. To the extent that any Outstanding Notes of other holders
are tendered and accepted in the Exchange Offer, a holder's ability to sell
untendered Outstanding Notes could be adversely affected. Following consummation
of
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<PAGE> 4
(Continued from Cover Page)
the Exchange Offer, the holders of untendered Outstanding Notes will continue to
be subject to the existing restrictions upon transfer thereof.
The Company expects that the Exchange Notes issued pursuant to this
Exchange Offer initially will be issued in the form of a Global Exchange Note
(as defined herein), which will be deposited with, or on behalf of, The
Depository Trust Company (the "Depositary") and registered in the name of Cede &
Co., its nominee. Beneficial interests in the Global Exchange Note representing
the Exchange Notes will be shown on, and transfers thereof to qualified
institutional buyers will be effected through, records maintained by the
Depositary and its participants. After the initial issuance of the Global
Exchange Note, Exchange Notes in certificated form will be issued in exchange
for the Global Exchange Note on the terms set forth in the Indenture. See
"Description of the Exchange Notes -- Book-Entry, Delivery and Form."
---------------------
No dealer, salesperson or other person has been authorized to give
information or to make any representations not contained in this Prospectus,
and, if given or made, such information or representations must not be relied
upon as having been authorized by the Company. This Prospectus does not
constitute an offer to sell or the solicitation of an offer to buy any security
other than the Exchange Notes offered hereby, nor does it constitute an offer to
sell or the solicitation of an offer to buy any of the Exchange Notes to any
person in any jurisdiction in which it is unlawful to make such an offer or
solicitation to such person. Neither the delivery of this Prospectus nor any
sale made hereunder shall under any circumstances create any implication that
the information contained herein is correct as of any date subsequent to the
date hereof.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549; the Chicago Regional Office, Suite 1400, 500 West Madison Street,
Citicorp Center, Chicago, Illinois 60661; and the New York Regional Office,
Suite 1300, 7 World Trade Center, New York, New York 10048. Copies of such
material also can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission maintains a Web site on the Internet that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of this
site on the Internet is http://www.sec.gov. The Company's Common Stock is traded
on the Nasdaq National Market. The Company's reports, proxy statements and other
information concerning the Company can be inspected and copied at the offices of
the Nasdaq National Market, 9513 Key West Avenue, Rockville, Maryland 20850.
The Company will furnish periodic reports to the Trustee, which will make
them available upon request to the holders of the Notes.
In addition, the Company has agreed that for so long as any of the
Outstanding Notes are outstanding and are "restricted securities" within the
meaning of Rule 144(a)(3) under the Securities Act, they will make available to
any prospective purchaser of the Outstanding Notes or beneficial owner of the
Outstanding Notes in connection with any sale thereof the information required
by Rule 144A(d)(4)(i) under the Securities Act.
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<PAGE> 5
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. ALL
STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS
PROSPECTUS, INCLUDING WITHOUT LIMITATION CERTAIN STATEMENTS UNDER "PROSPECTUS
SUMMARY," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND "BUSINESS," MAY CONSTITUTE FORWARD-LOOKING
STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN
SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CAN GIVE NO ASSURANCE THAT
SUCH EXPECTATIONS WILL PROVE TO BE CORRECT. IMPORTANT FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S EXPECTATIONS ("CAUTIONARY
STATEMENTS") ARE DISCLOSED IN THIS PROSPECTUS, INCLUDING WITHOUT LIMITATION IN
CONJUNCTION WITH THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS AND
UNDER "RISK FACTORS." ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS
ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY
QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS.
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PROSPECTUS SUMMARY
The Prospectus Summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
included elsewhere in this Prospectus. Unless the context otherwise requires,
and except as used in " -- The Exchange Offer," " -- Summary of Terms of the
Exchange Notes" and "Description of the Exchange Notes," all references in this
Prospectus to the "Company" and "HealthCor" include HealthCor Holdings, Inc.,
its predecessor and its operating subsidiaries.
THE COMPANY
HealthCor is one of the largest fully integrated providers of comprehensive
home health care services based in the southwestern and central United States,
providing home nursing, respiratory therapy/home medical equipment and infusion
therapy. The Company has successfully implemented a regional growth strategy,
expanding from 12 offices in three states at its inception in 1984 to 96 offices
in nine states at September 30, 1997. For the twelve months ended September 30,
1997, the Company had net revenues of $137.9 million and Adjusted EBITDA (as
defined) of $19.2 million.
The Company has diversified its business mix from 98% home nursing in 1990
to 55% home nursing for the nine months ended September 30, 1997. This shift
reflects the addition and growth of higher margin respiratory therapy/home
medical equipment and infusion therapy. Although higher margin respiratory
therapy/home medical equipment and infusion therapy accounted for approximately
41% of the Company's net revenues for the nine months ended September 30, 1997,
these businesses generated approximately 79% of Adjusted EBITDA. The Company
expects that it will continue to shift its business mix towards respiratory
therapy/home medical equipment and infusion therapy. Home nursing, however, will
continue to represent an important part of HealthCor's business mix because
managed care organizations and other referral sources often will make
arrangements for other home health care services after first referring home
nursing cases to a provider.
The Company believes its ability to offer a full range of integrated home
nursing, respiratory therapy/ home medical equipment and infusion therapy in
almost all of its markets creates an important competitive advantage in
obtaining patient referrals. Managed care organizations and other referral
sources generally favor home health care providers that offer integrated health
care services, because "one-stop shop" providers like the Company provide
superior coordination of care and reduce the administrative and service quality
complications of contracting with multiple providers. In the last nine months,
the Company has entered into relationships with several managed care
organizations with approximately 1.5 million total enrollees. As an integrated
provider, the Company rarely engages subcontractors, which the Company believes
permits it to exercise greater control over the quality of service and to
improve patient care.
The Company is also a leader in developing and implementing financial and
clinical management information systems for providing home health care. Upon the
complete implementation of its proprietary medical information system network
("Medisyn(TM)") expected to occur in 1998, the Company believes that it will be
able to achieve additional cost savings, increase productivity and capture
outcomes data that will provide significant advantages in obtaining managed care
business and adapting to regulatory and reimbursement changes.
Home health care is among the fastest growing segments of the health care
industry with estimated annual expenditures of $36.1 billion in 1995, up from an
estimated $12.9 billion in 1990, representing a compounded annual growth rate of
approximately 23%. The underlying growth factors in the home health care
industry include: (i) the cost effective nature of home health care; (ii) an
increasing number of patients due to growth in the elderly population; (iii)
technological advances that expand the range of home health care procedures; and
(iv) patient preference for treatment in the home. The home health care industry
is highly fragmented with more than 18,500 providers delivering home health care
services in the United States, most of which use unsophisticated information
technology systems. As a fully integrated provider and a leader in developing
and implementing information technology systems, the Company believes that it is
well positioned to capitalize on future growth and consolidation in the
industry.
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BUSINESS STRATEGY
HealthCor's business objective is to enhance its position as one of the
leading providers of comprehensive home health care services in the southwestern
and central United States. Elements of the Company's strategy include:
Provide One-Stop Shop Home Health Care Services. HealthCor provides payors,
physicians and patients with fully integrated one-stop shop home health care
services in almost all of its markets. The integration of comprehensive home
health care services enhances the Company's appeal to managed care organizations
and other referral sources that increasingly prefer single-source providers of
home health care. The Company believes that full integration of services enables
it to provide highly coordinated patient care and to increase revenues and
profitability by providing multiple services to an individual patient referral.
Focus on Managed Care Relationships. The Company has intensified its
managed care marketing efforts in order to take advantage of the increased
market penetration of managed care organizations in the home health care market
and the federal government's increasing preference for Medicare beneficiaries to
enroll in managed care plans. HealthCor is the sole or principal provider for a
number of large managed care plans, and the Company believes that its broad
product offering, quality of service, regional focus and advanced information
systems contribute to the Company's competitive advantage.
Target Referrals from Hospitals and Hospital Affiliated Sources. The
Company has implemented a major marketing and sales initiative that targets
physicians who previously referred cases predominantly to hospital-based home
health care organizations. Many of these physicians have financial and operating
relationships with the parent hospitals of such organizations. The Company
believes that recent government scrutiny of these relationships and accompanying
media attention have provided the Company with the opportunity to increase the
number of referrals from those physicians.
Enhance Profitability and Productivity Through Information Technology. The
Company seeks to enhance its profitability and productivity through the
development and use of innovative management information technology that
collects and integrates demographic, financial and clinical information. The
Company is developing and implementing a proprietary financial and clinical
management information system, trademarked Medisyn(TM), which is expected to be
substantially completed in May 1998. The Company believes that Medisyn(TM) will
improve profitability by efficiently servicing increased volumes of managed care
referrals, increase productivity gains, reduce costs and provide outcomes data
to payors in an environment increasingly influenced by managed care
organizations and reimbursement changes.
Make Selective Acquisitions to Increase Density in Existing Markets and to
Enter New Markets. The Company selectively seeks high-quality local and
strategic acquisitions that expand the range of services in its existing markets
and that enable the Company to expand its service area, increasing its appeal to
managed care organizations. Since January 1995, the Company has acquired 25 home
health care companies, adding 38 offices. The Company believes that due to the
fragmentation of the home health care industry, a substantial number of
acquisition opportunities are available.
SERVICES AND PRODUCTS
The Company provides a comprehensive array of services and products that
are essential to the proper implementation of the physician's plan of care in
the home. These products and services are classified into three groups: Home
Nursing, Respiratory Therapy/Home Medical Equipment and Infusion Therapy.
Home Nursing. HealthCor provides a wide range of nursing services to
individuals with acute illness, long-term chronic health conditions, permanent
disabilities, terminal illness or post-procedural needs. Patients are typically
referred to the Company by primary care or specialty physicians and managed care
case managers. After reviewing the patient's medical records and treatment plan,
a nurse, therapist or home health aide, where appropriate, provides care to the
patient in the home. The plan of care may require a few visits over a short
period of time or many visits over several years.
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Respiratory Therapy/Home Medical Equipment. The Company provides a wide
variety of home respiratory, monitoring and medical equipment. Respiratory
therapists provide care to the patient according to the physician-directed plan
of care and educate the patient and the family or other care giver regarding
treatment requirements, use of equipment and self-care. The Company rents, sells
and services respiratory equipment for patient use in the home and supplies
patients with aerosol medications for use in respiratory therapy treatments. In
addition, the Company leases and sells convalescent equipment such as hospital
beds, wheelchairs, and patient lifts, as well as medical and surgical supplies
such as stethoscopes, orthopedic supplies, urinary catheters, and syringes. The
Company is able to increase revenues by providing home medical equipment and
supplies to its patients who are also receiving nursing, respiratory therapy or
infusion therapy.
Home Infusion Therapy. The Company offers comprehensive home infusion
therapies. Home infusion therapy involves the administration of nutrients,
antibiotics and other medications intravenously (into the vein), subcutaneously
(under the skin), intramuscularly (into the muscle), intrathecally or epidurally
(via spinal routes), or through feeding tubes into the digestive tract. Infusion
therapy often begins during hospitalization of a patient and continues in the
home. New patients are instructed in the administration of infusion therapy and
related services by a registered nurse who provides the patient's first home
treatment and continuing supervision of care.
FINANCIAL AND CLINICAL MANAGEMENT INFORMATION SYSTEMS
The Company is implementing a proprietary financial and clinical management
information system trademarked Medisyn(TM), which is comprised of several
financial and clinical components integrated through a central interface engine.
Medisyn(TM) is designed to integrate all aspects of the Company's operations by
providing centralized information management for each patient by linking
clinical services to its financial systems. The Company believes that
Medisyn(TM) will enable it to service increased volumes of managed care
referrals, reduce costs and result in more efficient collection of receivables.
The Company also believes Medisyn(TM) will provide competitive advantages by
generating data that will enhance the Company's ability to price and manage the
Company's services and products in a managed care environment and by measuring
more accurately the quality and cost of care that is delivered in the home. The
Company believes that it is the only home health care provider implementing this
technology, and has filed a patent application with respect to Medisyn(TM) with
the United States Patent Office.
The principal components of Medisyn(TM) are:
- A customer information management system ("CIMS") through which the
Company coordinates all services for patients and generates a unified
database for clinical, case management and billing information. CIMS was
first implemented by the Company in February 1997 and currently services
approximately 75% of the Company's managed care business through a
central call center covering the greater Dallas-Fort Worth, Houston, East
Texas and Oklahoma markets. Rollout to substantially all of the Company's
remaining markets is expected to be completed in 1998.
- Hand-held clinical system point of care computers ("PtCT Units")
currently used by substantially all of the Company's nurses and home
health aides. The use of the PtCT Units allows the Company to quickly and
efficiently collect and analyze clinical, payroll and billing information
by capturing such information at the patient's bedside. The nurses and
home health aides electronically transmit this information directly to
the system, thereby updating the Company's records with minimal delays.
- An integrated suite of financial services software including general
ledger, cost accounting, accounts payable, materials
management/purchasing, payroll and human resources elements (the "Lawson
System"). The most significant applications of this software became
operational during 1997 and have improved the Company's ability to
analyze each element of its business to improve productivity and
operating efficiencies.
- The Innovative Managed Care System ("IMACS") is a contract management and
billing system that will enable the Company to capture the essential
elements of payor relationships (including relation-ships with managed
care organizations, other private payors, Medicaid and Medicare) to
assess pricing,
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<PAGE> 9
eligibility, utilization and other information necessary to assure
accurate billing and to enhance contract profitability. In addition,
IMACS will allow the Company to more effectively manage payor contract
terms and to provide payors with a consolidated bill for multiple
services. The most significant applications of IMACS have been
successfully developed on schedule, with full implementation to be
completed in May 1998. The Company has a four year proprietary right to
IMACS for licensing to non-hospital based home health care providers.
RECENT DEVELOPMENTS
Regulatory Changes. During 1997, the home health care industry experienced
several significant regulatory and reimbursement changes. In February 1997, the
Health Care Financing Administration ("HCFA") implemented mileage limitations
restricting the distance between a nursing agency's principal office and its
branches, with such rules becoming effective with respect to the Company on
January 1, 1997. Texas, where the Company has significant operations,
implemented even more restrictive mileage limitation rules for branch offices.
During the first six months of 1997, the Company was subject to Medicare cost
limitations for home nursing that were lower than the Company's operating
expenses for that period, resulting in a $2.8 million revenue adjustment. The
Company has responded by implementing a series of cost-saving initiatives
resulting in approximately $12.3 million in annualized savings. The cost savings
included realizing operating efficiencies available as a result of the partial
implementation of Medisyn(TM), and reducing head-count by reorganizing the
Company's branch structure and corporate office operations. On January 2, 1998,
HCFA published final Medicare nursing reimbursement guidelines which reduce
reimbursement for the Company by approximately 18.0% for 1998. The Company
believes that it will need to achieve additional cost savings in order to
operate within Medicare nursing cost limitations for 1998. See "Risk
Factors -- Medicare Reimbursement Reforms; Revenue Adjustments."
Congress has also recently adopted a per-beneficiary limit on reimbursement
for nursing services based upon historical cost, and the 1997 Federal Budget
contains other reimbursement changes that will reduce the level of reimbursement
available to the Company. In addition, reimbursement rights for Medicare home
oxygen services, which represent approximately 5.6% of the Company's annualized
revenues, will be reduced by 25.0% beginning January 1, 1998, with an additional
5.0% reduction to be effective January 1, 1999. The Company intends to respond
to such changes in a variety of ways, including further reducing costs and
making additional adjustments in its branch office structure. See "Risk
Factors -- Medicare Reimbursement Reforms; Revenue Adjustments."
Accounts Receivable Management. The Company's results for the three months
ended June 30, 1997, were adversely affected by a special provision for doubtful
accounts of $2.7 million. The special provision for doubtful accounts resulted
from the Company's continuing evaluation of certain accounts receivable from
managed care organizations which are a growing proportion of the Company's
business mix. See "Risk Factors -- Dependence on Reimbursement by Third-Party
Payors; Accounts Receivable."
Bank Credit Facility. The Company is party to a Second Amended and Restated
Credit Agreement, dated as of December 1, 1997 (the "New Credit Facility"),
which provides for an aggregate of $20.0 million of borrowings. No borrowings
under the New Credit Facility were outstanding on December 31, 1997. See
"Description of the New Credit Facility."
Managed Care Relationships. The Company is the sole or principal provider
for a number of managed care plans and intends to compete vigorously for
additional significant managed care business in the future. These relationships
are all fee-for-service and are consistent with the Company's strategy to price
managed care contracts profitably in order to provide quality service. A
description of certain recent contracts is as follows:
- In May 1997, the Company became the exclusive provider of respiratory
therapy/home medical equipment to a large, multi-state managed care
organization's approximately 220,000 members in greater Denver, Colorado
in need of such services and equipment.
- In July 1997, the Company became the exclusive provider for a 60,000
member health plan in Texas.
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<PAGE> 10
- In August 1997, the Company began receiving referrals as one of two
preferred providers (and the only one which is fully integrated) for a
managed care plan which has approximately 800,000 members in Texas and
Oklahoma.
- In August 1997, the Company began receiving referrals as a preferred
provider for a preferred provider organization ("PPO") which manages the
health care needs for approximately 350,000 members in the Company's
service area.
- In August 1997, the Company became a preferred provider for a 150,000
member PPO in Oklahoma.
The Company's principal executive offices are located at 8150 North Central
Expressway, Suite M-2000, Dallas, Texas 75206, and the Company's telephone
number is (214) 692-4663.
THE EXCHANGE OFFER
THE OUTSTANDING NOTES...... The Outstanding Notes were sold by the Company as
of December 1, 1997, in the Initial Offering, to
the Initial Purchasers pursuant to the Purchase
Agreement. The Initial Purchasers subsequently
resold the Outstanding Notes to "Qualified
Institutional Buyers" as such term is defined in
Rule 144A under the Securities Act ("QIBs").
REGISTRATION
REQUIREMENTS............... Pursuant to the Purchase Agreement, the Company and
the Initial Purchasers entered into the
Registration Rights Agreement, which grants the
holders of the Outstanding Notes certain exchange
and registration rights. The Exchange Offer is
intended to satisfy such exchange and registration
rights, which terminate upon the consummation of
the Exchange Offer. If applicable law or applicable
interpretations of the staff of the Commission do
not permit the Company to effect the Exchange
Offer, the Company has agreed to file a shelf
registration (the "Shelf Registration Statement")
covering resales of the Outstanding Notes. See "The
Exchange Offer -- Resale of Exchange Notes" and
"The Exchange Offer -- Shelf Registration
Statement."
THE EXCHANGE OFFER......... The Company is offering to exchange $1,000
principal amount of the Exchange Notes for each
$1,000 principal amount of Outstanding Notes. As of
the date hereof, $80.0 million aggregate principal
amount of Outstanding Notes are outstanding. The
Company will issue the Exchange Notes subsequent to
the Expiration Date and on or before April 9, 1998,
unless the Exchange Offer is extended (the
"Exchange Date"). See "Risk Factors -- Exchange
Offer Procedures; Consequences of Failure to
Exchange."
Based on an interpretation of the staff of the
Commission set forth in no-action letters issued to
third parities, the Company believes that the
Exchange Notes issued pursuant to the Exchange
Offer in exchange for Outstanding Notes may be
offered for resale, resold and otherwise
transferred by any holder thereof (other than any
such holder which is an "affiliate" of the Company
within the meaning of rule 405 under the Securities
Act) without compliance with the registration and
prospectus delivery provisions of the Securities
Act, provided that such Exchange Notes are acquired
in the ordinary course of such holder's business
and that such holder does not intend to participate
and has no arrangement or understanding with any
person to participate in the distribution of such
Exchange Notes.
9
<PAGE> 11
Any holder who tenders in the Exchange Offer with
the intention to participate, or for the purpose of
participating, in a distribution of the Exchange
Notes could not rely on the position of the staff
of the Commission enunciated in Exxon Capital
Holdings Corporation (available April 13, 1989) or
similar no-action letters and, in the absence of an
exemption therefrom, must comply with the
registration and prospectus delivery requirements
of the Securities Act in connection with the resale
transaction. Failure to comply with such
requirements in such instance may result in such
holder incurring liability under the Securities Act
for which the holder is not indemnified by the
Company.
Each Participating Broker-Dealer that receives
Exchange Notes for its own account in exchange for
Outstanding Notes, where such Outstanding Notes
were acquired by such broker-dealer as a result of
market-making activities or other trading
activities, must acknowledge that it will deliver a
prospectus in connection with any resale of
Exchange Notes. The Letter of Transmittal for the
Exchange Offer states that by so acknowledging and
by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter"
within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented
from time to time, may be used by a broker-dealer
in connection with resales of Exchange Notes
received in exchange for Outstanding Notes where
such Outstanding Notes were acquired by such
broker-dealer as a result of market-making
activities or other trading activities. The Company
has agreed to make this Prospectus available to any
Participating Broker-Dealer for use in connection
with any such resale for a period of up to 180 days
from the consummation of the Exchange Offer. See
"Plan of Distribution."
EXPIRATION DATE............ 5:00 p.m., E.S.T., on March 25, 1998, unless
extended.
INTEREST ON THE EXCHANGE
NOTES.................... Interest on the Exchange Notes will accrue at a
rate equal to 11% per annum and will be payable
semi-annually in arrears on June 1 and December 1
of each year, commencing June 1, 1998. Interest on
the Exchange Notes will accrue from the most recent
date to which interest has been paid on the
Outstanding Notes or, if no interest has been paid,
from the date of original issuance of the
Outstanding Notes.
PROCEDURES FOR TENDERING
OUTSTANDING NOTES........ Each holder of Outstanding Notes wishing to accept
the Exchange Offer must complete, sign and date the
accompanying Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions
contained herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such
facsimile, together with the Outstanding Notes and
any other required documentation to the Exchange
Agent at the address set forth herein. By executing
the Letter of Transmittal, each holder will
represent to the Company that, among other things,
the holder or person receiving such Exchange Notes,
whether or not such person is the holder, is
acquiring the Exchange Notes in the ordinary course
of business and that neither the holder nor any
such other person has any arrangement or
understanding with any person to participate in the
distribution of such Exchange Notes. In lieu of
physical delivery of the certificates representing
Outstanding Notes, tendering holders may transfer
Outstanding
10
<PAGE> 12
Notes pursuant to the procedure for book-entry
transfer as set forth under "The Exchange
Offer -- Procedures for Tendering."
Each Participating Dealer which acquired
Outstanding Notes as a result of market-making or
other trading activities must acknowledge that it
will deliver a prospectus in connection with any
resale of such Exchange Notes. See "Plan of
Distribution."
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS........ Any beneficial owner whose Outstanding Notes are
registered in the name of a broker-dealer,
commercial bank, trust company or other nominee and
who wishes to tender should contact such registered
holder promptly and instruct such registered holder
to tender on such beneficial owner's behalf.
If such beneficial owner wishes to tender on such
owner's own behalf, such owner must prior to
completing and executing the Letter of Transmittal
and delivering its Outstanding Notes, either make
appropriate arrangements to register ownership of
the Outstanding Notes in such owner's name or
obtain a properly completed bond power from the
registered holder. The transfer of record ownership
may take considerable time.
GUARANTEED DELIVERY
PROCEDURES............... Holders of Outstanding Notes who wish to tender
their Outstanding Notes and whose Outstanding Notes
are not immediately available or who cannot deliver
their Outstanding Notes, the Letter of Transmittal
or any other documents required by the Letter of
Transmittal to the Exchange Agent (or comply with
the procedures for book-entry transfer) prior to
the Expiration Date must tender their Outstanding
Notes according to the guaranteed delivery
procedures set forth in "The Exchange
Offer -- Guaranteed Delivery Procedures."
WITHDRAWAL RIGHTS.......... Tenders may be withdrawn at any time prior to 5:00
p.m., E.S.T., on the Expiration Date pursuant to
the procedures described under "The Exchange
Offer -- Withdrawal of Tenders."
ACCEPTANCE OF OUTSTANDING
NOTES
AND DELIVERY OF EXCHANGE
NOTES.................... Subject to certain conditions, the Company will
accept for exchange any and all Outstanding Notes
that are properly tendered in the Exchange Offer
prior to 5:00 p.m., E.S.T., on the Expiration Date.
The Exchange Notes issued pursuant to the Exchange
Offer will be delivered on the Exchange Date. See
"The Exchange Offer -- Terms of the Exchange
Offer."
FEDERAL INCOME TAX
CONSEQUENCES............. The exchange pursuant to the Exchange Offer should
not be a taxable event for United States federal
income tax purposes. See "Certain Federal Income
Tax Consequences."
EFFECT ON HOLDERS OF
OUTSTANDING NOTES........ As a result of the making of this Exchange Offer,
the Company will have fulfilled one of its
obligations under the Registration Rights
Agreement, and, with certain exceptions noted
below, holders of Outstanding Notes who do not
tender their Outstanding Notes will not have any
further registration rights under the Registration
Rights Agreement or otherwise.
11
<PAGE> 13
Such holders will continue to hold the untendered
Outstanding Notes and will be entitled to all the
rights and subject to all the limitations
applicable thereto under the Indenture, except to
the extent such rights or limitations, by their
terms, terminate or cease to have further
effectiveness as a result of the Exchange Offer.
All untendered Outstanding Notes will continue to
be subject to certain restrictions on transfer.
Accordingly, if any Outstanding Notes are tendered
and accepted in the Exchange Offer, the trading
market of the untendered Outstanding Notes could be
adversely affected. See "Risk Factors -- Exchange
Offer Procedures" and "Risk Factors -- Lack of
Public Market for the Exchange Notes."
EXCHANGE AGENT............. Norwest Bank Minnesota, National Association.
SUMMARY OF TERMS OF THE EXCHANGE NOTES
ISSUER..................... HealthCor Holdings, Inc.
SECURITIES OFFERED......... $80,000,000 in aggregate principal amount of 11%
Senior Notes due 2004.
MATURITY................... December 1, 2004.
INTEREST................... Interest on the Exchange Notes will accrue at a
rate equal to 11% per annum and will be payable
semi-annually in arrears on June 1 and December 1
of each year, commencing June 1, 1998. Interest on
the Exchange Notes will accrue from the most recent
date to which interest has been paid on the
Outstanding Notes or, if no interest has been paid,
from the date of original issuance of the
Outstanding Notes.
GUARANTEES................. The Exchange Notes will be fully and
unconditionally guaranteed on a senior, unsecured
and joint and several basis by all of the Company's
present and future Subsidiaries (as defined). As of
September 30, 1997, after giving effect to the
Initial Offering and the application of the
estimated net proceeds therefrom, the Company's
Subsidiaries would have had $9.5 million principal
amount of secured Indebtedness (as defined)
outstanding in the form of Capital Lease
Obligations (as defined) and $3.1 million in other
Indebtedness outstanding, including $600,000 of
letters of credit outstanding, but not including
the Guarantees (as defined).
RANKING.................... The Exchange Notes will be general unsecured
obligations of the Company ranking senior in right
of payment to all existing and future Subordinated
Indebtedness (as defined) and pari passu in right
of payment with all other Indebtedness and
liabilities (including trade payables) of the
Company. The Exchange Notes will rank pari passu
with the Company's Outstanding Notes not otherwise
exchanged for Exchange Notes pursuant to this
Exchange Offer. The Indenture pursuant to which the
Exchange Notes will be issued permits the Company
and its Subsidiaries to incur additional
Indebtedness, including Senior Indebtedness (as
defined) and secured Indebtedness, subject to
certain limitations. As of September 30, 1997,
after giving effect to the Initial Offering and the
application of the estimated net proceeds
therefrom, the Company would have had no secured or
other Indebtedness outstanding other than the
Notes. See "Capitalization," "Description of the
Exchange Notes" and "Description of the New Credit
Facility."
12
<PAGE> 14
OPTIONAL REDEMPTION........ Except as set forth below, the Exchange Notes will
not be redeemable at the option of the Company
prior to December 1, 2001. Thereafter, the Exchange
Notes will be subject to redemption at any time at
the option of the Company, in whole or in part, at
the redemption prices set forth herein, plus
accrued and unpaid interest and Liquidated Damages
(as defined), if any, thereon to the redemption
date. In addition, at any time prior to December 1,
2000, the Company may redeem up to an aggregate of
$25.0 million in principal amount of Notes at a
redemption price equal to 111% of the principal
amount thereof, plus accrued and unpaid interest
and Liquidated Damages, if any, thereon to the
redemption date with the net cash proceeds of one
or more Public Equity Offerings (as defined),
provided that at least $55.0 million in principal
amount of Notes remains outstanding immediately
following each such redemption.
CHANGE IN CONTROL.......... In the event of a Change of Control (as defined),
the Company will be required to make an offer to
each holder of Exchange Notes to repurchase all or
any part of such holder's Exchange Notes at a
repurchase price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest
and Liquidated Damages, if any, thereon to the
repurchase date. See "Risk Factors -- Potential
Failure to Make Payment Upon Change of Control" and
"Description of the Exchange Notes."
COVENANTS.................. The Indenture contains certain covenants that,
among other things, limit the ability of the
Company and its Subsidiaries to incur additional
Indebtedness, pay dividends, repurchase Equity
Interests (as defined) or make other Restricted
Payments (as defined), create Liens (as defined),
enter into transactions with Affiliates (as
defined), sell assets or enter into certain mergers
and consolidations. See "Description of the
Exchange Notes."
RISK FACTORS
For a discussion of certain factors that should be considered in evaluating
whether to exchange Outstanding Notes for the Exchange Notes, see "Risk
Factors."
13
<PAGE> 15
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary historical consolidated statements of income data of
the Company for each of the years ended December 31, 1994, 1995 and 1996 have
been derived from the Company's audited consolidated financial statements. The
summary historical consolidated statements of income and balance sheet data of
the Company for the nine months ended September 30, 1996 and 1997 have been
derived from the Company's unaudited condensed consolidated financial
statements. The Company's unaudited condensed consolidated financial statements
include all adjustments, consisting of normal recurring accruals, that the
Company considers necessary for a fair presentation of the financial position
and the results of operations for those periods. Operating results for the nine
months ended September 30, 1997 are not necessarily indicative of the results
for the entire year ending December 31, 1997. The summary historical and pro
forma financial data set forth below should be read in conjunction with
"Selected Consolidated Historical Financial Data" and the notes thereto, with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with HealthCor's Consolidated Financial Statements and the notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA AS ADJUSTED(1)
----------------------------
NINE MONTHS NINE
ENDED YEAR MONTHS
YEARS ENDED DECEMBER 31, SEPTEMBER 30, ENDED ENDED
---------------------------- ------------------ DECEMBER 31, SEPTEMBER 30,
1994 1995 1996 1996 1997 1996 1997
------- ------- -------- ------- -------- ------------ -------------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net revenues................. $57,151 $81,557 $106,785 $77,476 $108,583(2) $155,858 $116,311
Direct expenses.............. 30,337 41,392 48,314 35,095 48,982 72,870 53,664
General and administrative... 21,280 30,663 41,418 30,387 46,049 61,611 48,401
Provision for doubtful
accounts................... 1,115 1,489 3,580 2,287 6,738(3) 3,740 6,774
Income from operations....... 3,630 6,773 10,894 7,534 3,198 14,205 3,681
Net income per common
share...................... $ .31 $ .55 $ .66 $ .49 $ (.02) $ .36 $ (.25)
Weighted average common
shares outstanding......... 6,490 6,546 8,040 7,324 10,043 8,040 10,043
OTHER FINANCIAL DATA:
EBITDA(4).................... $ 5,070 $ 9,072 $ 15,668 $11,149 $ 9,227 19,832 $ 9,885
Adjusted EBITDA(5)........... 5,070 9,072 15,668 11,149 14,727 19,832 15,385
Depreciation and
amortization............... 1,440 2,299 4,774 3,615 6,029 5,627 6,204
Capital expenditures......... 866 7,180 7,867 5,369 4,744 -- --
Ratio of Adjusted EBITDA to
interest expense........... 2.1x 2.1x
STATISTICAL DATA:
Home health care offices (at
period end)................ 50 67 96 84 96
States of operation (at
period end)................ 6 8 9 9 9
Number of acquisitions....... 3 12 9 3 4
Sources of net revenues:
Home nursing............... 79.2% 74.2% 56.9% 59.4% 54.6%
Respiratory therapy/home
medical equipment........ 16.5 19.8 27.1 26.5 27.8
Infusion therapy........... 4.3 6.0 14.9 14.1 13.4
Other...................... -- -- 1.1 -- 4.2
------- ------- -------- ------- --------
Total............... 100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ======== ======= ========
</TABLE>
14
<PAGE> 16
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
--------------------------
ACTUAL AS ADJUSTED(6)
-------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ -- $ 26,225
Working capital (deficit)................................... (19,444) 57,606
Property and equipment...................................... 29,042 29,042
Total assets................................................ 137,953 167,128
Total debt, including capital leases........................ 59,116 91,928
Stockholders' equity........................................ 54,549 54,549
</TABLE>
- ---------------
(1) Adjusted to give effect to acquisitions, the issuance of the Outstanding
Notes and the application of the estimated net proceeds therefrom. See
"Capitalization" and "Unaudited Pro Forma Condensed Consolidated Financial
Statements."
(2) Includes a $2.8 million revenue adjustment relating to Medicare nursing cost
limitations. See "Prospectus Summary -- Recent Developments."
(3) Includes a $2.7 million special provision for doubtful accounts. See
"Prospectus Summary -- Recent Developments."
(4) As defined in this Prospectus, EBITDA represents income before interest and
amortization of debt costs, federal and state income taxes, and depreciation
and amortization. EBITDA is generally considered to provide information
regarding a company's ability to service and/or incur debt. EBITDA should
not be considered in isolation or as a substitute for net income, cash flows
from operations, or other consolidated income or cash flow data prepared in
accordance with generally accepted accounting principles or as a measure of
a company's profitability or liquidity.
(5) As defined in this Prospectus, Adjusted EBITDA for the nine months ended
September 30, 1997 represents EBITDA, plus a $2.8 million net revenue
adjustment relating to Medicare nursing cost limitations and a $2.7 million
special provision for doubtful accounts, both of which were recorded by the
Company in the three month period ended June 30, 1997.
(6) Adjusted to give effect to the issuance of the Outstanding Notes and the
application of the estimated net proceeds therefrom. See "Capitalization."
15
<PAGE> 17
RISK FACTORS
Holders of the Outstanding Notes should carefully review the information
set forth below, in addition to the other information in this Prospectus, before
deciding to tender their Outstanding Notes in the Exchange Offer.
EXCHANGE OFFER PROCEDURES; CONSEQUENCES OF FAILURE TO EXCHANGE
Issuance of the Exchange Notes in exchange for Outstanding Notes pursuant
to the Exchange Offer will be made only after a timely receipt by the Company of
such Outstanding Notes, a properly completed and duly executed Letter of
Transmittal and all other required documents. Therefore, holders of the
Outstanding Notes desiring to tender such Outstanding Notes in exchange for
Exchange Notes should allow sufficient time to ensure timely delivery. The
Company is under no duty to give notification of defects or irregularities with
respect to the tenders of Outstanding Notes for exchange. Outstanding Notes that
are not tendered or are tendered but not accepted will, following the
consummation of the Exchange Offer, continue to be subject to the existing
restrictions upon transfer thereof. Upon consummation of the Exchange Offer, the
registration rights under the Registration Rights Agreement will terminate. In
addition, any holder of Outstanding Notes who tenders in the Exchange Offer for
the purpose of participating in a distribution of the Exchange Notes may be
deemed to have received restricted securities and, if so, will be required to
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. Each broker-dealer
that receives Exchange Notes for its own account in exchange for the Outstanding
Notes, where such Outstanding Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such Exchange
Notes. See "Plan of Distribution." TO THE EXTENT THAT SOME OF THE OUTSTANDING
NOTES ARE TENDERED AND ACCEPTED IN THE EXCHANGE OFFER, THE TRADING MARKET FOR
UNTENDERED AND TENDERED BUT UNACCEPTED OUTSTANDING NOTES COULD BE ADVERSELY
AFFECTED.
SUBSTANTIAL LEVERAGE
Subsequent to the Initial Offering, the Company had substantial
indebtedness and increased debt service obligations compared to prior years. At
September 30, 1997, after giving effect to the issuance of the Outstanding Notes
and the application of the net proceeds therefrom, the Company had approximately
$91.9 million of consolidated indebtedness as compared to the Company's
stockholders' equity of $54.5 million. In addition, as of September 30, 1997,
after giving effect to the issuance of the Exchange Notes and the application of
the net proceeds therefrom, the Company had a debt-to-equity ratio of 1.7 to 1.
There can be no assurance that the Company will generate sufficient cash flow to
service the Exchange Notes. If the Company is unable to service the Notes and to
meet its operating expenses, it will be required to examine alternative means of
repayment that could include restructuring or refinancing its indebtedness.
There can be no assurance that any of these strategies could be effected on
satisfactory terms. The Indenture permits the Company to incur additional
indebtedness under certain conditions, and the Company expects that it will
incur additional indebtedness during the term of the Notes, including, without
limitation, pursuant to the New Credit Facility. The Company's ability to make
payments with respect to the Notes and to satisfy its other debt obligations
will depend on its future operating performance, which will be affected by
governmental regulations, prevailing economic conditions, financial factors, and
other factors, certain of which are beyond the Company's control. See
"Capitalization" and "Description of the New Credit Facility."
The degree to which the Company is leveraged could have important
consequences to holders of the Exchange Notes, including: (i) the Company's
ability to obtain additional financing in the future for operating expenses,
acquisitions or general corporate purposes may be impaired; (ii) a substantial
portion of the Company's cash flows from operations may be dedicated to the
payment of principal and interest on its indebtedness, thereby reducing the
funds available for operations; (iii) certain of the Company's indebtedness,
including the New Credit Facility, contain financial and other restrictive
covenants, including those restricting the incurrence of additional
indebtedness, the creation of liens, the payment of dividends, sales of assets
and minimum net worth requirements; and (iv) the Company's leverage may make the
Company vulnerable to
16
<PAGE> 18
changes in the industry, including, among other things, government regulations
and changing economic conditions.
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The Indenture governing the terms of the Exchange Notes contains certain
covenants limiting, subject to certain exceptions, the incurrence of additional
indebtedness, the payment of dividends, the redemption of capital stock, the
making of certain investments, the issuance of capital stock of subsidiaries,
the creation of liens and other restrictions affecting the Company's
subsidiaries, the issuance of guarantees, transactions with affiliates, asset
sales and certain mergers and consolidations. A breach of any of these covenants
could result in an event of default under the Indenture. In addition, the New
Credit Facility and the instruments governing the Company's other indebtedness
contain other more restrictive covenants and require the Company to satisfy
certain financial tests. The Company's ability to comply with such covenants and
to satisfy such financial tests may be affected by events beyond its control. A
breach of any of these covenants could result in an event of default under the
New Credit Facility. In the event of a default under the New Credit Facility,
the lenders thereunder could elect to declare all amounts borrowed, together
with accrued interest, to be immediately due and payable, and the lenders under
the New Credit Facility could terminate all commitments thereunder. In addition,
a default under the New Credit Facility or the instruments governing the
Company's other indebtedness could constitute a cross-default under the
Indenture and any instruments governing the Company's other indebtedness, and a
default under the Indenture could constitute a cross-default under the New
Credit Facility and any instruments governing the Company's other indebtedness.
In the event of a default under the New Credit Facility or other Senior
Indebtedness of the Company, the subordination provisions of the Indenture may
restrict payments with respect to the Exchange Notes. See "Description of the
Exchange Notes -- Certain Covenants" and "Description of the New Credit
Facility."
HOLDING COMPANY STRUCTURE
The Company is a holding company and substantially all of its operations
are conducted through its subsidiaries. After repaying certain existing
indebtedness, including all outstanding amounts under a prior credit facility,
the Company contributed most of the net proceeds that it received from the
issuance of the Outstanding Notes to its operating subsidiaries. The Company's
cash flow and, consequently, its ability to service its indebtedness, including
the Exchange Notes, are dependent on its ability to gain access to the cash flow
of its subsidiaries (whether through loans, dividends, distributions or
otherwise) and would be subject to any legal, contractual or other restrictions
that could hinder or prevent the Company from doing so. Each subsidiary is a
separate and distinct legal entity from the Company and has no obligation,
contingent or otherwise, to pay any amounts due in respect of the Exchange Notes
or to make any amounts available for the payment thereof. The holders of any
indebtedness of the Company's subsidiaries will be entitled to payment thereof
from the assets of such subsidiaries prior to the holders of any general,
unsecured obligations of the Company, including the Exchange Notes. As of
September 30, 1997, after giving effect to the issuance of the Outstanding Notes
and the use of the estimated net proceeds therefrom, the Company's subsidiaries
had $9.5 million of Senior Indebtedness outstanding relating to capital lease
obligations and $3.1 million of other Indebtedness, including $600,000 of
letters of credit outstanding.
DEPENDENCE ON REIMBURSEMENT BY THIRD-PARTY PAYORS; ACCOUNTS RECEIVABLE
In 1996, the percentages of the Company's net revenues derived from
Medicare, Medicaid and other third-party payors were approximately 68.5%, 4.4%
and 27.1%, respectively. The net revenues and profitability of the Company are
affected by the continuing efforts of all payors to contain or reduce the costs
of health care by, among other things, reducing reimbursement rates, narrowing
the scope of covered services, increasing case management review of services and
negotiating reduced contract pricing. In addition, the home health care industry
is characterized by long collection cycles for accounts receivable due to the
complex and time consuming requirements for obtaining reimbursement from private
and governmental third-party payors. Furthermore, reimbursement from government
payors is subject to audit and retroactive adjustment. Any changes in
reimbursement levels under Medicare, Medicaid or third-party payor programs and
any changes in
17
<PAGE> 19
applicable government regulations could have a material adverse effect on the
Company's business, financial condition, cash flows or results of operations.
Changes in the mix of the Company's patients among Medicare, Medicaid and
third-party payor categories could have a material adverse effect on the
Company's business, financial condition, cash flows or results of operations. In
addition, patients, including Medicare and Medicaid beneficiaries, increasingly
are participating in managed care plans. Managed care organizations, in turn,
are increasingly becoming involved in monitoring and determining the appropriate
health care settings for their enrollees based primarily on cost and quality of
care. The Company recorded a special provision for doubtful accounts of $2.7
million in the quarter ended June 30, 1997, because the Company's continuing
evaluation of accounts receivable payable, including accounts payable by managed
care organizations, resulted in the conclusion that a special provision was
appropriate. Managed care organizations in particular are increasingly
challenging the billing of home health care providers and limiting
reimbursements to home health care companies. This is an important trend in the
home health care industry, and there can be no assurance that this trend will
not continue or in the future will not have a material adverse effect on the
Company. Furthermore, there can be no assurance that the Company will be able to
maintain its current payor or revenue mix. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business -- Regulation."
MEDICARE REIMBURSEMENT REFORMS; REVENUE ADJUSTMENTS
The Company is subject to changes in federal, state and local regulations
which can have a significant effect on operating methods, costs and
reimbursement amounts provided by governmental and other third-party payors. The
federal government is continuing to review and assess alternative health care
delivery systems and payment methodologies. The federal government has recently
implemented, and is considering future additional, reductions in planned
Medicare spending, a number of which directly affect the home health care
industry. In part as a result of these reforms, during the first six months of
1997, the Company had Medicare cost limitations for home nursing that were lower
than the Company's operating expenses for that period, resulting in a revenue
adjustment of $2.8 million. There can be no assurance that the Company will not
experience additional revenue adjustments for the remainder of 1997 and for
future periods. On January 2, 1998, HCFA published final Medicare nursing
reimbursement guidelines which reduce reimbursement for the Company by
approximately 18.0% for 1998. Congress also recently enacted a provision that
establishes a per-beneficiary limit on reimbursement for nursing services based
upon historical cost. In addition, the 1997 Federal Budget contains other
provisions that would reduce Medicare reimbursements to acute care hospitals for
some Medicare patients who are discharged from the hospital after a very short
inpatient stay to a home health care agency's care. This provision could have
the effect of reducing the utilization of home health services by giving
hospitals the incentive to retain some Medicare patients longer. Other recent
amendments reduce Medicare reimbursements for oxygen and oxygen equipment,
freeze certain payment levels for durable medical equipment and
parenteral/enteral nutrition, supplies and equipment, and impose more stringent
home health care limits. In addition, reimbursement rates for Medicare home
oxygen services, which represent approximately 5.6% of the Company's annualized
revenues, will be reduced by 25.0% beginning January 1, 1998, with an additional
5.0% reduction to be effective January 1, 1999. Further, the Department of
Health and Human Services ("DHHS") is required to develop and implement a
Medicare prospective payment system for home health services beginning October
1, 1999, to replace the current Medicare reimbursement methodology based on the
lower of allowable reimbursable costs or actual charges. Although the impact of
this change on the Company's results of operations cannot be predicted at this
time, unless the Company is able to reduce its operating expenses
proportionately to any reduction in reimbursement rates or decrease the
percentage of Medicare contracts in its business mix, these changes would
adversely affect the Company. Based upon initiatives to reduce Medicare costs
and possible further cost containment or other initiatives in the future, the
Company expects the reimbursements received from the Medicare program to be at
continued risk of substantial reduction in the future. These changes in Medicare
reimbursements for home health care will reduce reimbursements available to the
Company in 1998 and could have a material adverse effect on the Company's
business, financial condition, cash flows or results of operations. The Company
is also subject to audit of the reimbursements it receives under the Medicare
program. Any significant audit adjustment could have a material adverse effect
on the Company's business, financial condition, cash flows or results of
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operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Regulation."
DEPENDENCE ON REFERRAL SOURCES
The growth and profitability of the Company depend in part on its ability
to establish and maintain close working relationships with referral sources,
including managed care organizations, payors, hospitals, physicians and other
health care professionals. There can be no assurance that the Company will be
able to successfully maintain significant existing referral sources and develop
new referral sources, or that certain of its referral sources, such as managed
care organizations and hospitals, will not become providers of home health care
services. Historically, independent home health care companies have encountered
significant competition from hospital-based home health care organizations whose
parent hospitals have financial and operating relationships with referring
physicians. There can be no assurance that these physicians will refer cases to
independent home health care companies or, if these physicians do refer cases to
independent home health care companies, that the Company will be able to obtain
referrals from these sources. The loss of existing referral sources or the
failure to develop important new referral sources (such as managed care
organizations) could have a material adverse effect on the Company's business,
financial condition, cash flows or results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Overview."
EFFECT OF GOVERNMENT REGULATIONS
The Company's business is subject to extensive and increasing regulation by
federal, state and local governments, including the DHHS, HCFA, the Office of
the Inspector General, the Food and Drug Administration, the Department of
Labor, the Drug Enforcement Agency and the Occupational Safety and Health
Administration, as well as state departments of health and other local
regulatory agencies. The government recently has devoted substantial attention
to this industry and may continue to do so in the future, which could have a
material adverse effect on the Company. Federal laws governing the Company's
activities include regulations concerning the repackaging and dispensing of
drugs, Medicare certification of home health agencies, Medicare coverage and
reimbursement and various health care anti-fraud and abuse policies. The
facilities operated by the Company must comply with all applicable laws,
regulations and licensing standards. In addition, many of the Company's
employees must maintain certain licenses in order to provide some of the
services offered by the Company. There can be no assurance that federal, state
or local governments will not change existing standards or impose additional
standards or that the Company will meet, or continue to meet, existing or future
standards relating to all or a portion of the Company's activities.
Additionally, there can be no assurance that businesses acquired by the Company
would be in compliance with all applicable laws, regulations and licenses when
acquired. Changes in existing standards, the imposition of additional standards
or the inability of the Company to meet such standards could have a material
adverse effect on the Company's business, financial condition, cash flows or
results of operations. See "Business -- Regulation."
OPERATION RESTORE TRUST
In May 1995, the federal government instituted Operation Restore Trust, a
health care fraud and abuse initiative focusing on nursing homes, home health
care agencies and durable medical equipment companies located in the five states
with the largest Medicare populations. Texas, where the Company has significant
business volume, was one of the original targeted states. The purpose of this
initiative is to identify fraudulent and abusive practices such as billing for
services not provided, providing unnecessary services and making prohibited
referral payments to health care professionals. Operation Restore Trust has been
responsible for significant fines, penalties and settlements. Operation Restore
Trust was recently expanded to cover twelve additional states for the next two
years. The program was also expanded to include reviews of psychiatric
hospitals, certain independent laboratories and partial hospitalization
benefits. Further, there are plans eventually to apply the program's
investigation techniques in all fifty states and throughout the Medicare and
Medicaid programs. One of the results of the program has been increased auditing
and inspection of the records of health care providers and stricter
interpretations of Medicare regulations governing reimbursement and other
issues. Specifically, the government plans to double the number of comprehensive
home health
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agency audits it performs each year (from 900 to 1800) and also to increase the
number of claims reviewed by 25.0% (from 200,000 to 250,000). The Company cannot
predict the effect of Operation Restore Trust on the Company or its results of
operations. See "Business -- Regulation."
MANAGEMENT INFORMATION SYSTEMS
Servicing a high volume of referrals from managed care organizations and
other payors requires the integration of complex and technical financial and
clinical information. Medisyn(TM), the Company's management information system,
is not yet fully implemented, and there can be no assurance that the Company
will successfully implement the remaining components of Medisyn(TM), or that the
Company will not experience unanticipated delays and expenses in such
implementation and integration. Successful implementation of Medisyn(TM) is an
important part of the Company's business strategy, and failure to successfully
implement the remaining components of Medisyn(TM), or to achieve expected cost
savings, improved productivity and more effective collection of receivables,
could have a material adverse effect on the Company's business, financial
condition, cash flows or results of operations. The Company's management
information systems existing prior to the implementation of Medisyn(TM) had
slowed the Company's response to regulatory and reimbursement changes, including
the revenue adjustment and the special provision for doubtful accounts; and the
conversion of such systems contributed to a delay in the recognition of certain
direct expenses discussed elsewhere in this Prospectus. See "-- Dependence on
Reimbursement by Third-Party Payors; Accounts Receivable;" "-- Medicare
Reimbursement Reforms; Revenue Adjustments;" and "Business -- Financial and
Clinical Management Information Systems." There can be no assurance that the
implementation of Medisyn(TM) will enable the Company to successfully respond to
such changes in the future. It is also impossible to predict the effect of
future regulatory changes on the ability of the Company's management information
systems to serve the Company's needs in an efficient and profitable manner. Any
malfunction or increase in expenses in connection with the Company's management
information systems could have a material adverse effect on the Company's
business, financial condition, cash flows or results of operations. See
"Business -- Financial and Clinical Management Information Systems" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RISK OF ACQUISITIONS AND EXPANSION INTO NEW MARKETS
The Company competes for acquisition opportunities with other providers,
some of which have greater financial resources than the Company. There can be no
assurance that the Company will be able to successfully acquire other companies,
that these companies, once acquired, will be integrated successfully into the
Company's operations or that any acquisition will not have a material adverse
effect upon the Company's operating and financial results, especially in the
fiscal quarters immediately following such transactions. Acquisitions involve
numerous short-term and long-term risks, including loss of referral sources,
diversion of management's attention, failure to retain key personnel, loss of
net revenues of the acquired company, incompatible information systems, the
possibility of the acquired company becoming subject to regulatory sanctions,
potential undisclosed liabilities and the continuing value of acquired
intangible assets. In addition, the Company may be required to comply with laws
and regulations of states that differ from those in which the Company currently
operates, and may face competitors with greater knowledge of such local markets.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Business -- Business
Strategy."
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on the services of S. Wayne Bazzle, the
Company's Chairman of the Board and Chief Executive Officer, and Cheryl C.
Bazzle, the Company's President and Chief Operating Officer, as well as its
other senior management and its staff of health care professionals. There can be
no assurance that the Company will be able to retain such personnel. See
"Management -- Executive Officers and Directors."
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COMPETITION
The home health care industry is highly fragmented, with significant
competition from multiple providers in most markets. The Company faces intense
competition for managed care contracts, patients, employees and acquisitions. In
recent years, independent home health care providers, including the Company,
have encountered significant competition from hospital-based home health care
organizations which have entered the home health care business. The Company has
experienced a decline in referrals from physicians with financial and operating
relationships with the parent hospitals of such organizations. There can be no
assurance that such decline will not continue or that the Company's strategy of
targeting such referrals will be successful. In addition, many of the Company's
current and potential competitors are larger and have significantly greater
financial and marketing resources than those of the Company. There can be no
assurance that such competition will not limit the Company's ability to maintain
or to increase its market share and will not adversely affect the Company's
business. See "-- Dependence on Referral Sources" and "Business -- Competition."
LIABILITY AND ADEQUACY OF INSURANCE
In recent years, physicians, hospitals and other participants in the health
care industry have been subjected to an increasing number of lawsuits alleging
malpractice, product liability or negligence, many of which involve large claims
and significant defense costs. The Company may be subject to such suits. The
Company currently maintains liability insurance intended to cover such claims.
While the Company has been able to obtain liability insurance in the past, such
insurance varies in cost and may not be available in the future on acceptable
terms, if at all. A successful claim against the Company in excess of the
Company's insurance coverage could have a material adverse effect upon the
Company's financial condition and results of operations. See
"Business -- Insurance."
CONTROL BY EXECUTIVE OFFICERS AND DIRECTORS
The Company's executive officers and directors and their affiliates
beneficially own 53.4% of the outstanding shares of the Company's common stock,
par value $0.01 per share (the "Common Stock"). As a result, these stockholders,
acting together, are able to control the Company and matters requiring approval
by the stockholders of the Company, including the election of directors. The
voting power of these stockholders under certain circumstances could have the
effect of delaying or preventing a change in control of the Company. See
"Management" and "Security Ownership."
FRAUDULENT CONVEYANCE; UNENFORCEABILITY OF CERTAIN CORPORATE GUARANTEES
If a court in a lawsuit brought by an unpaid creditor or representative of
creditors, such as a trustee in bankruptcy, or the Company as a
debtor-in-possession, were to determine under relevant federal or state
fraudulent conveyance statutes that the Company did not receive fair
consideration or reasonably equivalent value for incurring indebtedness,
including the Notes, and that, at the time of such incurrence, the Company (i)
was insolvent, (ii) was rendered insolvent by reason of such incurrence or
grant, (iii) was engaged in a business or transaction for which the assets
remaining with the Company constituted unreasonably small capital or (iv)
intended to incur, or believed that it would incur, debts beyond its ability to
pay such debts as they matured, then such court, subject to applicable statutes
of limitation, could void the Company's obligations under the Exchange Notes,
subordinate the Exchange Notes to other indebtedness of the Company or take
other action detrimental to the holders of the Exchange Notes.
The measure of insolvency for these purposes will depend upon the governing
law of the relevant jurisdiction. Generally, however, a company will be
considered insolvent for these purposes if the sum of that company's debts is
greater than the fair value or the fair salable value of all of that company's
property or if the present fair salable value of that company's assets is less
than the amount that will be required to pay its probable liability on its
existing debts as they become absolute and matured. Moreover, regardless of
solvency, a court could void an incurrence of indebtedness, including the
Exchange Notes, if it determined that such transaction was made with the intent
to hinder, delay or defraud creditors. In addition, a court could
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subordinate indebtedness, including the Exchange Notes, to the claims of all
existing and future creditors on similar grounds.
The Company's obligations under the Exchange Notes will be guaranteed by
the Guarantors, and the Guarantees also may be subject to review under various
laws for the protection of creditors, including federal and state fraudulent
conveyance and fraudulent transfer laws, if a bankruptcy case or a lawsuit
(including in circumstances where bankruptcy is not involved) is commenced by or
on behalf of any creditor of a Guarantor or a representative of any such
creditors. In such a case, the analysis set forth above would generally apply,
except that the Guarantees could also be subject to the claim that, since the
Guarantees were incurred for the benefit of the Company (and only indirectly for
the benefit of the Guarantors), the obligations of the Guarantors thereunder
were incurred for less than reasonably equivalent value or fair consideration. A
court could void a Guarantor's obligation under its Guarantee, subordinate the
Guarantee to other indebtedness of a Guarantor, direct that holders of the
Exchange Notes return any amounts paid under a Guarantee to the relevant
Guarantor or to a fund for the benefit of its creditors, or take other action
detrimental to the holders of the Exchange Notes.
In addition, the enforceability of a guarantee by a subsidiary of
indebtedness of its corporate parent may be unclear or limited under the laws of
certain jurisdictions under which existing or future Guarantors may be
organized. Although substantially all of the existing Guarantors are organized
under the laws of jurisdictions under which no such limitations exist for
wholly-owned subsidiaries, the Company may form additional subsidiaries under
the laws of jurisdictions where such limitations do exist. If a Guarantee is
held to be invalid or unenforceable as a result of any such limitation, then any
right of the Company or any other Guarantor to receive assets of the Guarantor
whose Guarantee is so limited upon the latter's liquidation or reorganization
(and the consequent right of the holders of the Notes to participate in those
assets) will be effectively subordinated to the claims of the affected
Guarantor's creditors, except to the extent that the Company or any other
Guarantor is itself recognized as a creditor of such affected Guarantor, in
which case the claims of the Company or such other Guarantor would still be
effectively subordinated to any security interest in the assets of such affected
Guarantor.
POTENTIAL FAILURE TO MAKE PAYMENT UPON CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company will be required to
offer to repurchase all or any part of the Notes outstanding at a price equal to
101% of the principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, to the repurchase date. There can be no assurance
that the Company would have sufficient resources to repurchase the Notes upon
the occurrence of a Change of Control. The failure to repurchase all of the
Notes tendered to the Company would constitute an Event of Default under the
Indenture. Furthermore, the repurchase of the Notes by the Company upon a Change
of Control might result in a default on the part of the Company in respect of
the New Credit Facility or other future indebtedness of the Company, as a result
of the financial effect of such repurchase on the Company or otherwise. See
"Description of the Exchange Notes" and "Description of the New Credit
Facility."
LACK OF PUBLIC MARKET FOR THE EXCHANGE NOTES
The Outstanding Notes are currently owned by a relatively small number of
beneficial owners. The Outstanding Notes have not been registered under the
Securities Act and are subject to significant restrictions on resale. The
Exchange Notes are a new issue of securities for which there is currently no
active trading market. The Company does not intend to apply for a listing or
quotation of the Outstanding Notes or the Exchange Notes on any securities
exchange or stock market. The Initial Purchasers have informed the Company that
they currently intend to make a market in the Exchange Notes. However, the
Initial Purchasers are not obligated to do so, and any such market making may be
discontinued at any time without notice. No assurance can be given as to the
liquidity of the trading market for the Exchange Notes. Accordingly, there can
be no assurance as to the development or liquidity of any market for the
Exchange Notes. Future trading prices of the Exchange Notes will depend upon
many factors, including, among others, prevailing interest rates, the market for
similar securities and other factors including general economic conditions and
the financial condition of the Company.
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<PAGE> 24
The Exchange Offer will not be conditioned upon any minimum or maximum
aggregate principal amount of Outstanding Notes being tendered for exchange. No
assurance can be given as to the liquidity of the trading market for the
Exchange Notes, or, in the case of non-tendering holders of the Outstanding
Notes, the trading market for the Outstanding Notes following the Exchange
Offer.
To the extent that all or most of the holders of the Outstanding Notes
tender such Notes, the liquidity of the Exchange Notes should be increased as a
result of the larger size of the issue. However, there can be no assurance that
any or all holders of the Outstanding Notes will accept the Exchange Offer. To
the extent that fewer of the holders of the Outstanding Notes accept the
Exchange Offer, the liquidity of the Exchange Notes could be decreased. In
addition, wide acceptance of the Exchange Offer will affect and could decrease
the liquidity of the Outstanding Notes held by non-tendering holders.
The liquidity of, and trading market for, the Outstanding Notes or the
Exchange Notes also may be adversely affected by general declines in the market
for similar securities. Such a decline may adversely affect such liquidity and
trading markets independent of the financial performance of, and prospects for,
the Company.
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Outstanding Notes were sold by the Company on December 1, 1997, to the
Initial Purchasers pursuant to the Purchase Agreement. The Initial Purchasers
subsequently placed the Outstanding Notes with QIBs in reliance on Rule 144A
under the Securities Act. As a condition of the purchase of the Outstanding
Notes by the Initial Purchasers, the Company entered into the Registration
Rights Agreement with the Initial Purchasers, which requires, among other
things, that the Company file with the Commission a registration statement under
the Securities Act with respect to an offer by the Company to the holders of the
Outstanding Notes to issue and deliver to such holders, in exchange for
Outstanding Notes, a like principal amount of Exchange Notes. The Company is
required to use its best efforts to cause the registration statement relating to
the Exchange Offer (the "Registration Statement") to be declared effective by
the Commission under the Securities Act and commence the Exchange Offer. The
Exchange Notes are to be issued without a restrictive legend, and based on
interpretations by the staff of the Commission, the Company believes that the
Exchange Notes may be reoffered and resold by a holder that is not an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that the holder is acquiring the Exchange Notes
in its ordinary course of business and is not participating in and has no
arrangement or understanding with any person to participate in the distribution
of the Exchange Notes. A copy of the Registration Rights Agreement has been
filed as an exhibit to the Registration Statement of which this Prospectus is a
part. See "-- Resale of Exchange Notes."
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Outstanding Notes, where such Outstanding Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution."
The term "Holder" with respect to the Exchange Offer means any person in
whose name the Outstanding Notes are registered on the books of the Company or
any other person who has obtained a properly completed bond power from the
registered holder.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all
Outstanding Notes validly tendered and not withdrawn prior to 5:00 p.m., E.S.T.,
on the Expiration Date. On the Exchange Date, the Company will issue $1,000
principal amount of
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Exchange Notes in exchange for $1,000 principal amount of Outstanding Notes
accepted in the Exchange Offer. Holders may tender some or all of their
Outstanding Notes pursuant to the Exchange Offer. However, Outstanding Notes may
be tendered only in integral multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Outstanding Notes except that (i) the Exchange Notes have been registered
under the Securities Act and hence will not bear legends restricting the
transfer thereof and (ii) the holders of the Exchange Notes will not be entitled
to certain rights under the Registration Rights Agreement. The Exchange Notes
will evidence the same debt as the Outstanding Notes and will be entitled the
benefits of the Indenture.
As of the date of this Prospectus, $80,000,000 aggregate principal amount
of the Outstanding Notes was outstanding and registered in the name of Cede &
Co., as nominee for the Depositary. The Company has fixed the close of business
of February 9, 1998, as the record date for the Exchange Offer for purposes of
determining the persons to whom this Prospectus and the Letter of Transmittal
will be mailed initially.
Holders of Outstanding Notes do not have any appraisal or dissenters'
rights under the General Corporation Law of Delaware or the Indenture in
connection with the Exchange Offer. The Company intends to conduct the Exchange
Offer in accordance with the applicable requirements of the Exchange Act and the
rules and regulations of the Commission thereunder, including Rule 14e-1
thereunder.
The Company shall be deemed to have accepted validly tendered Outstanding
Notes when, as and if the Company has given oral or written notice thereof to
the Exchange Agent. The Exchange Agent will act as agent for the tendering
Holders for the purpose of receiving the Exchange Notes from the Company.
If any tendered Outstanding Notes are not accepted for exchange because of
an invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Outstanding Notes will be
returned, without expense, to the tendering Holder thereof as promptly as
practicable after the Expiration Date.
Holders who tender Outstanding Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange of
Outstanding Notes pursuant to the Exchange Offer. The Company will pay all
charges and expenses, other than transfer taxes in certain circumstances, in
connection with the Exchange Offer. See "-- Fees and Expenses."
INTEREST ON THE EXCHANGE NOTES
Interest on the Exchange Notes will accrue at a rate of 11% per annum and
will be payable semi-annually in arrears on June l and December l of each year,
commencing June 1, 1998. Interest on the Exchange Notes will accrue from the
most recent date to which interest has been paid on the Outstanding Notes or, if
no interest has been paid, from the date of original issuance of the Outstanding
Notes.
PROCEDURES FOR TENDERING
Only a Holder of Outstanding Notes may tender such Outstanding Notes in the
Exchange Offer. To tender in the Exchange Offer, a Holder must complete, sign
and date the Letter of Transmittal, or a facsimile thereof, have the signatures
thereon guaranteed if required by the Letter of Transmittal and mail or
otherwise deliver such Letter of Transmittal or such facsimile, together with
the Outstanding Notes and any other required documents, to the Exchange Agent
prior to 5:00 p.m., E.S.T., on the Expiration Date. The Company is not asking
any Holder for a proxy, and no Holder is requested to send the Company a proxy.
To be tendered effectively, the Outstanding Notes, Letter of Transmittal and
other required documents must be received by the Exchange Agent at the address
set forth below under "-- Exchange Agent" prior to 5:00 p.m., E.S.T., on the
Expiration Date. Delivery of the Outstanding Notes may be made by book-entry
transfer in accordance with the procedures described below. Confirmation of such
book-entry transfer must be received by the Exchange Agent prior to the
Expiration Date.
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By executing the Letter of Transmittal, each Holder will make to the
Company the representations set forth below in the second paragraph under the
heading "-- Resale of Exchange Notes."
The tender by a Holder and the acceptance thereof by the Company will
constitute agreement between such Holder and the Company in accordance with the
terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF OUTSTANDING NOTES AND THE LETTER OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND
RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS
USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD
BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE.
NO LETTER OF TRANSMITTAL OR OUTSTANDING NOTES SHOULD BE SENT TO THE COMPANY.
HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Outstanding Notes are registered in the name of
a broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered Holder promptly and instruct such
registered Holder to tender on such beneficial owner's behalf.
Signatures on the Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Outstanding Notes tendered pursuant thereto are tendered (i) by a
registered Holder who has not completed the box entitled "Special Delivery
Instructions" on the Letter of Transmittal or (ii) for the account of an
Eligible Institution. In the event that signatures on a Letter of Transmittal or
a notice of withdrawal, as the case may be, are required to be guaranteed, such
guarantee must be by a member firm of a registered national securities exchange
or of the National Association of Securities Dealers, Inc., a commercial bank or
trust company having an office or correspondent in the United States or an
"eligible guarantor institution" within the meaning of Rule 17Ad-15 under the
Exchange Act (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Outstanding Notes listed therein, such Outstanding
Notes must be endorsed or accompanied by a properly completed bond power, signed
by such registered holder as such registered holder's name appears on such
Outstanding Notes with the signature thereon guaranteed by an Eligible
Institution.
If the Letter of Transmittal or any Outstanding Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act must
be submitted with the Letter of Transmittal.
The Company understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish accounts with respect to
the Exchange Notes at the Depository Trust Company (the "Book-Entry Transfer
Facility") for the purpose of facilitating the Exchange Offer, and subject to
the establishment thereof, any financial institution that is a participant in
the Book-Entry Transfer Facility's system may make book-entry delivery of the
Outstanding Notes by causing such Book-Entry Transfer Facility to transfer such
Outstanding Notes into the Exchange Agent's account with respect to the
Outstanding Notes in accordance with the Book-Entry Transfer Facility's
procedures for such transfer. Although delivery of the Outstanding Notes may be
effected through book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility, an appropriate Letter of Transmittal properly
completed and duly executed with any required signature guarantee and all other
required documents must in each case be transmitted to and received or confirmed
by the Exchange Agent at its address set forth below on or prior to the
Expiration Date, or, if the guaranteed delivery procedures described below are
complied with, within the time period provided under such procedures; provided,
however, that a participant in the Book-Entry Transfer Facility's book-entry
system may, in accordance with the Book-Entry Transfer Facility's Automated
Tender Offer Program
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procedures and in lieu of physical delivery to the Exchange Agent of a Letter of
Transmittal, electronically acknowledge its receipt of, and agreement to be
bound by, the terms of the Letter of Transmittal. Delivery of documents to the
Book-Entry Transfer Facility does not constitute delivery to the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Outstanding Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and all
Outstanding Notes not properly tendered or any Outstanding Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Outstanding Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Outstanding Notes must be cured within such time as
the Company shall determine. Although the Company intends to notify Holders of
defects or irregularities with respect to tenders of Outstanding Notes, neither
the Company, the Exchange Agent nor any other person shall incur any liability
for failure to give such notification. Tenders of Outstanding Notes will not be
deemed to have been made until such defects or irregularities have been cured or
waived. Any Outstanding Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering Holders,
unless otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Outstanding Notes, where such Outstanding Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution."
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Outstanding Notes and (i) whose
Outstanding Notes are not immediately available, (ii) who cannot deliver their
Outstanding Notes, the Letter of Transmittal or any other required documents to
the Exchange Agent or (iii) who cannot complete the procedures for book-entry
transfer, prior to the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder, the certificate number(s)
of such Outstanding Notes and the principal amount of Outstanding Notes
tendered, stating that the tender is being made thereby and guaranteeing
that, within five Nasdaq Stock Market trading days after the Expiration
Date, the Letter of Transmittal (or facsimile thereof), together with the
certificate(s) representing the Outstanding Notes (or a confirmation of
book-entry transfer of such Outstanding Notes into the Exchange Agent's
account at the Book-Entry Transfer Facility) and any other documents
required by the Letter of Transmittal, will be deposited by the Eligible
Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Outstanding Notes in proper form for transfer (or a confirmation of
book-entry transfer of such Outstanding Notes into the Exchange Agent's
account at the Book-Entry Transfer Facility) and all other documents
required by the Letter of Transmittal, are received by the Exchange Agent
within five Nasdaq Stock Market trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Outstanding Notes according to the
guaranteed delivery procedures set forth above.
26
<PAGE> 28
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Outstanding Notes may be
withdrawn at any time prior to 5:00 p.m., E.S.T., on the Expiration Date.
To withdraw a tender of Outstanding Notes in the Exchange Offer, a written
or facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., E.S.T., on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Outstanding Notes to be withdrawn (the "Depositor"),
(ii) identify the Outstanding Notes to be withdrawn (including the certificate
number(s) and principal amount of such Outstanding Notes, or, in the case of
Outstanding Notes transferred by book-entry transfer, the name and number of the
account at the Book-Entry Transfer Facility to be credited), (iii) be signed by
the Holder in the same manner as the original signature on the Letter of
Transmittal by which such Outstanding Notes were tendered (including any
required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee with respect to the Outstanding Notes register
the transfer of such Outstanding Notes into the name of the person withdrawing
the tender, (iv) specify the name in which any such Outstanding Notes are to be
registered, if different from that of the Depositor and (v) if applicable
because the Outstanding Notes have been tendered pursuant to book-entry
procedures, specify the name and number of the participant's account at the
Book-Entry Transfer Facility to be credited, if different from that of the
Depositor. All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Outstanding Notes
so withdrawn will be deemed not to have been validly tendered for purposes of
the Exchange Offer and no Exchange Notes will be issued with respect thereto
unless the Outstanding Notes so withdrawn are validly retendered. Any
Outstanding Notes which have been tendered but which are not accepted for
exchange, will be returned to the Holder thereof without cost to such Holder as
soon as practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Outstanding Notes may be retendered by
following one of the procedures described above under "-- Procedures for
Tendering" at any time prior to the Expiration Date.
EXCHANGE AGENT
Norwest Bank Minnesota, National Association has been appointed as Exchange
Agent for the Exchange Offer. Questions and requests for assistance, requests
for additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
<TABLE>
<S> <C>
By Registered or Certified Mail: By Overnight Delivery:
Norwest Bank Minnesota, Norwest Bank Minnesota,
National Association National Association
P.O. Box 1517 Norwest Center
Minneapolis, Minnesota 55480-1517 6th and Marquette
Attention: Corporate Trust Operations Minneapolis, Minnesota 55479-0069
Attention: Corporate Trust Operations
By Hand Delivery: By Facsimile:
Norwest Bank Minnesota, (612) 667-4927
National Association Confirm by Telephone:
Northstar East 12th Floor (612) 667-9764
608 2nd Avenue
Minneapolis, Minnesota 55479-0113
Attention: Corporate Trust Operations
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation is being made by mail; however,
additional solicitation may be made by telegraph, telephone, facsimile or in
person by officers and regular employees of the Company and its affiliates.
27
<PAGE> 29
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers or others soliciting
acceptances of the Exchange Offer. The Company, however, will pay the Exchange
Agent reasonable and customary fees for its services and registration expenses,
including fees and expenses of the Trustee, filing fees, blue sky fees and
printing and distribution expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of the Outstanding Notes pursuant to the Exchange Offer. If, however,
certificates representing the Exchange Notes or the Outstanding Notes for the
principal amounts not tendered or accepted for exchange are to be delivered to,
or are to be issued in the name of, any person other than the person signing the
Letter of Transmittal, or if a transfer tax is imposed for any reason other than
the exchange of the Outstanding Notes pursuant to the Exchange Offer, then the
amount of any such transfer taxes (whether imposed on the registered holder or
any other person) will be payable by the tendering Holder.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Outstanding Notes, which is face value, as reflected in the Company's accounting
records on the Exchange Date. Accordingly, no gain or loss for accounting
purposes will be recognized. The expenses of the Exchange Offer will be
amortized over the term of the Exchange Notes.
RESALE OF EXCHANGE NOTES
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that Exchange
Notes issued pursuant to the Exchange Offer in exchange for Outstanding Notes
may be offered for resale, resold and otherwise transferred by any holder of
such Exchange Notes (other than any such holder which is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such Exchange Notes are acquired in the ordinary
course of such holder's business and such holder does not intend to participate
and has no arrangement or understanding with any person to participate in the
distribution of such Exchange Notes. Any holder who tenders in the Exchange
Offer with the intention to participate, or for the purpose of participating, in
a distribution of the Exchange Notes may not rely on the position of the staff
of the Commission enunciated in Exxon Capital Holdings Corporation and Morgan
Stanley & Co., Incorporated, or similar no-action letters, but rather must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. In addition, any such
resale transaction should be covered by an effective registration statement
containing the selling security holders information required by Item 507 of
Regulation S-K of the Securities Act. Each broker-dealer that receives Exchange
Notes for its own account in exchange for Outstanding Notes, where such
Outstanding Notes were acquired by such broker-dealer as a result of market-
making activities or other trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. See
"Plan of Distribution."
By tendering in the Exchange Offer, each Holder will represent to the
Company that, among other things, (i) the Exchange Notes acquired pursuant to
the Exchange Offer are being obtained in the ordinary course of business of the
person receiving such Exchange Notes, whether or not such person is a Holder,
(ii) neither the Holder nor any such other person is engaged in or intends to
engage in, or has an arrangement or understanding with any person to participate
in the distribution of such Exchange Notes and (iii) the Holder and such other
person acknowledge that if they participate in the Exchange Offer for the
purpose of distributing the Exchange Notes (a) they must, in the absence of an
exemption therefrom, comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale of the Exchange
Notes and cannot rely on the no-action letters referenced above and (b) failure
to comply with such requirements in such instance could result in such Holder
incurring liability under the Securities Act for which such Holder is not
indemnified by the Company. Further, by tendering in the Exchange Offer, each
Holder that may be deemed an "affiliate" (as defined under Rule 405 of the
Securities Act) of the Company will represent to the Company that such Holder
understands and acknowledges that the Exchange Notes may not
28
<PAGE> 30
be offered for resale, resold or otherwise transferred by that Holder without
registration under the Securities Act or an exemption therefrom.
As set forth above, affiliates of the Company are not entitled to rely on
the foregoing interpretations of the staff of the Commission with respect to
resales of the Exchange Notes without compliance with the registration and
prospectus delivery requirements of the Securities Act.
SHELF REGISTRATION STATEMENT
If the Company is not permitted to consummate the Exchange Offer because
the Exchange Offer is not permitted by any applicable law or applicable
interpretation of the Commission or the staff of the Commission, the Company has
agreed to file with the Commission and use its best efforts to have declared
effective and keep continuously effective for up to two years a registration
statement that would allow resales of Outstanding Notes owned by such holders.
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Outstanding Notes are urged
to consult their financial and tax advisors in making their own decision on what
action to take.
The Company may in the future seek to acquire untendered Outstanding Notes
in open market or privately negotiated transactions, through subsequent exchange
offers or otherwise. The Company, however, has no present plans to acquire any
Outstanding Notes that are not tendered in the Exchange Offer or to file a
registration statement to permit resales of any untendered Outstanding Notes.
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain of the Company's
obligations under the Purchase Agreement and the Registration Rights Agreement
with respect to the Outstanding Notes. The Company will not receive any cash
proceeds from the issuance of the Exchange Notes offered hereby. In
consideration for issuing the Exchange Notes contemplated in this Prospectus,
the Company will receive Outstanding Notes in like principal amount, the form
and terms of which are substantially similar to the form and terms of the
Exchange Notes, except as otherwise described herein. The Outstanding Notes
surrendered in exchange for Exchange Notes will be retired and canceled and
cannot be reissued. Accordingly, issuance of the Exchange Notes will not result
in any increase or decrease in the indebtedness of the Company.
29
<PAGE> 31
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The following table sets forth selected consolidated historical financial
data which has been derived from the consolidated financial statements of the
Company. The selected consolidated financial data for the nine months ended
December 31, 1992 and the years ended December 31, 1993, 1994, 1995 and 1996 has
been derived from the audited consolidated financial statements of the Company.
The selected consolidated financial data for the nine months ended September 30,
1996 and 1997 is unaudited. The following selected financial data is qualified
in its entirety and should be read in conjunction with the Company's
consolidated financial statements and related notes included elsewhere in this
Prospectus. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
NINE MONTHS
NINE MONTHS ENDED
ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, -------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
------------ ------- ------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net revenues.......................... $34,301 $60,097 $57,151 $81,557 $106,785 $77,476 $108,583(1)
Direct expenses....................... 18,987 33,302 30,337 41,392 48,314 35,095 48,982
------- ------- ------- ------- -------- ------- --------
Gross profit.......................... 15,314 26,795 26,814 40,165 58,471 42,381 59,601
Other costs and expenses:
General and administrative............ 11,664 21,493 21,280 30,663 41,418 30,387 46,049
Depreciation and amortization......... 514 895 789 1,240 2,579 2,173 3,616
Provision for doubtful accounts....... 1,020 1,318 1,115 1,489 3,580 2,287 6,738(2)
------- ------- ------- ------- -------- ------- --------
Total costs........................... 13,198 23,706 23,184 33,392 47,577 34,847 56,403
------- ------- ------- ------- -------- ------- --------
Income from operations................ 2,116 3,089 3,630 6,773 10,894 7,534 3,198
Interest expense, net................. 244 427 244 987 2,144 1,663 3,215
------- ------- ------- ------- -------- ------- --------
Income (loss) before income taxes..... 1,872 2,662 3,386 5,786 8,750 5,871 (17)
Provision for income taxes............ 523 1,129 1,359 2,202 3,418 2,262 218
------- ------- ------- ------- -------- ------- --------
Net income (loss)..................... $ 1,349 $ 1,533 $ 2,027 $ 3,584 $ 5,332 $ 3,609 $ (235)
Net income per common share........... $ .23 $ .24 $ .31 $ .55 $ .66 $ .49 $ (.02)
Weighted average common shares
outstanding......................... 5,787 6,403 6,490 6,546 8,040 7,324 10,043
======= ======= ======= ======= ======== ======= ========
OTHER FINANCIAL DATA:
EBITDA(3)............................. $ 2,630 $ 4,270 $ 5,070 $ 9,072 $ 15,668 $11,149 $ 9,227
Adjusted EBITDA(4).................... 2,630 4,270 5,070 9,072 15,668 11,149 14,727
Depreciation and amortization......... 514 1,181 1,440 2,299 4,774 3,615 6,029
Capital expenditures.................. 1,246 1,957 866 7,180 7,867 5,369 4,744
Ratio of Adjusted EBITDA to interest
expense............................. 10.8x 10.0x 20.8x 9.2x 7.3x 6.7x 4.6x
Ratio of earnings to fixed
charges(5).......................... 5.2x 4.3x 5.7x 4.3x 3.8x 3.7x 1.0x
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, SEPTEMBER 30,
------------------------------------------------ ------------------
1992 1993 1994 1995 1996 1996 1997
---- ------- ------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 1,491 $ 506 $ 3,775 $ 1,628 $ -- $ 1,007 $ --
Working capital (deficit).................. 1,923 1,292 1,296 (1,737) 5,773 11,155 (19,444)
Property and equipment, net................ 2,756 3,866 3,880 11,054 22,288 19,049 29,042
Total assets............................... 19,444 22,251 24,504 52,573 100,303 84,799 137,953
Total debt, including capital leases....... 2,014 1,678 4,374 19,584 24,432 15,465 59,116
Stockholders' equity....................... 2,837 5,046 7,074 12,062 54,555 53,118 54,549
</TABLE>
- ---------------
(1) Includes a $2.8 million revenue adjustment relating to Medicare nursing cost
limitations. See "Prospectus Summary -- Recent Developments."
(2) Includes a $2.7 million special provision for doubtful accounts. See
"Prospectus Summary -- Recent Developments."
30
<PAGE> 32
(3) As defined in this Prospectus, EBITDA represents income before interest and
amortization of debt costs, federal and state income taxes, and depreciation
and amortization. EBITDA is generally considered to provide information
regarding a company's ability to service and/or incur debt. EBITDA should
not be considered in isolation or as a substitute for net income, cash flows
from operations, or consolidated income or cash flow data prepared in
accordance with generally accepted accounting principles or as a measure of
a company's profitability or liquidity.
(4) As defined in this Prospectus, Adjusted EBITDA for the nine months ended
September 30, 1997 represents EBITDA, plus a $2.8 million net revenue
adjustment relating to Medicare nursing cost limitations and a $2.7 million
special provision for doubtful accounts, both of which were recorded by the
Company in the three month period ended June 30, 1997.
(5) For purposes of calculating the ratio of earnings to fixed charges, earnings
consist of income before extraordinary item and federal and state income
taxes, plus fixed charges. Fixed charges consist of interest and
amortization of debt costs plus that portion of rental payments on operating
leases deemed representative of the interest factor.
31
<PAGE> 33
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited pro forma condensed consolidated statements of
income for the year ended December 31, 1996, and the nine-month period ended
September 30, 1997, reflect (i) the acquisitions by the Company in 1996 and 1997
(the "Recent Acquisitions") using the purchase method of accounting and (ii) the
receipt and application of the net proceeds (after deducting offering related
expenses) from the issuance of $80.0 million in Senior Notes due 2004. The
unaudited pro forma condensed consolidated statements of income do not purport
to represent the Company's results of operations had the transactions occurred
in January 1, 1996, or to project the Company's results of operations for any
future periods.
The following unaudited pro forma condensed consolidated balance sheet as
of September 30, 1997, reflects (i) the Recent Acquisitions by the Company in
1997 using the purchase method of accounting, and (ii) the receipt and
application of the net proceeds (after deducting offering related expenses) from
the issuance of $80.0 million in Senior Notes due 2004, as if such transactions
had occurred as of September 30, 1997.
The Company usually implements significant changes to the operations of the
entities that it acquires to enhance profitability. The expected benefits and
cost reductions anticipated by the Company have not been reflected in the
accompanying unaudited pro forma condensed consolidated financial statements.
Accordingly, these pro forma condensed consolidated financial statements are not
necessarily indicative of the operating results that would have been achieved
had the Recent Acquisitions occurred at the beginning of each period presented.
The pro forma adjustments are based upon available information. These
adjustments are directly attributable to the transactions referenced above, and
are expected to have a continuing impact on the Company's business, results of
operations, and financial condition. The following unaudited pro forma condensed
consolidated financial statements should be read in conjunction with the
historical consolidated financial statements of the Company, which are included
elsewhere in this Prospectus.
32
<PAGE> 34
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
HISTORICAL RECENT PRO FORMA
HEALTHCOR ACQUISITIONS ADJUSTMENTS OFFERING AS ADJUSTED
---------- ------------ ----------- -------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net revenues.................... $106,785 $49,073(A) $ -- $ -- $155,858
Direct expenses................. 48,314 24,556(A) -- -- 72,870
-------- ------- ------- ------- --------
Gross profit.................... 58,471 24,517 -- -- 82,988
Other costs and expenses:
General and administrative
........................... 41,418 20,518(A) (325)(B) -- 61,611
Depreciation and
amortization............... 2,579 286(A) 567(C) -- 3,432
Provision for doubtful
accounts................... 3,580 160(A) -- -- 3,740
-------- ------- ------- ------- --------
Total costs and
expenses............ 47,577 20,964 242 -- 68,783
-------- ------- ------- ------- --------
Income from operations.......... 10,894 3,553 (242) -- 14,205
Interest expense, net........... 2,144 117(A) 2,171(D) 5,032(E) 9,464
-------- ------- ------- ------- --------
Income (loss) before income
taxes......................... 8,750 3,436 (2,413) (5,032) 4,741
Provision for income taxes...... 3,418 1,374(F) (965)(F) (2,013)(F) 1,814
-------- ------- ------- ------- --------
Net income (loss)............... $ 5,332 $ 2,062 $(1,448) $(3,019) $ 2,927
======== ======= ======= ======= ========
Net income per common share..... $ 0.66 $ 0.36
======== ========
Weighted average common shares
outstanding................... 8,040 8,040
======== ========
OTHER DATA:
EBITDA(G)....................... $ 15,668 $ 19,833
======== ========
Ratio of EBITDA to interest
expense....................... 2.1x
========
</TABLE>
The accompanying notes are an integral part of the
Unaudited Pro Forma Condensed Consolidated Financial Statements
33
<PAGE> 35
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
HISTORICAL RECENT PRO FORMA
HEALTHCOR ACQUISITIONS ADJUSTMENTS OFFERING AS ADJUSTED
---------- ------------ ----------- -------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net revenues..................... $108,583 $7,728(A) $ -- $ -- $116,311
Direct expenses.................. 48,982 4,682(A) -- -- 53,664
-------- ------ ------ -------- --------
Gross profit..................... 59,601 3,046 -- -- 62,647
Other costs and expenses:
General and administrative..... 46,049 2,347(A) 5(B) -- 48,401
Depreciation and
amortization................ 3,616 48(A) 127(C) -- 3,791
Provision for doubtful
accounts.................... 6,738 36(A) -- -- 6,774
-------- ------ ------ -------- --------
Total costs and
expenses............. 56,403 2,431 132 -- 58,966
-------- ------ ------ -------- --------
Income from operations........... 3,198 615 (132) -- 3,681
Interest, net.................... 3,215 10(A) 383(D) 3,835(E) 7,443
-------- ------ ------ -------- --------
Income (loss) before income
taxes.......................... (17) 605 (515) (3,835) (3,762)
Provision for income taxes....... 218 242(F) (206)(F) (1,534)(F) (1,280)
-------- ------ ------ -------- --------
Net income (loss)................ $ (235) $ 363 $ (309) $ (2,301) $ (2,482)
======== ====== ====== ======== ========
Net loss per common share........ $ (0.02) $ (0.25)
======== ========
Weighted average common shares
outstanding.................... 10,043 10,043
======== ========
Other data:
Adjusted EBITDA(G)............. $ 14,727 $ 15,385
======== ========
Ratio of Adjusted EBITDA to
interest expense............ 2.1x
========
</TABLE>
The accompanying notes are an integral part of the
Unaudited Pro Forma Condensed Consolidated Financial Statements
34
<PAGE> 36
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
ASSETS
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
HEALTHCOR ADJUSTMENTS(H) OFFERING(I) AS ADJUSTED
---------- -------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Current Assets:
Cash....................................... $ -- $ 3,500 $ 22,725 $ 26,225
Accounts receivable, net of allowance for
doubtful accounts....................... 43,103 -- -- 43,103
Income tax receivable...................... 1,628 -- -- 1,628
Supplies inventory......................... 4,014 -- -- 4,014
Prepaid expenses and other................. 1,226 -- -- 1,226
Deferred income taxes...................... 2,644 -- -- 2,644
-------- ------- -------- --------
Total current assets....................... 52,615 3,500 22,725 78,840
Property and equipment, net................ 29,042 -- -- 29,042
Excess of cost of acquired businesses over
fair values of net assets acquired...... 54,271 -- -- 54,271
Other assets............................... 2,025 -- 2,950 4,975
-------- ------- -------- --------
Total assets....................... $137,953 $ 3,500 $ 25,675 $167,128
======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses...... $ 11,584 $ -- $ (3,637)(J) $ 7,947
Accrued payroll and related expenses....... 6,349 -- -- 6,349
Line of credit payable..................... 24,885 4,500 (29,385) --
Current portion of long-term debt and
capital lease obligations............... 29,241 (1,000) (21,303) 6,938
Income taxes payable....................... -- -- -- --
-------- ------- -------- --------
Total current liabilities.................. 72,059 3,500 (54,325) 21,234
Deferred income taxes and other............ 6,355 -- -- 6,355
Long-term debt and capital lease
obligations............................. 4,990 -- 80,000 84,990
-------- ------- -------- --------
Total liabilities.................. 83,404 3,500 25,675 112,579
Commitments and contingencies
Stockholders' equity:
Common stock............................... 101 -- -- 101
Additional paid-in capital................. 39,791 -- -- 39,791
Retained earnings.......................... 14,657 -- -- 14,657
-------- ------- -------- --------
Total stockholders' equity............ 54,549 -- -- 54,549
Total liabilities and stockholders'
equity........................... $137,953 $ 3,500 $ 25,675 $167,128
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the
Unaudited Pro Forma Condensed Consolidated Financial Statements
35
<PAGE> 37
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(A) Reflects the historical net revenues, direct expenses, general and
administrative expense, depreciation and amortization expense, provision for
doubtful accounts, interest expense, net, and provision for income taxes
recorded up to the date of purchase for the Recent Acquisitions on a
consolidated basis.
(B) Represents the adjustment to general and administrative expense which would
have been realized had the acquisition been completed at the beginning of
the period.
(C) Represents incremental amortization of the excess purchase price over the
net assets acquired as a result of the Recent Acquisitions. Goodwill is
being amortized over a 40-year period and is based on $20.5 million and
$13.4 million of goodwill related to acquisitions during 1996 and 1997,
respectively.
(D) Reflects the additional interest expense that would have been incurred had
the debt issued, assumed, or incurred to finance the Recent Acquisitions
been outstanding from the beginning of the period to the dates of
acquisition and interest. The calculation is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
To record incremental interest on $21.4 million and
$13.1 million of bank financing related to
acquisitions taking place during 1996 and 1997,
respectively (8.4% and 8.5% effective interest
rate)............................................ $2,010 $357
To record incremental interest on $3.3 million and
$1.5 million of seller financing related to
acquisitions taking place during 1996 and 1997,
respectively (7.8% and 8.1% effective interest
rate)............................................ 278 36
Other.............................................. (117) (10)
------ ----
Incremental interest expense related to
acquisitions..................................... $2,171 $383
====== ====
</TABLE>
(E) Reflects an adjustment to increase interest expense relating to the
assumption of $80.0 million in Senior Notes and amortization of debt
issuance costs of $3.0 million (representing interest expense of $421,430
and $316,070 for the 12 month period ended December 31, 1996 and the nine
month period ended September 30, 1997, respectively), net of decreases in
interest expense relating to the use of proceeds of the Initial Offering
and interest income earned on excess cash received.
(F) Represents an adjustment to reflect income tax expense at an assumed
effective tax rate of 40%.
(G) EBITDA represents income before interest and amortization of debt costs,
federal and state income taxes, and depreciation and amortization. EBITDA is
generally considered to provide information regarding a company's ability to
service and/or incur debt. EBITDA should not be considered in isolation or
as a substitute for net income, cash flows from operations, or other
consolidated income or cash flow data prepared in accordance with generally
accepted accounting principles or as a measure of a company's profitability
or liquidity. Adjusted EBITDA for the nine months ended September 30, 1997
represents EBITDA, plus a $2.8 million net revenue adjustment relating to
the Medicare nursing cost limitations and a $2.7 million special provision
for doubtful accounts, both of which were recorded by the Company in the
three month period ended June 30, 1997.
(H) Adjustments for this column represent transactions occurring after September
30, 1997, including the incurrence of $4.5 million of indebtedness under the
revolving credit portion of the Company's prior credit facility, and
payments of $1.0 million on the term portion of such credit facility.
(I) Adjustments for the Initial Offering include the issuance of $80.0 million
of Outstanding Notes and the retirement of approximately $29.4 million of
indebtedness outstanding under the Company's prior revolving credit
facility and $21.3 million of indebtedness outstanding under the Company's
prior term facility.
(J) Reflects an adjustment to reduce the cash deficit in accounts payable
balance at September 30, 1997.
36
<PAGE> 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is one of the largest fully integrated providers of
comprehensive home health care services based in the southwestern and central
United States, providing home nursing, respiratory therapy/home medical
equipment and infusion therapy. The Company has successfully implemented a
regional growth strategy, expanding from 12 offices in three states at its
inception in 1984 to 96 offices in nine states at September 30, 1997. For the
twelve months ended September 30, 1997, the Company had net revenues of $137.9
million and Adjusted EBITDA of $19.2 million. Adjusted EBITDA for the nine
months ended September 30, 1997 represents income before interest and
amortization of debt costs, federal and state income taxes, and depreciation and
amortization, plus a $2.8 million revenue adjustment relating to Medicare
nursing cost limitations and a $2.7 million special provision for doubtful
accounts, both of which were recorded by the Company in the three month period
ended June 30, 1997.
The Company has diversified its business mix from 98% home nursing in 1990
to 55% home nursing for the nine months ended September 30, 1997. This shift
reflects the addition and growth of higher margin respiratory therapy/home
medical equipment and infusion therapy. Although higher margin respiratory
therapy/home medical equipment and infusion therapy accounted for approximately
41% of the Company's net revenues for the nine months ended September 30, 1997,
these businesses generated approximately 79% of Adjusted EBITDA. The Company
expects that it will continue to shift its business mix towards respiratory
therapy/home medical equipment and infusion therapy. Home nursing, however, will
continue to represent an important part of HealthCor's business mix because
managed care organizations and other referral sources often will make
arrangements for other home health services after first referring home nursing
cases to a provider.
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED
-------------------------- SEPTEMBER 30,
1994 1995 1996 1997
------ ------ ------ -------------
<S> <C> <C> <C> <C>
Nursing....................................... 79.2% 74.2% 56.9% 54.6%
Respiratory therapy/home medical equipment.... 16.5 19.8 27.1 27.8
Infusion therapy.............................. 4 .3 6.0 14.9 13.4
Other......................................... -- -- 1.1 4.2
----- ----- ----- -----
Total............................... 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
As the Company has pursued its fully-integrated provider strategy, the
Company's revenue mix has shifted from predominately home nursing to higher
margin respiratory therapy/home medical equipment and infusion therapy. The
Company is paid for its services and products primarily by Medicare, Medicaid
and private payors, including managed care organizations, insurance companies
and other third-party payors. The following table represents the Company's payor
mix:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED
-------------------------- SEPTEMBER 30,
1994 1995 1996 1997
------ ------ ------ -------------
<S> <C> <C> <C> <C>
Medicare Part A (cost-based).................. 69.5% 67.2% 50.1% 47.2%
Medicare Part B (charge-based)................ 13.7 13.8 18.4 10.4
Medicaid...................................... 1.1 1.3 4.4 9.2
Third-party payors and others................. 15.7 17.7 27.1 33.2
----- ----- ----- -----
Total............................... 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
Medicare reimburses the Company for both Part A and Part B services.
Medicare Part A reimburses the Company on a "cost basis" based on the lower of
the Company's allowable cost as defined by Medicare
37
<PAGE> 39
regulations, not to exceed annual cost limits, or the Company's actual charges.
Allowable cost is the actual cost directly related to providing home nursing,
plus an overhead allocation. A cost report evidencing the fiscal year allowable
costs, visit data, charges and other financial information is filed annually and
subject to audit. Medicare Part B is paid on a fixed fee-for-service basis
similar to third-party payors, such as managed care organizations.
RESULTS OF OPERATIONS
The following table sets forth certain items included in the Company's
consolidated statements of income as a percentage of net revenues:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- --------------
1994 1995 1996 1996 1997
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
Net revenues............................... 100.0% 100.0% 100.0% 100.0% 100.0%
Direct expenses............................ 53.1 50.8 45.2 45.3 45.1
----- ----- ----- ----- -----
Gross profit............................... 46.9 49.2 54.8 54.7 54.9
Other costs and expenses:
General and administration............... 37.2 37.6 38.8 39.2 42.4
Depreciation and amortization............ 1.4 1.5 2.4 2.8 3.3
Provision for doubtful accounts.......... 2.0 1.8 3.4 2.9 6.2
----- ----- ----- ----- -----
Total operating expenses......... 40.6 40.9 44.6 44.9 51.9
----- ----- ----- ----- -----
Income from operations..................... 6.3 8.3 10.2 9.8 3.0
Interest, Net Proceeds Payment Date........ 0.4 1.2 2.0 2.1 2.9
----- ----- ----- ----- -----
Income before income taxes................. 5.9 7.1 8.2 7.7 0.1
Provision for income taxes................. 2.4 2.7 3.2 2.9 0.2
----- ----- ----- ----- -----
Net income (loss).......................... 3.5% 4.4% 5.0% 4.8% (0.1)%
===== ===== ===== ===== =====
</TABLE>
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996
Net Revenues. Net revenues increased to $108.6 million for the nine months
ended September 30, 1997, from $77.5 million for the same period in 1996, an
increase of $31.1 million, or 40.1%. This increase is primarily the result of
additional revenues from acquisitions and from internal growth in respiratory
therapy, infusion therapy and commercial nursing revenues, partially offset by a
revenue adjustment of $2.8 million relating to Medicare nursing cost limitations
and by a decrease in Medicare nursing revenues from certain offices. See
"Prospectus Summary -- Recent Developments -- Regulatory Changes."
Direct Expenses. Direct expenses increased to $49.0 million for the nine
months ended September 30, 1997, from $35.1 million for the same period in 1996,
an increase of $13.9 million, or 39.6%. This increase is the result of the
direct expenses associated with the operations of companies acquired during 1996
and 1997. As a percentage of net revenues, direct expenses declined to 45.1% for
the nine months ended September 30, 1997, from 45.3% for the comparable period
in 1996, primarily as a result of lower direct costs incurred by the Company for
pharmaceutical and nursing supplies and improved pricing for respiratory sales
and rental equipment. Direct expenses include all costs directly related to the
production of net revenues, including salary and employee benefit costs, rental
equipment depreciation, medical supplies, and product purchase costs.
General and Administrative. General and administrative expenses increased
to $46.0 million for the nine months ended September 30, 1997, from $30.4
million for the same period in 1996, an increase of $15.6 million, or 51.5%.
This increase is primarily the result of additional field office expenses
associated with the operations of companies acquired during 1996 and 1997, and
increased central office costs. As a percentage of net revenues, general and
administrative expenses increased to 42.4% for the nine months ended September
30, 1997, from 39.2% for the same period in 1996, primarily as a result of
increased implementation costs of Medisyn(TM).
38
<PAGE> 40
Depreciation and Amortization. Depreciation and amortization expense
increased to $3.6 million for the nine months ended September 30, 1997, from
$2.2 million for the same period in 1996, an increase of $1.4 million, or 66.4%.
This increase is primarily due to the amortization of goodwill incurred in
connection with acquisitions and depreciation of capital expenditures relating
to increased purchases of home medical equipment to service increased business
and the development and implementation of Medisyn(TM).
Provision for Doubtful Accounts. The provision for doubtful accounts
increased to $6.7 million for the nine months ended September 30, 1997, from
$2.3 million for the same period in 1996, an increase of $4.4 million, or
195.0%. This increase is the result of increased revenues and the special
provision for doubtful accounts of $2.7 million for the three months ended June
30, 1997. This additional provision for doubtful accounts resulted from the
Company's continuing evaluation of certain accounts receivable.
Interest, Net. Interest, net increased to $3.2 million for the nine months
ended September 30, 1997, from $1.7 million for the same period in 1996, an
increase of $1.5 million, or 93.3%. This increase resulted from interest costs
associated with additional indebtedness incurred in connection with
acquisitions, increased working capital borrowings, and interest on equipment
leases to service additional home medical equipment business and leases
associated with the implementation and development of Medisyn(TM).
Provision for Income Taxes. The provision for income taxes decreased to
$0.2 million for the nine months ended September 30, 1997, from $2.2 million for
the same period in 1996, a decrease of $2.0 million, or 90.4%. This decrease is
a result of the decrease in income before taxes in the nine months ended
September 30, 1997.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net Revenues. Net revenues increased to $106.8 million in 1996 from $81.6
million in 1995, an increase of $25.2 million, or 30.9%. This increase is
primarily the result of additional revenues from acquisitions and from internal
growth in respiratory therapy, infusion therapy and managed care nursing
revenues, partially offset by a decrease in Medicare nursing revenues from
certain offices.
Direct Expenses. Direct expenses increased to $48.3 million for 1996 from
$41.4 million in 1995, an increase of $6.9 million, or 16.7%. This increase is
primarily the result of the direct expenses associated with the operations of
companies acquired during 1996 and 1995. As a percentage of net revenues, direct
expenses declined to 45.2% in 1996 from 50.8% in 1995 primarily as a result of a
shift in the Company's business mix to a higher percentage of respiratory
therapy/home medical equipment and infusion therapy, which have lower direct
expenses than home nursing.
General and Administrative. General and administrative expenses increased
to $41.4 million for 1996 from $30.7 million in 1995, an increase of $10.8
million, or 35.1%. This increase was primarily the result of additional field
office expenses associated with the operations of acquired companies and
increased central office costs. General and administrative expenses increased as
a percentage of net revenues to 38.8% in 1996 from 37.6% in 1995, primarily as a
result of increased development costs of Medisyn(TM).
Depreciation and Amortization. Depreciation and amortization expense
increased to $2.6 million for 1996 from $1.2 million in 1995, an increase of
$1.4 million, or 108.0%. This increase was primarily due to the amortization of
goodwill associated with acquisitions and depreciation of capital expenditures
relating to Medisyn(TM).
Provision for Doubtful Accounts. The provision for doubtful accounts
increased to $3.6 million in 1996 from $1.5 million for 1995, an increase of
$2.1 million, or 140.5%. This increase was primarily a result of revenue growth
and a shift in the Company's business mix to respiratory therapy/home medical
equipment and infusion therapy businesses, which historically carry a higher
provision for doubtful accounts.
Interest, Net. Interest, net increased to $2.1 million for 1996 from $1.0
million in 1995, or 117.2%. This increase resulted from interest costs
associated with indebtedness incurred in connection with acquisitions, increased
working capital borrowings to finance additional managed care business, interest
on equipment
39
<PAGE> 41
leases to service additional home medical equipment business and leases
associated with the implementation and development of Medisyn(TM), and higher
borrowing costs.
Provision for Income Taxes. The provision for income taxes increased to
$3.4 million for 1996 from $2.2 million in 1995, an increase of $1.2 million, or
55.2%. This increase is a result of the growth of income before taxes and an
increase in the Company's effective income tax rate to 39.0% in 1996 from 38.0%
in 1995.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net Revenues. Net revenues increased to $81.6 million in 1995 from $57.1
million in 1994, an increase of $24.4 million, or 42.7%. This increase is
primarily the result of additional revenues from acquisitions and from internal
growth in respiratory therapy/home medical equipment, infusion therapy and
managed care nursing revenues, partially offset by a decrease in Medicare
nursing revenues from certain offices.
Direct Expenses. Direct expenses increased to $41.4 million in 1995 from
$30.3 million in 1994, an increase of $11.1 million, or 36.4%. This increase is
the result of the direct expenses associated with the operations of companies
acquired during 1995. As a percentage of net revenues, direct expenses declined
to 50.8% in 1995 from 53.1% in 1994, primarily as a result of a shift in the
Company's business mix to a higher percentage of respiratory therapy/medical
equipment and infusion therapy, which have lower direct expenses than nursing.
General and Administrative. General and administrative expenses increased
to $30.7 million in 1995 from $21.3 million in 1994, an increase of $9.4
million, or 44.1%. This increase was primarily the result of additional field
office expenses associated with the operations of acquired companies and
increased central office costs. General and administrative expense as a
percentage of net revenues increased to 37.6% in 1995 from 37.2% in 1994. This
increase was primarily the result of increased development costs of Medisyn(TM).
Depreciation and Amortization. Depreciation and amortization expense
increased to $1.2 million in 1995 from $0.8 million in 1994, an increase of $0.4
million, or 57.1%. This increase was primarily due to the amortization of
goodwill associated with acquisitions and depreciation of capital expenditures
associated with the development and implementation of Medisyn(TM).
Provision for Doubtful Accounts. Provision for doubtful accounts increased
to $1.5 million in 1995 from $1.1 million in 1994, an increase of $0.4 million,
or 33.4%. This increase is primarily a result of revenue growth and a shift in
the Company's business mix to respiratory therapy/home medical equipment and
infusion therapy, which historically carry a higher provision for doubtful
accounts.
Interest, Net. Interest, net increased to $1.0 million in 1995 from $0.2
million in 1994, an increase of $0.8 million, or 305.1%. This increase resulted
from interest costs associated with additional indebtedness incurred in
connection with acquisitions, increased working capital borrowings, and interest
on leases associated with equipment and the development and implementation of
Medisyn(TM).
Provision for Income Taxes. Provision for income taxes increased to $2.2
million in 1995 from $1.4 million in 1994, an increase of $0.8 million or 62.0%,
as a result of an increase in income before taxes.
SELECTED QUARTERLY CONSOLIDATED OPERATING RESULTS
The following table sets forth certain unaudited quarterly consolidated
operating results for 1995, 1996 and the first nine months of 1997. The Company
believes this unaudited information has been prepared on the same basis as the
annual financial statements and includes all adjustments necessary for a fair
presentation of the information for the quarters presented when read in
conjunction with the consolidated financial statements and related notes
included elsewhere in this Prospectus. The operating results for any quarter are
not
40
<PAGE> 42
necessarily indicative of results for any subsequent quarter. The Company's
results of operations are not significantly affected by seasonality factors.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT 30, DEC. 31, MAR. 31,
1995 1995 1995 1995 1996 1996 1996 1996 1997
-------- -------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS -- UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues......... $17,553 $18,368 $21,577 $24,059 $24,254 $25,968 $27,254 $29,309 $33,765
Income (loss) from
operations......... 1,260 1,229 1,854 2,430 2,134 2,520 2,880 3,360 3,675
Income (loss) before
income taxes....... 1,141 1,096 1,538 2,011 1,648 1,868 2,355 2,880 3,014
Net income (loss).... $ 703 $ 677 $ 958 $ 1,246 $ 971 $ 1,175 $ 1,462 $ 1,723 $ 1,808
<CAPTION>
THREE MONTHS ENDED
--------------------
JUNE 30, SEPT. 30,
1997 1997
-------- ---------
<S> <C> <C>
Net revenues......... $34,314 $40,504
Income (loss) from
operations......... (4,069) 3,592
Income (loss) before
income taxes....... (5,185) 2,154
Net income (loss).... $(3,336) $ 1,293
</TABLE>
For the effect and nature of certain adjustments reflected in the three
months ended June 30, 1997, see "-- Nine Months Ended September 30, 1997
Compared to Nine Months Ended September 30, 1996 -- Net Revenues" and "-- Nine
Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1996 -- Provision for Doubtful Accounts."
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirements will be for debt service, for
additional working capital to fund growth of the Company's managed care business
and for acquisitions. The Company believes that the proceeds from the Initial
Offering and borrowings under the New Credit Facility will be sufficient to meet
Company's capital needs for the foreseeable future.
At September 30, 1997, the Company had a working capital deficit of $(19.5)
million as compared to working capital of $5.8 million as of December 31, 1996.
This decrease is primarily a result of the classification of a portion of the
Company's long-term debt as current liabilities pursuant to the Company not
being in compliance with certain provisions of its prior bank credit facility.
During 1996 and the nine months ended September 30, 1997, the Company had
capital expenditures of $7.9 million and $4.7 million, respectively. Capital
expenditures for the fourth quarter of fiscal 1997 were anticipated to be
approximately $1.3 million, the majority of which was used to continue the
development and implementation of Medisyn(TM). The Company estimates that it
will have aggregate capital expenditures in 1998 of approximately $5.0 million.
Days of Sales Outstanding ("DSO") were 97.5 as of September 30, 1997,
compared to 82.0 at December 31, 1996. The increase in DSO from December 31,
1996 to September 30, 1997 is attributable primarily to an overall increase in
net revenue from respiratory therapy/home medical equipment and infusion
therapy, which historically have higher DSO, delays by third parties in paying
for respiratory therapy/home medical equipment and infusion therapy, and a
slowdown in reimbursement from governmental payors.
Net cash provided by operating activities decreased from $0.4 million for
the nine months ended September 30, 1996, to $(8.8) million for the nine months
ended September 30, 1997. This decrease is primarily attributable to an increase
in accounts receivable and a reduction in accounts payable and accrued expenses.
Net cash used in investing activities decreased from $22.8 million for the nine
months ended September 30, 1996 to $18.2 million for the comparable period in
1997 as the Company increased its focus on managed care business and completed
fewer acquisitions. Payments under capital leases increased to $1.5 million for
the nine months ended September 30, 1997 compared to $0.2 million for the
comparable period in 1996, primarily as a result of increased expenditures on
medical equipment used to service managed care business and increased
expenditures relating to the implementation of Medisyn(TM).
As of September 30, 1997, the Company had outstanding $24.9 million under
its prior revolving credit facility and $22.3 million under its prior term
facility. The Company repaid the amounts with proceeds from the Initial Offering
and contemporaneously entered into the New Credit Facility. See "Description of
the New Credit Facility."
41
<PAGE> 43
BUSINESS
THE COMPANY
The Company is one of the largest fully integrated providers of
comprehensive home health care services based in the southwestern and central
United States, providing home nursing, respiratory therapy/home medical
equipment and infusion therapy. The Company has successfully implemented a
regional growth strategy, expanding from 12 offices in three states at its
inception in 1984 to 96 offices in nine states at September 30, 1997. For the
twelve months ended September 30, 1997, the Company had net revenues of $137.9
million and Adjusted EBITDA of $19.2 million.
The Company has diversified its business mix from 98% home nursing in 1990
to 55% home nursing for the nine months ended September 30, 1997. This shift
reflects the addition and growth of higher margin respiratory therapy/home
medical equipment and infusion therapy. Although higher margin respiratory
therapy/home medical equipment and infusion therapy accounted for approximately
41% of the Company's net revenues for the nine months ended September 30, 1997,
these businesses generated approximately 79% of Adjusted EBITDA. The Company
expects that it will continue to shift its business mix towards respiratory
therapy/home medical equipment and infusion therapy. Home nursing, however, will
continue to represent an important part of HealthCor's business mix because
managed care organizations and other referral sources often will make
arrangements for other home health care services after first referring home
nursing cases to a provider.
The Company believes its ability to offer a full range of integrated home
nursing, respiratory therapy/ home medical equipment and infusion therapy in
almost all of its markets creates an important competitive advantage in
obtaining patient referrals. Managed care organizations and other referral
sources generally favor home health care providers that offer integrated health
care services, because "one-stop shop" providers like the Company provide
superior coordination of care and reduce the administrative and service quality
complications of contracting with multiple providers. In the last nine months,
the Company has entered into relationships with several managed care
organizations with approximately 1.5 million total enrollees. As an integrated
provider, the Company rarely engages subcontractors, which the Company believes
permits it to exercise greater control over quality of service and to improve
patient care.
The Company is also a leader in developing and implementing financial and
clinical management information systems for providing home health care. Upon the
complete implementation of its proprietary medical information system network
trademarked Medisyn(TM), expected to occur in 1998, the Company believes that it
will be able to achieve additional cost savings, increase productivity and
capture outcomes data that will provide significant advantages in obtaining
managed care business and adapting to regulatory and reimbursement changes.
INDUSTRY OVERVIEW
Home health care is among the fastest growing segments of the health care
industry with estimated annual expenditures of $36.1 billion in 1995, up from an
estimated $12.9 billion in 1990, representing a compounded annual growth rate of
approximately 23%. The underlying growth factors in the home health care
industry include: (i) the cost-effective nature of home health care; (ii) an
increasing number of patients due to growth in the elderly population; (iii)
technological advances that expand the range of home health care procedures; and
(iv) patient preference for treatment in the home.
The home health care industry is highly fragmented with more than 18,500
providers delivering home health care services in the United States, most of
which use unsophisticated information technology systems. Many of these
companies are local providers that offer a limited scope of services in a
defined geographical area and lack the capital necessary to substantially expand
their operations. Managed care organizations and cost containment initiatives by
payors have driven the growth of home health care by emphasizing lower cost
alternatives to hospitals and skilled nursing facilities. These organizations
and payors seek coordinated, consistent quality home health care across broad
geographic areas in order to serve their patients more effectively. As a fully
integrated provider and a leader in developing and implementing information
technology
42
<PAGE> 44
systems, the Company believes that it is well positioned to capitalize on future
growth and consolidation in the industry.
BUSINESS STRATEGY
HealthCor's business objective is to enhance its position as one of the
leading providers of comprehensive home health care services in the southwestern
and central United States. Elements of the Company's strategy include:
Provide One-Stop Shop Home Health Care Services. HealthCor provides payors,
physicians and patients with fully integrated one-stop shop home health care
services in almost all of its markets. The integration of comprehensive home
health care services enhances the Company's appeal to managed care organizations
and other referral sources that increasingly prefer single-source providers of
home health care. The Company believes that full integration of services enables
it to provide highly coordinated patient care and to increase revenues and
profitability by providing multiple services to an individual patient referral.
Focus on Managed Care Relationships. The Company has intensified its
managed care marketing efforts in order to take advantage of the increased
market penetration of managed care organizations in the home health care market
and the federal government's increasing preference for Medicare beneficiaries to
enroll in managed care plans. HealthCor is the sole or principal provider for a
number of large managed care plans, and the Company believes that its broad
product offering, quality of service, regional focus and advanced information
systems contribute to the Company's competitive advantage.
Target Referrals from Hospitals and Hospital Affiliated Sources. The
Company has implemented a major marketing and sales initiative that targets
physicians who previously referred cases predominantly to hospital-based home
health care organizations. Many of these physicians have financial and operating
relationships with the parent hospitals of such organizations. The Company
believes that recent government scrutiny of these relationships and accompanying
media attention have provided the Company with the opportunity to increase the
number of referrals from those physicians. See "Risk Factors -- Dependence on
Referral Sources."
Enhance Profitability and Productivity Through Information Technology. The
Company seeks to enhance its profitability and productivity through the
development and use of innovative management information technology that
collects and integrates demographic, financial and clinical information. The
Company is developing and implementing a proprietary financial and clinical
management information system, Medisyn(TM), which is expected to be
substantially completed in May 1998. The Company believes that Medisyn(TM) will
improve profitability by efficiently servicing increased volumes of managed care
referrals, increase productivity gains, reduce costs and provide outcomes data
to payors in an environment increasingly influenced by managed care
organizations and reimbursement changes.
Make Selective Acquisitions to Increase Density in Existing Markets and to
Enter New Markets. The Company selectively seeks high-quality local and
strategic acquisitions that expand the range of services in its existing markets
and that enable the Company to expand its service area, increasing its appeal to
managed care organizations. Since January 1995, the Company has acquired 25 home
health care companies, adding 38 offices. The Company believes that due to the
fragmentation of the home health care industry, a substantial number of
acquisition opportunities are available. See "Risk Factors -- Risk of
Acquisitions and Expansion into New Markets."
43
<PAGE> 45
MANAGED CARE RELATIONSHIPS
The Company is the sole or principal provider for a number of managed care
plans and intends to compete vigorously for additional significant managed care
business in the future. These relationships are all fee-for-service and are
consistent with the Company's strategy to price managed care contracts
profitably in order to provide quality service. A description of certain recent
contracts is as follows:
- In May 1997, the Company became the exclusive provider of respiratory
therapy/home medical equipment to a large, multi-state managed care
organization's approximately 220,000 members in greater Denver, Colorado
in need of such services and equipment.
- In July 1997, the Company became the exclusive provider for a 60,000
member health plan in Texas.
- In August 1997, the Company began receiving referrals as one of two
preferred providers (and the only one which is fully integrated) for a
managed care plan which has approximately 800,000 members in Texas and
Oklahoma.
- In August 1997, the Company began receiving referrals as a preferred
provider for a PPO which manages the health care needs for approximately
350,000 members in the Company's service area.
- In August 1997, the Company became a preferred provider for a 150,000
member PPO in Oklahoma.
Servicing new managed care business can require significant capital
expenditures and can generate significant revenues. For example, in the case of
the Colorado contract referred to above, the Company had almost no existing
infrastructure in Colorado and made capital expenditures in excess of $4.0
million to achieve full implementation. Within two and one-half months of the
contract becoming effective, the Company had successfully transitioned
approximately 1,500 patients and continues to receive additional referrals. The
Company intends to use a portion of the proceeds of the Initial Offering for
capital expenditures related to the new contracts discussed above. See "Risk
Factors -- Dependence on Reimbursement by Third-Party Payors; Accounts
Receivable."
SERVICES AND PRODUCTS
Home Nursing. The Company provides a wide range of nursing services to
individuals with acute illness, long-term chronic health conditions, permanent
disabilities, terminal illness or post-procedural needs. Patients are typically
referred to the Company by primary care or specialty physicians and managed care
case managers. After reviewing the patient's medical records and treatment plan
(which are displayed on PtCT Units), a nurse, therapist or home health aide,
where appropriate, provides care to the patient in the home. The plan of care
may require a few visits over a short period of time or many visits over several
years. The Company provides the following home nursing services:
General nursing care is the periodic assessment of the appropriateness
of home health care, the performance of clinical procedures, and
instruction of the patient and the family or other care giver regarding
proper treatments. Such care is provided by registered nurses or licensed
practical nurses. Patients receiving such care typically include stabilized
postoperative patients, patients who are acutely ill but who do not require
hospitalization, and patients who are chronically or terminally ill.
Specialty nursing care is the provision of specialized nursing
services such as geriatric, pediatric or neonatal nursing. Such care is
provided by nurses with the appropriate experience or certification in such
specialty. Specialty nursing care also involves the instruction of the
patient and the family or other care giver in the self-administration of
certain procedures, such as wound care and infection control, emergency
procedures and the proper handling and usage of medication, medical
supplies and equipment.
Therapy services consist of rehabilitation therapies such as physical,
occupational and speech therapy to patients recovering from strokes, trauma
or certain surgeries, services for high risk pregnancies, postpartum care,
AIDS therapy, various medical social services, and case management services
to insurance companies and self-insured employers.
44
<PAGE> 46
Home health aide care is the provision of personal care services and
assistance with activities of daily living such as personal hygiene and
meal preparation. The Company's home health aides must pass certain
competency tests and are supervised by a registered nurse.
Primary home health care is provided by the Company through state
administered programs that pay for unskilled homemaker services to the
elderly or the disabled, as ordered by a physician. A registered nurse
makes the initial assessment and assigns a homemaker to provide
housekeeping, shopping and limited personal care.
Respiratory Therapy/Home Medical Equipment. The Company provides a wide
variety of home respiratory, monitoring and medical equipment. Respiratory
therapists provide care to the patient according to the physician-directed plan
of care and educate the patient and the family or other care giver regarding
treatment requirements, use of equipment and self-care. The Company rents, sells
and services respiratory equipment for patient use in the home and supplies
patients with aerosol medications for use in respiratory therapy treatments. The
Company's principal respiratory services include:
Oxygen systems that assist patients with breathing. The Company
provides three types of oxygen systems: (i) oxygen concentrators, which are
stationary units that filter ordinary air in order to provide a continuous
flow of oxygen and are generally the most cost effective supply of oxygen
for patients who require a continuous flow of supplemental oxygen; (ii)
liquid oxygen systems, which are containers used for patients who require a
continuous high flow of supplemental oxygen; and (iii) high pressure oxygen
cylinders, which provide an ambulatory patient with the ability to obtain
supplemental oxygen outside of the home.
Nebulizers that deliver aerosol medications that are inhaled directly
by the patients. Nebulizers are used to treat patients with asthma, chronic
obstructive pulmonary disease, cystic fibrosis and neurologically related
respiratory problems, and patients with AIDS.
Home ventilators that mechanically sustain a patient's respiratory
function in cases of severe respiratory failure.
Continuous positive airway pressure therapy that forces air through
respiratory passage-ways during sleep. This treatment is provided to adults
with sleep apnea, a condition in which a patient's normal breathing
patterns are disturbed during sleep. Monitoring services are usually
provided with this therapy.
The Company also leases and sells convalescent equipment, in connection
with the provision of its other services to patients in the home. Such equipment
includes hospital beds, wheelchairs, walkers, and patient lifts as well as
medical and surgical supplies such as stethoscopes, orthopedic supplies, urinary
catheters, syringes, and needles. The Company is able to increase revenues by
providing home medical equipment and supplies to its patients who are also
receiving nursing, respiratory therapy or infusion therapy.
The Company also provides monitoring services to assist physicians with
diagnoses. The Company's principal monitoring services currently comprise a
small portion of the Company's business but have experienced significant growth
in recent years. Monitoring services include:
Cardiac monitoring for the detection of arrhythmias, a condition that
is responsible for an estimated 500,000 deaths each year in the United
States. The Company provides cardiac loop event recorders which are
monitored electronically and are efficient and cost-effective arrhythmia
detection devices.
Uterine monitoring which detects, records and sends uterine activity
information to a prenatal monitoring center. Such monitoring is designed to
alert health care professionals of pre-term labor in high-risk pregnancies.
Apnea monitors provided to certain high risk newborn infants warn
parents of apnea episodes as a preventative measure against sudden infant
death syndrome.
Home Infusion Therapy. The Company offers comprehensive home infusion
therapies. Home infusion therapy involves the administration of nutrients,
antibiotics and other medications intravenously (into the
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vein), subcutaneously (under the skin), intramuscularly (into the muscle),
intrathecally or epidurally (via spinal routes), or through feeding tubes into
the digestive tract. Infusion therapy often begins during hospitalization of a
patient and continues in the home. New patients are instructed in the
administration of infusion therapy and related services by a registered nurse
who provides the patient's first home treatment and continuing supervision of
care. The Company's principal infusion therapies follow:
Antibiotic therapy is the infusion of antibiotic medications into a
patient's bloodstream to treat a variety of infections and diseases.
Enteral nutrition is the infusion of essential nutrients through a
feeding tube, and is necessary for patients who are unable to orally ingest
adequate nutrients.
Total Parenteral Nutrition is the infusion of a nutrient solution to
restore and/or maintain electrolyte balance and nutritional function.
Pain management is provided to patients experiencing acute pain as a
result of traumatic injury, surgical procedures or other medical disorders.
The Company provides a comprehensive approach to pain management that
includes a thorough knowledge of available agents, routes of administration
and appropriate dosage levels as directed.
Chemotherapy is provided in the home or in other locations and allows
patients with cancer an alternative to frequent and expensive hospital
stays.
Pentamidine is an agent used specifically in the treatment of patients
with AIDS who have experienced one or more episodes of pneumocystis carinii
pneumonia.
FINANCIAL AND CLINICAL MANAGEMENT INFORMATION SYSTEMS
The Company is implementing a proprietary financial and clinical management
information system trademarked Medisyn(TM), which is comprised of several
financial and clinical components integrated through a central interface engine.
Medisyn(TM) is designed to integrate all aspects of the Company's operations by
providing centralized information management for each patient by linking
clinical services to its financial systems. The Company believes that
Medisyn(TM) will enable it to service increased volumes of managed care
referrals, reduce costs and result in more efficient collection of receivables.
The Company also believes Medisyn(TM) will provide competitive advantages by
generating data that will enhance the Company's ability to price and manage the
Company's services and products in a managed care environment and by measuring
more accurately the quality and cost of care that is delivered in the home. The
Company believes that it is the only home health care provider implementing this
technology, and has filed a patent application with respect to Medisyn(TM) with
the United States Patent Office.
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A diagram of the organization of Medisyn(TM) follows:
[Pursuant to Rule 304 of Regulation S-T, the following is a narrative
description of the Medisyn(TM) graphic that cannot be reproduced in this
electronic filing: The Medisyn(TM) graphic is structured as a multi-tiered flow
chart, and represents the processing of information from the time a referral is
made to HealthCor, to CIMS, to either the nursing, infusion therapy or
respiratory therapy/home medical equipment group, to the billing system, to
IMACS, and finally to cash posting, bills to payors, reports for internal review
and the Lawson System.]
Medisyn(TM) consists of the following four principal components, which
interface with the others through a central interface engine: (i) a proprietary,
customer information management system ("CIMS"); (ii) hand-held clinical system
point of care computers ("PtCT Units"); (iii) an integrated financial services
system (the "Lawson System"); and (iv) a contract management and billing system
(the "Innovative Managed Care System" or "IMACS"). Medisyn(TM) processes
referrals through CIMS, which captures patient information, creates a patient
profile and interfaces with the appropriate billing system(s) to create a
billing record. CIMS also assures that the requested services are authorized by
the payor. If the referral includes nursing services, the visit and clinical
information will be recorded at the patient's home in a PtCT Unit and
transmitted via modem to a central data base to be included in the patient
profile. After services have been provided, the IMACS system applies the
contract terms of the payor and generates a customized invoice, and through an
interface provides this information to the Company's financial systems,
including cash posting and the general ledger. A description of each principal
component follows.
CIMS. CIMS coordinates all services for patients by assigning each patient
a single identification number and developing for each patient a readily
accessible comprehensive patient profile comprised of demographic, clinical,
case management and billing information. By integrating customer information
management for all of the Company's services, the Company is able to more
effectively service increased volumes of referrals from managed care payors.
CIMS enables the Company to record demographic data, obtain payor verification,
payor authorizations and diagnosis, all of which will enable the Company to more
efficiently service managed care and other payor relationships.
CIMS was implemented in February 1997 and currently services approximately
75% of the Company's managed care business through a central call center
covering the greater Dallas-Fort Worth, Houston, East Texas and Oklahoma
markets, each of which is characterized by a high degree of managed care market
penetration. Rollout to substantially all of the Company's remaining markets is
expected to be completed in 1998.
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PtCT Units. The Company's nurses and home health aides are equipped with
PtCT Units, which are hand-held clinical system point of care computers. The
PtCT Units allow each of the Company's nurses to have an electronic patient
chart in hand and to transmit directly to the Company's system via modem
clinical, payroll and billing information. Once the clinical data has been
recorded, the system enables the Company to develop clinical assessments of
patients via computer generated documentation. Same-day reporting capabilities
reduce paperwork and transcription errors, which has increased certain nurse
productivity. The system also expedites the processing of payroll data,
accelerates the transfer of information to attending physicians, and improves
the consistency and completeness of the assessments generated.
Integrated Financial Services System. The Company has substantially
implemented the Lawson System, which is an integrated suite of financial
services software, including a general ledger, cost accounting, accounts
payable, materials management/purchasing, payroll and human resource elements.
The conversion of the Company's financial system to the Lawson System in early
1997 delayed the Company's recognition of certain estimated purchases of
respiratory therapy/home medical equipment and infusion therapy equipment and
supplies until the second quarter of 1997. The general ledger, accounts payable
and payroll systems are fully operational and have improved the Company's
ability to analyze each element of its business to improve productivity and
operating efficiencies. The remaining applications of the Lawson System will
become operational over the next several quarters. See "Risk
Factors -- Management Information Systems."
IMACS. IMACS, the Company's contract management and billing system, will
enable the Company to capture the essential elements of payor relationships
(including relationships with managed care organizations, other private payors,
Medicaid and Medicare), to assess pricing, eligibility, utilization and other
information necessary to assure accurate billing and to enhance contract
profitability. In addition, IMACS will allow the Company to more effectively
manage payor contract terms and to provide payors with a consolidated bill for
multiple services. The most significant applications of IMACS have been
successfully developed on schedule, with full implementation to be completed in
May 1998. The Company has a four year proprietary right to IMACS for licensing
to non-hospital based home health care providers.
MARKETING
The Company's marketing efforts are based on a sales force of more than 50
persons, which is divided into two specialized groups: (i) national account
managers and (ii) field-based provider relations specialists. The national
account managers are responsible for developing additional managed care business
and for managing existing relationships. The field-based provider relations
specialists cover a specific geographic region and focus on referral sources
which include physicians, hospital discharge planners, social workers, and
community service organizations. In addition, at the local market level the
Company's employees, including office management, support the sales forces by
maintaining relationships with referral sources in order to provide them with
knowledge of the services provided by the Company.
The Company believes that its ability to provide a full range of services
to clients in all of its markets is a significant advantage in developing
relationships with managed care organizations. In addition, the Company works
with managed care organizations to meet their specialized demands for services,
pricing, billing and other matters.
QUALITY ASSURANCE
The Company believes that the quality of services is critical to its
ability to obtain referrals and increase revenues and profitability. To assure
the delivery of high-quality patient care, and to assure the overall quality of
service, the Company has a quality improvement program designed to integrate and
assess the quality improvement activities and processes across all services. The
cornerstone to this quality improvement program is the HealthCor Survey Tool,
which is designed to routinely measure compliance with Medicare conditions of
participation, federal and state regulations, Joint Commission on Accreditation
of Health Organizations ("JCAHO") standards, and HealthCor's standards of care
and practice. The survey process includes review of clinical and billing
documentation, interviews of clinical personnel and observations of home visits
performed by Company staff. Other quality assurance initiatives include
measuring customer satisfaction, reporting
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adverse medical incidents, monitoring risk management, and ensuring a safe and
appropriate working environment.
The Company is accredited by JCAHO in a majority of its offices and
believes that this accreditation is generally preferred by managed care and
other third-party payors. The Company believes that it is JCAHO certified in all
markets where such certification is important to third-party payors.
HUMAN RESOURCE MANAGEMENT
The Company continuously recruits, screens, trains and offers benefits and
other programs in an effort to attract and retain its personnel. The Company
also recruits through Quest Personnel Resources, its personnel placement
division, reducing certain recruiting fees and expenses. Recruiting is conducted
primarily through advertising, personnel agencies, direct contact with community
groups and the use of bonuses. The Company has implemented a computerized
interviewing software system to assist in screening and hiring of potential
employees.
The Company operates regional learning centers to provide orientation and
training to new employees and continuing education for existing employees. The
Company routinely develops and distributes quality improvement in-service
materials, manuals, and forms to its nurses and has implemented an internal
system of employee recognition and rewards. In addition, skilled nurses are
initially assigned to a nurse preceptor until the Company believes that these
new nurses have acquired a sufficient degree of home health care knowledge and
experience. The Company also has implemented an infusion therapy verification
program for skilled nurses. The Company is recognized as a provider of
continuing education units by the Texas Nursing Association, which is accredited
by the American Nursing Credentialing Center.
The retention of qualified employees is a high priority for the Company. As
of September 30, 1997, the Company employed over 2,500 individuals. Management
believes that the Company's employee relations are good. None of the Company's
employees are represented by a labor union or other collective bargaining
organization.
PROPERTIES AND OFFICES
The Company currently leases all of its office space and has approximately
100 real property leases. The Company's executive headquarters (approximately
57,400 square feet) are located in Dallas, Texas and are leased for an original
term of ten years, expiring November 2006.
INSURANCE
The Company maintains professional liability insurance covering the
negligent acts and omissions of its home health care personnel while rendering
services. This policy provides coverage of $5.0 million in the aggregate or $5.0
million per occurrence for each policy year. The Company believes that the
insurance which it maintains, in relation to the size of its business, is
customary in the home health care industry; however, there can be no assurance
that any such insurance will be adequate to cover the Company's liabilities. The
Company maintains product liability insurance on all of the medical equipment,
supplies and pharmaceuticals that it sells, leases or provides to its home
health care patients. This insurance provides coverage of $2.0 million in the
aggregate or $1.0 million per occurrence for each policy year. The Company also
maintains umbrella coverage in excess of its general liability insurance which
provides $4.0 million in the aggregate or $4.0 million per occurrence for each
policy year.
LITIGATION
There are no material legal proceedings to which the Company or any of its
subsidiaries is subject.
COMPETITION
The home health care industry is highly fragmented with more than 18,500
providers, with significant competition from multiple providers in most markets.
The Company faces intense competition for managed
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care contracts, patients, employees and acquisitions. In recent years,
independent home health care providers, including the Company, have encountered
significant competition from hospital-based home health care organizations which
have entered the home health care business. The Company has experienced a
decline in referrals from physicians with financial and operating relationships
with the parent hospitals of such organizations. In addition, many of the
Company's current and potential competitors are larger and have significantly
greater financial and marketing resources than those of the Company.
REGULATION
The Company's business is subject to extensive and increasing regulation by
federal, state and local government. Federal agencies which regulate aspects of
the Company's business include the DHHS, HCFA, the Office of the Inspector
General, the Food and Drug Administration, the Department of Labor, the Drug
Enforcement Agency, and the Occupational Safety and Health Administration. In
most states, home health care providers are regulated by the state department of
health and board of pharmacy. See "Risk Factors -- Effect of Government
Regulations."
The Company is subject to federal laws regulating the repackaging and
dispensing of drugs and regulating interstate motor-carrier transportation and
state laws regulating pharmacies, nursing services and certain types of home
health agency activities. Under state laws, the Company's offices must be
licensed prior to commencing business and must renew their licenses
periodically. In addition, certain of the Company's employees are subject to
state laws and regulations governing the professional practice of respiratory
therapy, pharmacy and nursing. Failure to comply with regulatory laws could
expose the Company to criminal and civil penalties, and jeopardize the licensure
of one or more of its home health care agencies, or their participation in the
Medicare, Medicaid and other reimbursement programs. See "Risk Factors -- Effect
of Government Regulations."
As a provider of services under the Medicare and Medicaid programs, the
Company is subject to the various "anti-fraud and abuse" laws, including the
federal health care programs anti-kickback statute. This law prohibits any
offer, payment, solicitation or receipt of any form of remuneration to induce
the referral of business reimbursable under a federal health care program or in
return for the purchase, lease, order, arranging for, or recommendation of items
or services covered by any such program. Federal health care programs are any
health care plans or programs that are funded by the United States (other than
certain federal employee health insurance benefits) and certain state health
care programs that receive federal funds under various programs, such as
Medicaid. A related law forbids the offer or transfer of any item or service for
less than fair market value, or certain waivers of copayment obligations, to a
beneficiary of Medicare or a state health care program that is likely to
influence the beneficiary's selection of health care providers. Violations of
the anti-fraud and abuse laws can result in the imposition of substantial civil
and criminal penalties and, potentially, exclusion from furnishing services
under any federal health care programs. In addition, the states in which the
Company operates generally have laws that prohibit certain direct or indirect
payments or fee-splitting arrangements between health care providers where they
are designed to obtain the referral of patients to a particular provider. See
"Risk Factors -- Operation Restore Trust."
Congress adopted legislation in 1989, known as the "Stark" Law, that
generally prohibits a physician ordering clinical laboratory services for a
Medicare beneficiary where the entity providing that service has a financial
relationship (including direct or indirect ownership or compensation
relationships) with the physician (or a member of his immediate family), and
prohibits such entity from billing for or receiving reimbursement for such
services, unless a specified exemption is available. Additional legislation
became effective as of January 1, 1993 known as "Stark II," that extends the
Stark Law prohibitions to services under state Medicaid programs, and beyond
clinical laboratory services to all "designated health services," including home
health services, durable medical equipment and supplies, outpatient prescription
drugs, and parenteral and enteral nutrients, equipment, and supplies. Violations
of the Stark Law may also trigger civil monetary penalties and program
exclusion. Pursuant to Stark II, physicians who are compensated by the Company
are prohibited from making referrals to the Company, and the Company will be
prohibited from seeking reimbursement for services rendered to such patients
unless an exception applies. Several of the states in
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which the Company conducts business have also enacted statutes similar in scope
and purpose to the federal fraud and abuse laws and the Stark Laws.
Various federal and state laws impose criminal and civil penalties for
making false claims for Medicare, Medicaid or other health care reimbursements.
The Company believes that it bills for its services under such programs
accurately. However, the rules governing coverage of, and reimbursements for,
the Company's services are complex. There can be no assurance that these rules
will be interpreted in a manner consistent with the Company's billing practices.
See "Risk Factors -- Operation Restore Trust."
In May 1995, the federal government instituted Operation Restore Trust, a
health care fraud and abuse initiative focusing on nursing homes, home health
care agencies and durable medical equipment companies located in the five states
with the largest Medicare populations. Texas, the Company's corporate base, was
one of the original targeted states. The purpose of this initiative is to
identify fraudulent and abusive practices such as billing for services not
provided, providing unnecessary services and making prohibited referral payments
to health care professionals. Operation Restore Trust has been responsible for
significant fines, penalties and settlements. Operation Restore Trust was
recently expanded to cover twelve additional states for the next two years. The
program was also expanded to include reviews of psychiatric hospitals, certain
independent laboratories and partial hospitalization benefits. Further, there
are plans eventually to apply the program's investigation techniques in all
fifty states and throughout the Medicare and Medicaid programs. One of the
results of the program has been increased auditing and inspection of the records
of health care providers and stricter interpretations of Medicare regulations
governing reimbursement and other issues. Specifically, the government plans to
double the number of comprehensive home health agency audits it performs each
year (from 900 to 1800) and also to increase the number of claims reviewed by
25.0% (from 200,000 to 250,000). In general, the application of these anti-fraud
and abuse laws is evolving. See "Risk Factors -- Operation Restore Trust."
During 1997, the home health care industry experienced several significant
regulatory and reimbursement changes. In February 1997, HCFA implemented mileage
limitations restricting the distance between a nursing agency's principal office
and its branches, with such rules being implemented with respect to the Company
on January 1, 1997. Texas, where the Company has significant operations,
implemented even more restrictive mileage limitation rules for branch offices.
During the first six months of 1997, the Company was subject to Medicare cost
limitations for home nursing that were lower than the Company's operating
expenses for that period. The Company has responded by implementing a series of
cost-saving initiatives resulting in approximately $9.3 million in annualized
savings, which included realizing operating efficiencies available as a result
of the partial implementation of Medisyn(TM), and reducing head-count by
reorganizing its branch structure and corporate operations. See "Risk
Factors -- Medicare Reimbursement Reforms; Revenue Adjustments" and "Risk
Factors -- Dependence on Reimbursement by Third-Party Payors; Accounts
Receivable."
Recent amendments affecting Medicare also require: (i) the imposition of
more stringent limits on reimbursable home health care costs; (ii) the
establishment of a prospective payment system for home health care services to
be implemented in late 1999; (iii) the separation of home health care services
into two distinct benefits under Medicare Part A and Medicare Part B; (iv) the
establishment of per-beneficiary benefit limitations based upon historical cost;
(v) requiring billing by location of service rather than by location of the home
health care agency's headquarters; and (vi) the establishment of guidelines for
the frequency and duration of reimbursable home health visits. Such provisions
may adversely affect reimbursement for Medicare home health services over the
next several years. For example, reimbursement rates for Medicare home oxygen
services, which represent approximately 5.6% of the Company's revenues, will be
reduced by 25.0% beginning January 1, 1998, with an additional 5.0% reduction to
be effective January 1, 1999. Based upon such initiatives and possible further
cost containment or other initiatives in the future, the Company expects the
reimbursements received from the Medicare program to be at continued risk of
substantial reductions in the future. See "Risk Factors -- Medicare
Reimbursement Reforms; Revenue Adjustments."
Recent DHHS rulemaking proposals affecting the home health care industry
include: (i) a rule which would revise Medicare's Conditions of Participation
that home health agencies must meet in order to
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participate in the Medicare program, and require that all home health care
agencies conduct background investigation of their employees; and (ii) a rule
that would require home health care agencies to use standard measurements of the
quality and outcomes of patient care. DHHS is expected to publish final rules in
these areas. The Company believes that it has the capacity to comply with
changes in such rules. See "Risk Factors -- Medicare Reimbursement Reforms;
Revenue Adjustments."
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the directors,
executive officers and certain other key personnel of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
S. Wayne Bazzle................. 62 Chairman of the Board and Chief Executive Officer
Cheryl C. Bazzle................ 50 President, Chief Operating Officer and Director
Joel H. Williams................ 42 Vice President and Chief Financial Officer
Frank Barker.................... 55 Vice President and Chief Information Officer
Judith A. Kremers............... 56 Senior Vice President
Mary E. Barton.................. 48 Senior Vice President -- Field Operations
M. Sue Collins.................. 53 Vice President -- Regulatory Affairs
Philip C. Dowling............... 45 Vice President -- Field Operations
Deryl Jay....................... 41 Vice President -- Field Operations
Michael J. Foster............... 44 Director
Robert B. Crates................ 34 Director
Jane R. Finley, Ph.D............ 50 Director
</TABLE>
Set forth below are descriptions of the backgrounds and principal
occupations of each of the Company's executive officers, directors and certain
other key personnel.
S. Wayne Bazzle has served as the Chairman of the Board and Chief Executive
Officer of the Company since the Company's incorporation in October 1989. In
addition, Mr. Bazzle served as President of the Company from October 1989 to
October 1991 when Cheryl C. Bazzle was elected President. From October 1985 to
October 1989, Mr. Bazzle served as Chairman of the Board and Chief Executive
Officer of HealthCor, Inc., a predecessor of the Company. From September 1983 to
September 1985, Mr. Bazzle served as a consultant to a home health care company.
Mr. Bazzle was President and Chief Executive Officer of Drum Financial
Corporation, a publicly traded insurance and financial services corporation from
1976 to 1981. Prior thereto, Mr. Bazzle was employed with the Bank of Virginia,
where he served as President and Chief Administrative Officer from 1973 to 1976.
Mr. Bazzle is married to Cheryl C. Bazzle.
Cheryl C. Bazzle has served as President, Chief Operating Officer and
Director since 1991. From 1989 to 1991, Mrs. Bazzle served as Senior Vice
President of the Company. From December 1987 to October 1989, Mrs. Bazzle served
in various capacities for HealthCor, Inc., a predecessor and a subsidiary of the
Company, including as Senior Vice President, Chief Operating Officer and
President. From September 1985 to December 1987, Mrs. Bazzle served in various
capacities for a home health care company. From September 1981 to October 1985,
Mrs. Bazzle operated an equipment leasing company which she founded and which no
longer operates. Mrs. Bazzle is married to S. Wayne Bazzle.
Joel H. Williams has served as Vice President and Chief Financial Officer
since September 1997. Mr. Williams joined the Company in 1995 to direct
acquisition strategy, and in December 1996 was named Vice President with
additional responsibilities for corporate planning. From 1992 to 1995 he was
Chief Financial Officer for Barton Creek Health Care, an Austin-based home
health care provider, and from 1985 to 1992 served as Director of Financial
Analysis and Controller of Franklin Federal Bancorp, a $2.0 billion financial
institution based in Austin. Mr. Williams has also held positions as Director of
Planning and Planning Manager for several financial institutions, including
InterFirst Corporation (now NationsBank) in
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Houston and Dallas. Mr. Williams holds a B.B.A. with highest honors from the
University of Texas at Austin and a M.B.A. with honors from the University of
Houston.
Frank Barker serves as Vice President and Chief Information Officer. Mr.
Barker joined the Company in September 1996 as Vice President, Information
Technology. Prior to joining HealthCor, he was Vice President, Client Services
for Antrim Corporation, a Division of Compucare, a major laboratory/financial
information systems vendor. Mr. Barker has over 20 years of increasingly
responsible experience in the installation, maintenance, support and development
of a variety of computer systems, application software and network technology.
Judith A. Kremers serves as Senior Vice President. Ms. Kremers, whose
health care experience spans more than 30 years, has been employed by HealthCor
and its predecessor since inception. She served as Senior Vice President of
field operations from 1990 to 1995. From 1995 to 1997, she was responsible for
the planning and execution of the re-engineering and execution of HealthCor's
processes and information systems and the Information Services Department. Prior
to joining HealthCor's predecessor in 1984, she worked from 1968 to 1983 at
Adventist Hospital of Simi Valley, California where her responsibilities
included supervision of all nursing services. She is an honors graduate of the
St. Alexis School of Nursing in Bismarck, North Dakota.
Mary E. Barton serves as Senior Vice President of field operations. Ms.
Barton joined HealthCor in 1990 as a Director for the Oklahoma City office and
was named Vice President of Field Operations in 1993. Ms. Barton's 28 years of
health care experience include five years in the Navy Nurse Corps. and 14 years
at Baxter Healthcare in the Hyland Therapeutics Division, including nine years
as Regional Manager. She is an honors graduate of the Union Hospital School of
Nursing in Fall River, Massachusetts.
M. Sue Collins serves as the Company's Vice President of Regulatory
Affairs. Ms. Collins joined the Company in 1989 in connection with the Company's
acquisition of a home nursing business she owned and operated. Ms. Collins has
over 19 years of experience in the home health care industry, including service
as an Assistant Professor of Nursing at Wichita State University. She received a
B.S.N. from Kansas State University and a Masters of Nursing from Emory
University.
Philip C. Dowling has served as Vice President of field operations since
March 1997. From 1994 to 1997, Mr. Dowling served as Regional Vice President for
Vitas Healthcare Corporation, a for profit hospice provider. From 1991 to 1994,
he served in various capacities, including area sales manager and branch
manager, for Caremark Inc., a provider of home infusion therapy services. Mr.
Dowling also was employed by Baxter International, Inc. in several positions
over a 10 year period, including Vice President for operations in the
Philippines, Director of Manufacturing in Spain and managerial positions in
Puerto Rico and Israel. He holds a B.S. in Microbiology from the University of
Nebraska.
Deryl Jay serves as Vice President of field operations. Mr. Jay joined
HealthCor in July 1995 in connection with HealthCor's acquisition of two home
respiratory/medical equipment companies he owned and managed. Mr. Jay has more
than 20 years of health care experience, 14 of which have been as managing owner
of several health care companies. He also has held several positions during his
five year tenure with American Medical International (now Tenet Healthcare,
Inc.), including area manager. Mr. Jay is on the Advisory Board for the School
of Respiratory Therapy for South Plains College in Lubbock, Texas. He holds a
degree in Respiratory Therapy from Texas Tech University.
Michael J. Foster has served as a Director of the Company since October
1991. Since 1989, Mr. Foster has been employed by RFE Management Corp., an
investment manager of several private equity investment funds, and a general
partner of RFE Associates IV, L.P. the general partner of RFE IV. Prior thereto,
Mr. Foster was a partner with the law firm of O'Sullivan Graev & Karabell. Mr.
Foster has previously served as a director of Community Health Systems, Inc. and
ReLife, Inc.
Robert B. Crates has served as a Director of the Company since June 1992.
Since December 1995, Mr. Crates has been a principal of Crates Thompson Capital,
Inc., an investment company engaged in direct investments. From May 1988 to
November 1995, Mr. Crates served as a Vice President of Luther King Capital
Management, an investment advisory firm. In that capacity, Mr. Crates,
individually and as President
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of RBC Investment Corp., served as the general partner of LKCM Venture Partners
I, Ltd., a stockholder of the Company which is affiliated with Luther King
Capital Management. From October 1994 to January 1995, Mr. Crates served as
Interim Chairman and Chief Executive Officer of Eddie Haggar Limited, Inc., a
company in which LKCM Venture Partners I, Ltd. had an investment and which filed
for bankruptcy in 1995.
Jane R. Finley, Ph.D. has served on the Board of Directors since October
1996. Since 1992, Dr. Finley has been an Assistant Professor and Coordinator of
the Accounting Program at Belmont University in Nashville, Tennessee. Dr. Finley
was a Partner in the Consulting Practice of Deloitte & Touche from 1983 to 1992,
and with KPMG Peat Marwick as Manager in the Information Systems practice from
1980 to 1983.
ORGANIZATION OF THE BOARD OF DIRECTORS AND MEETINGS
The Board of Directors currently has two standing committees: the Audit
Committee and the Compensation Committee. The Audit Committee, which currently
consists of Ms. Finley and Mr. Foster, will confer periodically with
representatives of the Company's independent auditors to review the general
scope of the annual audit, including consideration of the Company's accounting
practices and procedures and system of internal accounting controls, and reports
to the Board of Directors with respect thereto. The Compensation Committee meets
periodically to review and make recommendations with respect to the annual
compensation of the Company's executive officers.
COMPENSATION OF DIRECTORS
Each director of the Company who is not an officer, employee or affiliate
of the Company receives a $1,000 fee for each meeting of the Board of Directors
attended by such director and a $500 per month retainer. In addition, directors
of the Company are reimbursed for their reasonable out-of-pocket expenses in
connection with their travel to and attendance at meetings of the Board of
Directors or committees thereof. Mr. Foster currently serves as a general
partner of RFE Associates IV, L.P., the general partner of RFE Investment
Partners IV, L.P. and receives no compensation for serving as a director of the
Company.
In October 1996, the Company granted Dr. Finley options to purchase 5,000
shares of Common Stock at $11.50 per share vesting over a five-year period and
exercisable through October 2006. In addition, during 1997 the Company paid Dr.
Finley a fee of $52,450 in connection with consulting services provided to the
Company by Dr. Finley.
LIMITATION ON DIRECTORS' LIABILITY
The Company's Amended and Restated Certificate of Incorporation provides
that no director of the Company shall be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability: (i) for any breach of the director's duty of loyalty to
the Company or its stockholders; (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii) in
respect of certain unlawful dividend payments or stock redemptions or
repurchases; or (iv) for any transaction from which the director derived an
improper personal benefit. The effect of these provisions is to eliminate the
rights of the Company and its stockholders (through stockholders' derivative
suits on behalf of the Company) to recover monetary damages against a director
for breach of fiduciary duty as a director (including breaches resulting from
grossly negligent behavior), except in the situations described above.
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<PAGE> 56
COMPENSATION OF CERTAIN EXECUTIVE OFFICERS
The following table sets forth the compensation paid by the Company to the
Chief Executive Officer and the two next most highly compensated executive
officers (collectively, the "Named Executive Officers") for services rendered in
all capacities during fiscal 1997, 1996 and 1995(6).
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------ OTHER
---------------------------- STOCK ANNUAL ALL OTHER
YEAR SALARY BONUS(1) OPTIONS COMPENSATION(2) COMPENSATION(3)
---- -------- -------- ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
S. Wayne Bazzle.................. 1997 $286,710 -- -- $ 2,250 $12,060
Chairman of the Board 1996 $275,000 $96,250 -- $ 2,250 $12,060
and Chief Executive 1995 $240,000 $72,000 -- $ 2,250 $12,060
Officer
Cheryl C. Bazzle................. 1997 $233,829 -- -- $ 2,250 $ 6,591
President and Chief 1996 $225,000 $78,750 -- $ 2,250 $ 6,591
Operating Officer 1995 $200,000 $60,000 -- $ 2,250 $ 6,591
Joel H. Williams................. 1997 $106,000(4) -- 10,000 -- --
Vice President and Chief 1996 $100,000 $20,000 -- -- --
Financial Officer 1995 $ 60,459(5) -- 3,750 $17,000 --
</TABLE>
- ---------------
(1) The Company's executive officers are entitled to receive bonuses depending
on the Company's achievement of certain performance criteria. Amounts
represent bonuses accrued for each year's performance, but paid in the
subsequent year. As of the date of this Prospectus, bonuses, if any, for
1997 have not been awarded.
(2) Represents the Company's contribution to its 401(k) Plan made on behalf of
the Named Executive Officers, except with respect to Mr. Williams for whom
it represents a relocation bonus.
(3) Amounts represent automobile allowances and expenses.
(4) Mr. Williams' current annual base salary is $125,000.
(5) Partial year amount. Mr. Williams joined the Company in April 1995.
(6) Susan L. Belske resigned as the Company's Chief Financial Officer on
September 4, 1997. Ms. Belske's total compensation for 1995, 1996 and 1997
was $135,000, $160,000 and $140,000, respectively.
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<PAGE> 57
The following table sets forth, as of December 31, 1997, the number of
stock options and the value of unexercised stock options held by the Named
Executive Officers. The Company granted 10,000 stock options exercisable at
$5.00 per share to Joel H. Williams in 1997. As of December 31, 1997, there had
been no stock options exercised by any Named Executive Officer.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SHARES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1997 DECEMBER 31, 1997(1)
---------------------------- ----------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
S. Wayne Bazzle............................ -- -- -- --
Chairman of the Board and Chief Executive
Officer
Cheryl C. Bazzle........................... -- -- -- --
President and Chief Operating Officer
Joel H. Williams........................... 2,500 11,250 -- --
Vice President and Chief Financial
Officer
</TABLE>
- ---------------
(1) Based on the last sale price of $3.88 on December 31, 1997, as reported on
the Nasdaq National Market.
BONUS PLAN
The executive officers and certain other members of corporate management
are eligible to receive cash bonuses in addition to their base salaries. The
bonus plan for executive officers and corporate management is based upon
individual performance and the Company's financial results for the fiscal year.
Total bonuses paid to Named Executive Officers for fiscal 1996 were
approximately $200,000. Certain other corporate officers, corporate office
management personnel and field managers are eligible to receive bonuses based on
individual performance goals and Company performance. The executive officers'
bonus plan is reviewed and approved by the Compensation Committee of the
Company's Board of Directors. All other bonuses are reviewed and approved by the
executive officers.
STOCK OPTION PLANS
1996 Incentive Plan. The Company may grant officers, directors and key
employees awards with respect to shares of Common Stock under the HealthCor
Holdings, Inc. 1996 Long-Term Incentive Plan (the "1996 Incentive Plan"). The
awards under the 1996 Incentive Plan include: (i) incentive stock options
qualified as such under U.S. federal tax laws, (ii) stock options that do not
qualify as incentive stock options, (iii) SARs and (iv) restricted stock awards.
The 1996 Incentive Plan authorizes the issuance of 237,500 shares of Common
Stock pursuant to the exercise of non-transferable options granted to
participating employees. On September 16, 1997, the exercise prices of
substantially all of the options granted under the 1996 Incentive Plan were
reduced to $5.00 per share.
The 1996 Incentive Plan is administered by the Board or a committee of the
Board (the "Committee") who determines the exercise price of each option granted
under the 1996 Incentive Plan. However, the exercise price for an incentive
stock option must not be less than the fair market value of the Common Stock on
the date of grant. Stock options may be exercised as the Committee determines
but not later than ten years from the date of grant in the case of incentive
stock options. At the discretion of the Committee, holders may use shares of
Common Stock to pay the exercise price, including shares issuable upon exercise
of the option.
An SAR may be awarded in connection with or separate from a stock option.
An SAR is the right to receive an amount in cash or stock equal to the fair
market value of a share of the Common Stock on the date of exercise less the
exercise price specified in the agreement governing the SAR (for SARs not
granted in connection with a stock option) or the exercise price of the related
stock option (for SARs granted in connection with a stock option). An SAR
granted in connection with a stock option will require the holder,
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<PAGE> 58
upon exercise, to surrender the related stock option or portion thereof relating
to the number of shares for which the SAR is exercised. The surrendered stock
option, or portion thereof, will then cease to be exercisable. Such an SAR is
exercisable or transferable only to the extent that the related stock option is
exercisable or transferable. An SAR granted independently of a stock option will
be exercisable as the Committee determines. The Committee may limit the amount
payable upon exercise of any SAR and such amounts may be paid in cash or stock.
A restricted stock award is a grant of shares of Common Stock that is
nontransferable or subject to risk of forfeiture until specific conditions are
met. The restrictions will lapse in accordance with a schedule or other
conditions as the Committee determines. During the restriction period, the
holder of a restricted stock award may, in the Committee's discretion, have
certain rights as a stockholder, including the right to vote the stock subject
to the award or to receive dividends thereon. Restricted stock may also be
issued upon exercise or settlement of options or SARs.
An award under the 1996 Incentive Plan may have change of control features
as the Committee determines. Such change of control features may provide that
upon the change of control of the Company: (i) the holder of a stock option will
be granted a corresponding SAR, (ii) all outstanding SARs and options will
become immediately and fully vested and exercisable in full and (iii) the
restriction period on any restricted stock award will be accelerated and the
restrictions will expire. Outstanding options under the 1996 Incentive Plan have
the provision described in the preceding clause (ii). A "change in control" of
the Company means: (i) a person other than the Company, certain affiliated
companies or benefit plans, or a company a majority of which is owned directly
or indirectly by the stockholders of the Company becomes the beneficial owner of
50% or more of the voting power of the Company's outstanding voting securities;
(ii) a majority of the Board of Directors is not comprised of the members of the
Board of Directors at a specified date in June 1996, and persons whose elections
as directors were approved by those directors of their approved successors;
(iii) the Company merges or consolidates with another corporation or entity
(whether the Company or the other entity is the survivor), or the Company and
the holders of the voting securities of such other corporation or entity (or the
stockholders of the Company and such other corporation or entity) participate in
a securities exchange, other than a merger, consolidation or securities exchange
in which the Company's voting securities are converted into or continue to
represent securities having the majority of voting power in the surviving
company; or (iv) the Company liquidates or sells all or substantially all of its
assets, except sales to an entity having substantially the same ownership as the
Company.
If a restructuring of the Company occurs that does not constitute a change
in control of the Company, the Committee may: (i) accelerate in whole or in part
the time of vesting and exercisability of any outstanding stock options and
SARs, in order to permit those stock options and SARs to be exercisable before,
upon, or after the completion of the restructuring; (ii) grant each option
holder corresponding SARs; (iii) accelerate in whole or in part the expiration
of some or all of the restrictions on any restricted stock award; (iv) if the
restructuring involves a transaction in which the Company is not the surviving
entity, cause the surviving entity to assume in whole or in part any one or more
of the outstanding awards under the 1996 Incentive Plan upon such terms and
provisions as the Committee deems desirable; or (v) redeem in whole or in part
any one or more of the outstanding awards (whether or not then exercisable) in
consideration of a cash payment, adjusted for withholding obligations. A
restructuring generally is any merger of the Company or the direct or indirect
transfer of all or substantially all of the Company's assets (whether by sale,
merger, consolidation, liquidation, or otherwise) in one transaction or a series
of transactions.
The options granted in 1996 under the 1996 Incentive Plan to executive
officers automatically vest upon a change in control, termination of their
employment with the Company by the Company without cause or termination of their
employment with the Company by the officer for good reason.
1989 Stock Option Plan. The Company's 1989 Stock Option Plan (the "1989
Stock Option Plan"), which was approved by the Board of Directors in October
1989 and subsequently amended in June 1996, provides for the issuance of
Incentive and Non-Qualified Stock Options to purchase up to 387,500 shares of
Common Stock of the Company. Non-Qualified Stock Options may be granted to
full-time employees (including executive officers and directors other than Mr.
and Ms. Bazzle) of the Company or to part-time
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<PAGE> 59
employees or persons performing services for the Company. Incentive Stock
Options may only be granted to full-time employees of the Company. Unexercised
options under the 1989 Stock Option Plan are subject to adjustment if the
outstanding shares of Common Stock of the Company are increased or decreased or
changed into or exchanged for a different number or kind of shares of stock or
other securities or other securities of the Company or of another corporation
through a stock split, combination, reorganization, merger, consolidation or
similar transaction. On September 16, 1997, the exercise price of substantially
all of the options granted under the 1989 Stock Option Plan were reduced to
$5.00 per share.
The 1989 Stock Option Plan is administered by the Board or the Committee
which (i) selects the employees, officers or directors who are to be granted
options, (ii) establishes the number of shares of Common Stock subject to the
options, (iii) determines the exercise prices and (iv) establishes the terms,
restrictions and/or conditions applicable to the options. The exercise price for
an Incentive Stock Option must not be less than the fair market value of the
Common Stock on the date of grant. Options granted under the 1989 Stock Option
Plan vest over a three year period beginning on the date of the grant, with
one-third of the options vesting and becoming exercisable on each anniversary of
the grant. All options will vest automatically upon the occurrence of a change
in control triggering event, which includes a consolidation or merger of the
Company with or into any other entity or a sale or other transfer of
substantially all of the property and assets of the Company. Options are not
transferable except by the laws of devise and descent, and during an optionee's
lifetime may only be exercised by the optionee.
EMPLOYEE STOCK OWNERSHIP PLAN
The Board of Directors adopted an Employee Stock Ownership Plan ("ESOP"),
effective as of April 1, 1990, for eligible employees. The ESOP is an employee
stock ownership plan that is intended to satisfy the applicable qualification
requirements set forth in the Internal Revenue Code of 1986, as amended. The
ESOP is designed to invest primarily in shares of the Company's Common Stock.
The Company intends to terminate the ESOP in early 1998.
Contributions of Common Stock and cash by the Company, when declared at the
discretion of the Board, are allocated to the accounts of participants based on
the ratio each participant's compensation for the year bears to all
participants' compensation for that year. Participants are not vested in any
amounts allocated to them until they have completed at least 1,000 hours of
service per year for one year. After five such years, a participant is 100%
vested in such amounts. Generally, a participant also will be fully vested upon
attaining age 65 or in the event of total and permanent disability, death or
termination of the ESOP.
Shares of Common Stock, together with any other ESOP assets, are held by a
trustee appointed by the Company. Under the ESOP, each participant has a right
to direct the trustee as to the manner in which shares of Common Stock allocated
to his or her account, as well as a portion of the shares of Common Stock held
by the trustee pending allocation to participant accounts, are to be voted at
each meeting of the Company's stockholders. Allocated shares for which no timely
instructions are received will be voted by the trustee proportionally in the
manner as the shares for which voting instructions were received.
Upon termination of employment, a participant is entitled to the amounts
which have been allocated to his or her account and which have become vested. If
a participant dies before receiving vested benefits from the ESOP, then ESOP
assets held for the participant will be distributed to the participant's
beneficiary. Under the ESOP, participants and beneficiaries will receive ESOP
distributions in the form of Common Stock and cash in lieu of any fractional
shares.
401(K) PLAN
The Company sponsors a defined contribution plan (the "401(k) Plan")
pursuant to which all employees at least 21 years of age are eligible to
participate. Participants in the 401(k) Plan may contribute up to 15% of his or
her pre-tax total compensation with the Company matching 25% of the
participant's contributions, up to 6% of the participant's compensation.
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<PAGE> 60
CHANGE OF CONTROL AGREEMENTS
The Company is a party to Change of Control Agreements with Joel H.
Williams and certain other officers of the Company and its subsidiaries, but not
with the Chief Executive Officer or President of the Company. The Change of
Control Agreements will provide for payment of one year's salary upon certain
circumstances following a Change of Control (as defined therein).
SECURITY OWNERSHIP
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock of as of September 30, 1997,
for: (i) each person known by the Company to own beneficially more than 5% of
the outstanding shares of the Company's Common Stock; (ii) each executive
officer and director of the Company; and (iii) all executive officers and
directors of the Company as a group.
<TABLE>
<CAPTION>
NUMBER PERCENT OF CLASS
--------- ----------------
<S> <C> <C>
S. Wayne Bazzle(1) and Cheryl C. Bazzle(1)................ 2,609,270 26.0
8150 North Central Expressway
Suite M-2000
Dallas, Texas 75206
RFE Investment Partners IV, L.P........................... 2,158,528 21.5
36 Grove Street
New Canaan, Connecticut 06840
HealthCor Holdings, Inc. Employee Stock Ownership Plan and
Trust................................................... 565,719 5.6
Joel H. Williams(2)....................................... 14,190 *
Robert B. Crates(3)....................................... 16,662 *
Jane B. Finley............................................ 1,190 *
Michael J. Foster(4)...................................... 2,158,528 21.5
All directors and officers as a group (6 persons)......... 4,799,840 47.8
</TABLE>
- ---------------
* Less than 1%
(1) Of such shares, 1,175,000 shares are owned by S. Wayne Bazzle, 1,175,000
shares are owned by Cheryl C. Bazzle and 247,000 shares are owned by the
John Bradley Trust (the "Trust"). S. Wayne Bazzle and Cheryl C. Bazzle serve
as trustees of the Trust. Each of Mr. and Ms. Bazzle disclaim beneficial
ownership of the shares owned by the other and the Trust. Includes 12,270
shares beneficially owned through the Company's ESOP.
(2) Represents 13,750 shares issuable upon exercise of stock options and 440
shares beneficially owned through the Company's ESOP.
(3) 8,331 of such shares are owned by Mr. Crates individually and 8,331 of such
shares are owned by RBC Investment Corp., a corporation of which Mr. Crates
is the sole director and officer and a shareholder.
(4) Michael J. Foster disclaims beneficial ownership of the shares held of
record by RFE Investment Partners, IV, L.P. except to the extent of his
partnership interest in RFE Investment Partners IV, L.P.
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<PAGE> 61
DESCRIPTION OF THE NEW CREDIT FACILITY
Contemporaneously with the closing of the Initial Offering, the Company
entered into the New Credit Facility with Texas Commerce Bank National
Association (the "Agent"), as issuing bank and agent, and each of the lending
institutions which is or may become a signatory thereto. The existing and, if
requested by the Agent, future subsidiaries of the Company guarantee the
indebtedness of the Company under the New Credit Facility. The following is a
summary does not purport to be a complete description of the New Credit Facility
or various documents entered into in connection with the New Credit Facility and
is subject to the detailed provisions of, and qualified in its entirety by
reference to, the New Credit Facility and such related documents.
General. The New Credit Facility consists of a three-year revolving credit
facility providing up to $20.0 million of availability. The New Credit Facility
is available in multiple drawings from time to time subject to certain
conditions and limitations, and amounts borrowed and repaid may be reborrowed
until the third anniversary of the closing date (the "Final Maturity Date").
Advances under the New Credit Facility will be used to finance the working
capital and general corporate requirements of the Company and its subsidiaries,
excluding the financing of asset or stock acquisitions.
Interest Rates; Fees. Amounts outstanding under the New Credit Facility
will bear interest at a rate based on LIBOR plus a specified margin ranging from
1.25% to 2.75% or, at the option of the Company, at a rate based on the prime
rate plus a specified margin ranging from 0% to 0.75%.
The Company will pay a commitment fee on the unused portion of the New
Credit Facility which will be payable quarterly in arrears. The amount of the
commitment fee will range from 0.25% to 0.375% per annum of the daily average
unused commitment amount.
Collateral. All amounts owing under the New Credit Facility are secured by
security interests in substantially all of the assets of the Company and its
subsidiaries.
Covenants. The Company and its existing subsidiaries are subject to certain
affirmative and negative covenants contained in the New Credit Facility,
including without limitation covenants that restrict, subject to specified
exceptions: (i) the incurrence of additional indebtedness and other obligations
and the granting of additional liens; (ii) mergers, acquisitions, investments
and acquisitions and dispositions of assets; (iii) the incurrence of capitalized
lease obligations; (iv) dividends; (v) prepayments or repurchase of other
indebtedness and amendments to certain agreements governing indebtedness,
including the Indenture and the Notes; (vi) engaging in transactions with
affiliates and formation of subsidiaries; (vii) the use of proceeds; (viii)
changes of lines of business; and (ix) other customary covenants. There are also
covenants relating to compliance with ERISA and environmental and other laws,
acquisitions, payment of taxes, maintenance of corporate existence and rights,
maintenance of insurance and financial reporting. Certain of these covenants are
more restrictive than those set forth in the Indenture. In addition, the New
Credit Facility requires the Company to maintain compliance with certain
specified financial covenants, including covenants relating to minimum net
worth, minimum interest coverage ratio, debt to total capitalization ratio and
maximum debt to EBITDAA (as defined in the New Credit Facility) ratio.
Events of Default. The New Credit Facility includes customary events of
default, including, without limitation, payment defaults, breach of
representations, warranties or covenants, bankruptcy of the Company or any
subsidiary, a change of control or change of management of the Company or any
subsidiary, certain changes of ownership of the Company by management, the
invalidity of guaranties or security documents under the New Credit Facility and
cross-default to other indebtedness of the Company and its subsidiaries. The
occurrence of any of such events of default could result in acceleration of the
Company's obligations under the New Credit Facility and foreclosure on the
collateral securing such obligations, which could have a material adverse effect
on holders of the Exchange Notes.
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<PAGE> 62
DESCRIPTION OF THE EXCHANGE NOTES
The Outstanding Notes were, and the Exchange Notes will be, issued pursuant
to the Indenture dated as of December 1, 1997 between the Company, the
Guarantors and the Trustee. The terms of the Exchange Notes are identical in all
material respects to the Outstanding Notes, except the Exchange Notes have been
registered under the Securities Act and, therefore, will not bear legends
restricting their transfer.
The terms of the Exchange Notes include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"), as in effect from time to time.
The Exchange Notes are subject to all such terms, and holders of the Exchange
Notes are referred to the Indenture and the Trust Indenture Act for a statement
of them. The following is a summary of certain terms and provisions of the
Indenture and the Notes. This summary does not purport to be a complete
description of the Indenture or the Exchange Notes and is subject to the
detailed provisions of, and qualified in its entirety by reference to, the
Exchange Notes and the Indenture (including the definitions contained therein).
For purposes of this section of the Prospectus, the term "the Company" means
HealthCor Holdings, Inc. Definitions relating to certain capitalized terms are
set forth under "Certain Definitions" and throughout this description.
Capitalized terms that are used but not otherwise defined herein have the
meanings assigned to them in the Indenture and such definitions are incorporated
herein by reference.
GENERAL
The Exchange Notes will be general unsecured obligations of the Company
ranking senior in right of payment to all existing and future Subordinated
Indebtedness and pari passu in right of payment with all other Indebtedness and
liabilities (including trade payables) of the Company. The Exchange Notes will
rank pari passu with the Company's Outstanding Notes not otherwise exchanged for
Exchange Notes pursuant to this Exchange Offer. The Notes will be effectively
subordinated to all present or future secured Indebtedness of the Company to the
extent of the value of the assets securing such Indebtedness. As of September
30, 1997, on a pro forma basis after giving effect to the issuance and sale of
the Outstanding Notes and the use of the net proceeds therefrom, the Company
would have had no secured or other Indebtedness outstanding.
The Company is a holding company and has no material assets or operations
other than its investment in its subsidiaries. The Notes will be fully and
unconditionally guaranteed on a senior unsecured and joint and several basis
(the "Guarantees") by the Company's present and future domestic Subsidiaries
(collectively, the "Guarantors"). The term "Subsidiaries" does not include
Unrestricted Subsidiaries and under certain circumstances the Company will be
permitted to designate certain of its subsidiaries as Unrestricted Subsidiaries;
however, as of the date hereof there are no Unrestricted Subsidiaries. The
Guarantees will rank senior in right of payment to all existing and future
Subordinated Indebtedness of the Guarantors and pari passu in right of payment
with all other Indebtedness and liabilities (including trade payables) of the
Guarantors. The Guarantees will be effectively subordinated to all secured
Indebtedness of the Guarantors to the extent of the value of the assets securing
such Indebtedness. As of September 30, 1997, on a pro forma basis after giving
effect to the issuance and sale of the Outstanding Notes and the use of the net
proceeds therefrom, the Guarantors would have had $9.5 million principal amount
of secured Indebtedness outstanding in the form of Capital Lease Obligations and
$3.1 million in other Indebtedness outstanding, including $600,000 of letters of
credit outstanding.
Any right of the Company or a Guarantor to receive assets of any of the
Company's subsidiaries that is not a Guarantor upon the latter's liquidation or
reorganization (and the consequent right of the holders of the Notes to
participate in those assets) will be effectively subordinated to the claims of
that subsidiary's creditors, except to the extent that the Company or a
Guarantor is itself recognized as a creditor of such subsidiary, in which case
the claims of the Company or such Guarantor would still be effectively
subordinated to any security interest in the assets of such subsidiary.
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<PAGE> 63
PRINCIPAL, MATURITY AND INTEREST
The Exchange Notes will be limited in aggregate principal amount to $80.0
million and will mature on December 1, 2004. The Exchange Notes will bear
interest at a rate of 11% per annum from the date of original issuance until
maturity. Interest is payable semi-annually in arrears on June 1 and December 1
of each year, commencing on June 1, 1998, to holders of record of the Exchange
Notes at the close of business on the immediately preceding May 15 and November
15, respectively (whether or not a business day). Interest on the Exchange Notes
will accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the date of original issuance. Interest will be
computed on the basis of a 360-day year consisting of twelve 30-day months. The
Exchange Notes will be issued in denominations of $1,000 and any integral
multiple of $1,000.
Principal of, premium, if any, interest and Liquidated Damages, if any, on
the Notes will be payable at the office or agency of the Company maintained for
such purpose within the City and State of New York or, at the option of the
Company, payment of interest may be made by check mailed to the holders of the
Notes at their respective addresses set forth in the register of holders of
Notes; provided that all payments with respect to Notes, the holders of which
have given wire transfer instructions to the paying agent on or prior to the
relevant record date will be required to be made by wire transfer of immediately
available funds to the accounts specified by such holders. Until otherwise
designated by the Company, the Company's office or agency in New York will be
the office of the Trustee maintained for such purpose.
GUARANTEES
The Company's payment obligations under the Notes will be jointly and
severally and unconditionally guaranteed by the Guarantors. See, however, "Risk
Factors -- Fraudulent Conveyance; Unenforceability of Certain Corporate
Guarantees." Each Guarantor that makes a payment or distribution under a
Guarantee will be entitled to a contribution from each other Guarantor in a pro
rata amount based on the Adjusted Net Assets of each Guarantor.
The Indenture provides that no Guarantor may consolidate with or merge with
or into (whether or not such Guarantor is the surviving Person), another Person
whether or not affiliated with such Guarantor unless (i) subject to the
provisions of the following paragraph, the Person formed by or surviving any
such consolidation or merger (if other than such Guarantor) assumes all the
obligations of such Guarantor, pursuant to a supplemental indenture in form and
substance reasonably satisfactory to the Trustee in respect of the Notes, the
Indenture and such Guarantor's Guarantee and (ii) immediately after giving
effect to such transaction, no Default or Event of Default exists.
The Indenture provides that in the event of a sale or other disposition of
all or substantially all of the assets of any Guarantor to a third party or an
Unrestricted Subsidiary in a transaction that does not violate any of the
covenants in the Indenture (including the covenant described under the caption
"-- Repurchase at the Option of Holders -- Asset Sales"), by way of merger,
consolidation or otherwise, or a sale or other disposition of all of the capital
stock of any Guarantor, or the designation of such Guarantor as an Unrestricted
Subsidiary in accordance with the Indenture, then (i) in the event of a sale or
other disposition, by way of such a merger, consolidation or otherwise, of all
of the capital stock of such Guarantor, or in the event of such designation,
such Guarantor will be released from and relieved of any obligations under its
Guarantee, or (ii) in the event of a sale or other disposition of all of the
assets of such Guarantor, the Person acquiring such assets will not be required
to assume the obligations of such Guarantor under its Guarantee.
Any Guarantor that is designated an Unrestricted Subsidiary in accordance
with the terms of the Indenture shall be released from and relieved of its
obligations under its Guarantee and any Unrestricted Subsidiary that ceases to
be an Unrestricted Subsidiary will be required to execute a Guarantee in
accordance with the terms of the Indenture.
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<PAGE> 64
OPTIONAL REDEMPTION
Except as set forth below, the Notes will not be redeemable at the option
of the Company prior to December 1, 2001. Thereafter, the Notes will be
redeemable at any time, and from time to time, at the option of the Company, in
whole or in part, at the following redemption prices (expressed as a percentage
of principal amount), together, in each case, with accrued and unpaid interest
and Liquidated Damages, if any, to the redemption date, if redeemed during the
twelvemonth period beginning on December 1 of each year listed below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2001...................................................... 106.50%
2002...................................................... 103.25%
2003...................................................... 100.00%
</TABLE>
Notwithstanding the foregoing, at any time prior to December 1, 2000, the
Company may redeem up to an aggregate of $25 million in principal amount of
Notes at a redemption price equal to 111% of the principal amount thereof, plus
accrued and unpaid interest and Liquidated Damages, if any, thereon to the
redemption date with the net cash proceeds of one or more Public Equity
Offerings, provided that at least $55 million in principal amount of Notes
remains outstanding immediately following each such redemption and that any such
redemption occurs within 90 days following the closing of any such Public Equity
Offering.
In the event of redemption of fewer than all of the Notes, the Trustee
shall select pro rata, by lot or in such other manner as it shall deem fair and
equitable, the Notes to be redeemed. No Notes of $1,000 or less shall be
redeemed in part. Subject to the limitations described herein, the Notes will be
redeemable in whole or in part upon not less than 30 nor more than 60 days'
prior written notice, mailed by first class mail to a holder's last address as
it shall appear on the register maintained by the Registrar of the Notes.
Notices of redemption may not be conditional. If any Note is to be redeemed in
part only, the notice of redemption that relates to such Note shall state the
portion of the principal amount thereof to be redeemed. A new Note, in a
principal amount equal to the unredeemed portion thereof will be issued in the
name of the holder thereof upon cancellation of the original Note. After any
redemption date, unless the Company shall default in the payment of the
redemption price, interest will cease to accrue on the Notes or portions thereof
called for redemption.
MANDATORY REDEMPTION
Except as set forth under "-- Repurchase at the Option of Holders," the
Company is not obligated to make any mandatory redemption of or sinking fund
payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control Offer
Within 30 days of the occurrence of a Change of Control, the Company shall
notify the Trustee in writing of such occurrence and shall make an offer to
purchase (the "Change of Control Offer") all or any portion (equal to $1,000 or
an integral multiple of $1,000) of the outstanding Notes at a cash purchase
price equal to 101% of the principal amount thereof plus any accrued and unpaid
interest and Liquidated Damages, if any, thereon to the Change of Control
Payment Date (as hereinafter defined) (such applicable purchase price being
hereinafter referred to as the "Change of Control Purchase Price") in accordance
with the procedures set forth in this covenant.
Within 30 days of the occurrence of a Change of Control, the Company also
shall (i) cause a notice of the Change of Control Offer to be sent at least once
to the Dow Jones News Service or similar business news service in the United
States and (ii) send by first-class mail, postage prepaid, to the Trustee and to
each
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holder of the Notes, at the address appearing in the register maintained by the
Registrar of the Notes, a notice describing the transactions constituting a
Change of Control and stating:
(1) that the Change of Control Offer is being made pursuant to this
covenant and that all Notes tendered will be accepted for payment, subject
to the terms and conditions set forth herein;
(2) the Change of Control Purchase Price and the purchase date (which
shall be a Business Day no earlier than 20 business days and no later than
60 days from the date such notice is mailed (the "Change of Control Payment
Date"));
(3) that any Note not tendered will continue to accrue interest;
(4) that, unless the Company defaults in the payment of the Change of
Control Purchase Price, any Notes accepted for payment pursuant to the
Change of Control Offer shall cease to accrue interest after the Change of
Control Payment Date;
(5) that holders accepting the offer to have their Notes purchased
pursuant to a Change of Control Offer will be required to surrender the
Notes to the Paying Agent at the address specified in the notice prior to
the close of business on the Business Day preceding the Change of Control
Payment Date;
(6) that holders will be entitled to withdraw their acceptance if the
Paying Agent receives, not later than the close of business on the fifth
Business Day preceding the Change of Control Payment Date, a telegram,
telex, facsimile transmission or letter setting forth the name of the
holder, the principal amount of the Notes delivered for purchase, and a
statement that such holder is withdrawing its election to have such Notes
purchased;
(7) that holders whose Notes are being purchased only in part will be
issued new Notes equal in principal amount to the unpurchased portion of
the Notes surrendered, provided that each Note purchased and each such new
Note issued shall be in an original principal amount in denominations of
$1,000 and integral multiples thereof;
(8) any other reasonable procedures that a holder must follow to
accept a Change of Control Offer or effect withdrawal of such acceptance;
and
(9) the name and address of the Paying Agent.
On the Change of Control Payment Date, the Company shall, to the extent
lawful, (i) accept for payment all Notes or portions thereof or beneficial
interests under a Global Note tendered pursuant to the Change of Control Offer,
(ii) deposit with the Paying Agent money sufficient to pay the purchase price of
all Notes or portions thereof or beneficial interests so tendered and (iii)
deliver or cause to be delivered to the Trustee Notes so accepted together with
an Officers' Certificate stating the Notes or portions thereof tendered to the
Company. The Paying Agent shall promptly (1) mail to each holder of Notes so
accepted and (2) cause to be credited to the respective accounts of the holders
under a Global Note of beneficial interests so accepted payment in an amount
equal to the Change of Control Purchase Price for such Notes, and the Company
shall execute and issue, and the Trustee shall promptly authenticate and mail to
such holder, a new Note equal in principal amount to any unpurchased portion of
the Notes surrendered and shall issue a new Global Note equal in principal
amount to any unpurchased portion of beneficial interest so surrendered or shall
reflect on such Global Note or a schedule thereto such change in beneficial
interest; provided, however, that each such new Note shall be issued in an
original principal amount in denominations of $1,000 and integral multiples
thereof.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the holders of the Notes to require that the Company
repurchase or redeem the Notes in the event of a takeover, recapitalization or
similar transaction.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change or Control Offer in the
manner, at the times and otherwise in compliance with the
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<PAGE> 66
requirements set forth in the Indenture applicable to a Change of Control Offer
made by the Company and purchases all Notes validly tendered and not withdrawn
under such Change of Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a holder of Notes to require the Company to
repurchase such Notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of the assets of the Company and its
Subsidiaries taken as a whole to another Person or group may be uncertain.
Asset Sales
The Company will not, and will not permit any of its Subsidiaries to,
consummate an Asset Sale unless (i) the Company or such Subsidiary, as the case
may be, receives consideration at the time of such sale or other disposition at
least equal to the fair market value thereof (as reasonably determined for Asset
Sales in excess of $1 million in good faith by its Board of Directors); (ii) not
less than 75% of the consideration received by the Company or the Subsidiary, as
the case may be, from such Asset Sale is in the form of cash or Temporary Cash
Investments; provided that the amount of (a) any liabilities (as shown on the
Company's or a Subsidiary's most recent balance sheet) of the Company or a
Subsidiary (other than contingent liabilities and liabilities that are by their
terms subordinated to the Notes or any Guarantee thereof) that are assumed by
the transferee of any such assets or an Affiliate thereof pursuant to a
customary novation agreement that releases the Company or such Subsidiary from
further liability and (b) any securities, notes or other obligations received by
the Company or a Subsidiary from such transferee or an Affiliate thereof that
are converted by the Company or a Subsidiary into cash prior to the Reinvestment
Date (to the extent of the cash received) shall be deemed to be cash for
purposes of this provision; and (iii) the Asset Sale Proceeds received by the
Company or such Subsidiary are applied, to the extent the Company elects, (A) to
repay and permanently reduce outstanding Senior Indebtedness under the New
Credit Facility, other secured Senior Indebtedness or any other Senior
Indebtedness that has a maturity date earlier than the maturity of the Notes and
to permanently reduce the commitments in respect thereof, provided, however,
that such repayment and commitment reduction occurs prior to the Reinvestment
Date or (B) to an investment in assets (including Equity Interests or other
securities purchased in connection with the acquisition of Equity Interests or
property of another Person) used or useful in the Company's business; provided,
however, that such investment occurs or the Company or a Subsidiary enters into
contractual commitments to make such investment, subject only to customary
conditions (other than the obtaining of financing), on or prior to the 270th day
following receipt of such Asset Sale Proceeds (the "Reinvestment Date") (and
notifies the Trustee of the same in writing) and Asset Sale Proceeds
contractually committed are so applied within 360 days following the receipt of
such Asset Sale Proceeds or (C) as Excess Proceeds as set forth below. Pending
the final application of any such Asset Sale Proceeds, the Company may
temporarily reduce Senior Indebtedness or otherwise invest such Asset Sale
Proceeds in any manner that is not prohibited by the Indenture. Any Asset Sale
Proceeds that are not applied as permitted by clause (iii)(A) or (iii)(B) of the
preceding sentence shall constitute "Excess Proceeds." If at any time from and
after the Issue Date the aggregate amount of Excess Proceeds exceeds $5 million,
the Company shall offer (an "Excess Proceeds Offer") to purchase from all
holders of Notes, pursuant to procedures set forth in the Indenture and if the
Company is required to do so under the terms of any other Senior Indebtedness,
to purchase from the holders of such other Senior Indebtedness the maximum
principal amount of Notes and principal of such other Senior Indebtedness that
may be purchased with such Excess Proceeds at a purchase price in cash equal to
100% of the principal amount thereof plus accrued interest, and Liquidated
Damages, if any, to the date of the purchase. To the extent that the purchase
price of Notes and principal of such other Senior Indebtedness tendered pursuant
to such Excess Proceeds Offer is less than the amount of Excess Proceeds, the
Company may use such portion of the Excess Proceeds that is not used to purchase
Notes or such other Senior Indebtedness so tendered for general corporate
purposes not inconsistent with the Notes or the Indenture. If the aggregate
purchase price of Notes and principal of such other Senior Indebtedness tendered
pursuant to such Excess Proceeds Offer is more than the amount of the Excess
Proceeds, the Notes and principal of such other Senior Indebtedness
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<PAGE> 67
tendered will be repurchased on a basis pro rata to the amount tendered or by
such other method as the Trustee shall deem fair and appropriate. Upon the
completion of any Excess Proceeds Offer and the closing of any repurchase of
Notes and principal of such other Senior Indebtedness tendered pursuant to such
Excess Proceeds Offer, the amount of Excess Proceeds shall be deemed to be zero.
If the Company is required to make an Excess Proceeds Offer, the Company
shall mail, within 30 days following the Reinvestment Date, a notice to the
holders of the Notes describing the transactions giving rise to the Excess
Proceeds Offer and stating, among other things: (1) that such holders have the
right to require the Company to apply the Excess Proceeds to repurchase such
Notes at a purchase price in cash equal to 100% of the principal amount thereof
plus accrued and unpaid interest and Liquidated Damages, if any, to the date of
purchase; (2) the purchase date, which shall be no earlier than 30 days and not
later than 60 days from the date such notice is mailed; (3) the instructions,
reasonably determined by the Company, that each holder of Notes must follow in
order to have such Notes repurchased; and (4) the calculations used in
determining the amount of Excess Proceeds to be applied to the repurchase of
such Notes.
The Company or any of its Subsidiaries may engage in transactions in which
assets are transferred in exchange for one or more like-kind assets; provided
that if the fair market value of the assets to be transferred by the Company or
such Subsidiary, plus the fair market value of any other consideration paid or
credited by the Company or such Subsidiary exceeds $1 million, such transaction
shall require approval of the Board of Directors of the Company; provided that
no such transaction shall be permitted if the Consolidated Fixed Charge Coverage
Ratio of the Company would be reduced after giving effect to such transaction.
In addition, each such transaction shall be valued at an amount equal to all
consideration received by the Company or such Subsidiary in such transaction,
other than the like-kind assets received pursuant to such exchange ("Other
Consideration"), for purposes of determining whether an Asset Sale has occurred.
If the Other Consideration is of an amount and character such that such
transaction constitutes an Asset Sale, then the first paragraph of this "Asset
Sales" covenant shall be applicable to any Asset Sale Proceeds of such Other
Consideration.
General
The Indenture requires that if any Indebtedness under the New Credit
Facility is outstanding at the time of the occurrence of a Change of Control or
at the time the Company is required to make an Excess Proceeds Offer, and the
New Credit Facility shall prohibit the Company from fully complying with its
obligations to make and consummate a Change in Control Offer or an Excess
Proceeds Offer, prior to the mailing of the notice to holders described in the
preceding paragraphs, but in any event within 30 days following any Change of
Control or Reinvestment Date, the Company shall (i) repay in full all
obligations and terminate all commitments under the New Credit Facility or offer
to repay in full all obligations and terminate all commitments under the New
Credit Facility or (ii) obtain the requisite consent under the New Credit
Facility to permit the making of, and the repurchase of the Notes pursuant to,
the Change of Control Offer or the Excess Proceeds Offer. The time by which the
Company is requested to commence and consummate a Change of Control Offer or an
Excess Proceeds Offer shall be deferred until the Company has taken the actions
requested by this paragraph. The Company's failure to comply with the covenant
described in the first sentence of this paragraph constitutes an Event of
Default. As a result of the foregoing, a holder of the Notes may not be able to
compel the Company to purchase the Notes unless the Company is able at the time
to refinance the Indebtedness under the New Credit Facility or obtain requisite
consents thereunder.
The Indenture provides that, (A) if the Company or any Subsidiary thereof
has issued any outstanding (i) Subordinated Indebtedness or (ii) Preferred
Equity Interests, and the Company or such Subsidiary is required to make a
Change of Control Offer or an Excess Proceeds Offer or to make a distribution
with respect to such Subordinated Indebtedness or Preferred Equity Interests in
the event of a change of control or sale of assets, the Company and such
Subsidiary shall not consummate any such offer or distribution with respect to
such Subordinated Indebtedness or Preferred Equity Interests until such time as
the Company shall have paid the Change of Control Purchase Price in full to the
holders of Notes that have accepted the Company's Change of Control Offer and
shall otherwise have consummated the Change of Control Offer made to Holders of
the Notes, or until such time as the Company has paid the Excess Proceeds to
Holders of the Notes that have accepted the Excess Proceeds Offer and shall
otherwise have consummated the Excess Proceeds Offer,
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as the case may be, and (B) the Company will not issue Subordinated Indebtedness
or Preferred Equity Interests with change of control provisions or asset sales
provisions requiring the payment of such Subordinated Indebtedness or Preferred
Equity Interests prior to the payment in full to the holders of Notes that have
accepted the Company's Change of Control Offer following a Change in Control
Offer or payment of the Excess Proceeds to holders of Notes that have accepted
the Excess Proceeds Offer, as the case may be.
The Company will comply with any applicable requirements of Rule 14e-1 as
then in effect with respect to any Change in Control Offer or Excess Proceeds
Offer and the purchase of any Notes thereunder. The Company's ability to
purchase the Notes will be limited by the Company's then available financial
resources and, if such financial resources are insufficient, its ability to
arrange financing to effect such purchases. There can be no assurance that the
Company will have sufficient funds to repurchase the Notes upon a Change of
Control or Asset Sale or that the Company will be able to arrange financing for
such purpose.
CERTAIN COVENANTS
The Indenture will contain, among others, the following covenants:
Limitation on Restricted Payments
The Company and the Guarantors will not, and will not permit any of their
Subsidiaries to, directly or indirectly, make, any Restricted Payment unless:
(a) no Default or Event of Default shall have occurred and be
continuing at the time of or immediately after giving effect to such
Restricted Payment;
(b) immediately after giving pro forma effect to such Restricted
Payment, the Company could incur $1.00 of additional Indebtedness (other
than Permitted Indebtedness) under the covenant set forth under "Limitation
on Additional Indebtedness"; and
(c) immediately after giving effect to such Restricted Payment, the
aggregate of all Restricted Payments declared or made after the Issue Date
through and including the date of such Restricted Payment (the "Base
Period") does not exceed the sum of (1) 50% of the Company's Consolidated
Net Income (or in the event such Consolidated Net Income shall be a
deficit, minus 100% of such deficit) from the Issue Date to the end of the
Company's most recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted Payment, (2) 100%
of the aggregate net cash proceeds received by the Company from the issue
or sale, during the Base Period, of Equity Interests (other than
Disqualified Equity Interests or Equity Interests of the Company issued to
any Subsidiary of the Company) of the Company or any Indebtedness or other
securities of the Company convertible into or exercisable or exchangeable
for Equity Interests (other than Disqualified Equity Interests) of the
Company which have been so converted or exercised or exchanged, as the case
may be, (3) if any Restricted Investment that was made after the Closing
Date is sold for cash, the net cash proceeds from such sale to the extent
received by the Company or any Restricted Subsidiary, minus the initial
amount of such Restricted Investment and (4) in the event an Unrestricted
Subsidiary is redesignated as a Restricted Subsidiary, an amount equal to
the lesser of (i) the net book value of such Investments at the time of
such designation, (ii) the fair market value of such Investments at the
time of such designation and (iii) the original fair market value of such
Investments at the time they were made. For purposes of determining under
this clause (c) the amount expended for Restricted Payments, cash
distributed shall be valued at the face amount thereof and property other
than cash shall be valued at its fair market value at the time expended.
The provisions of this covenant shall not prohibit (i) the agreement or
commitment to make any payment or distribution permitted under the Indenture or
the payment or distribution so agreed or committed to be made as long as such
payment or distribution is made on the date of such agreement or commitment or
within 60 days thereof, provided, however, that on the date of such agreement or
commitment such payment would comply with the foregoing provisions, it being
understood that the agreement or commitment to make such payment or distribution
shall constitute Permitted Indebtedness, (ii) the purchase, redemption or other
acquisition or retirement of any Equity Interests or the making of any principal
payment on, or the purchase,
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defeasance, repurchase, redemption or other acquisition or retirement of
Subordinated Indebtedness by conversion into, or by or in exchange for, Equity
Interests (other than Disqualified Equity Interests), or out of, the net cash
proceeds of the substantially concurrent sale (other than to a Subsidiary of the
Company) of other Equity Interests of the Company (other than Disqualified
Equity Interests), (iii) the making of any principal payment on, or the
purchase, defeasance, repurchase, redemption or other acquisition or retirement
of Subordinated Indebtedness in exchange for, by conversion into, or out of the
net cash proceeds of, a substantially concurrent sale or incurrence of
Indebtedness (including Disqualified Equity Interests) (other than any
Indebtedness owed to a Subsidiary) of the Company or a Subsidiary that (1) is
contractually subordinated in right of payment to the Notes to at least the same
extent as, and (2) has a final maturity date later than the final maturity date
of, and has a weighted average life to maturity at least equal to the weighted
average life to maturity of, the Subordinated Indebtedness being paid,
purchased, defeased, repurchased, redeemed or otherwise acquired or retired,
(iv) the purchase, redemption or other acquisition or retirement of any
Disqualified Equity Interests by conversion into, or by exchange for, shares of
Disqualified Equity Interests, or out of the net cash proceeds of the
substantially concurrent sale (other than to a Subsidiary of the Company) of
other Disqualified Equity Interests and (v) the purchase, redemption or other
acquisition or retirement for value of any Equity Interests held by any current
or past member of the Company's (or any of its Subsidiaries') management or
board of directors (or the estate, heirs or legatees of any such individual)
pursuant to any management equity subscription agreement, stock option agreement
or other similar agreement; provided that the aggregate price paid for all such
repurchased, redeemed, acquired or retired Equity Interests shall not exceed
$500,000 in any twelve-month period; provided, however, that in the case of the
immediately preceding clauses (ii), (iii), (iv) and (v), no Default or Event of
Default shall have occurred and be continuing at the time of such Restricted
Payment or would occur as a result thereof.
The Indenture provides that in determining the aggregate amount of
Restricted Payments made subsequent to the Issue Date for purposes of
subparagraph (c) above, amounts expended pursuant to clauses (i), (ii) and (v)
of the immediately preceding paragraph shall be included, but without
duplication, in such calculation, and amounts expended pursuant to clauses (iii)
and (iv) thereof shall be excluded.
The Indenture provides that for purposes of calculating the net cash
proceeds received by the Company from the issuance or sale of its Equity
Interests either upon the conversion of, or exchange for, Indebtedness of the
Company or any Subsidiary, such amount will be deemed to be an amount equal to
the difference of (a) the sum of (i) the principal amount or accreted value
(whichever is less) of such Indebtedness on the date of such conversion or
exchange and (ii) the additional cash consideration, if any, received by the
Company upon such conversion or exchange, less any payment on account of
fractional shares, minus (b) all expenses incurred in connection with such
issuance or sale. In addition, for purposes of calculating the net cash proceeds
received by the Company from the issuance or sale of its Equity Interests upon
the exercise of any options or warrants of the Company, such amount will be
deemed to be an amount equal to the difference of (a) the additional cash
consideration, if any, received by the Company upon such exercise, minus (b) all
expenses incurred in connection with such issuance or sale.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an Officers' Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by this covenant were computed, which calculations may be based upon
the Company's latest available financial statements, and, where required, that
no Default or Event of Default exists and is continuing and no Default or Event
of Default will occur immediately after giving effect to such Restricted
Payment.
Limitation on Subsidiaries and Unrestricted Subsidiaries
The Indenture provides that the Company may by written notice to the
Trustee designate any Subsidiary (including a newly acquired or a newly formed
Subsidiary) to be an Unrestricted Subsidiary, provided, however, that (i) no
Default or Event of Default shall have occurred and be continuing or would arise
therefrom and (ii) such designation is at that time permitted under the covenant
described under "Limitation on Restricted Payments." For purposes of the
covenant described under "Limitation on Restricted Payments" above, (i) an
"Investment" shall be deemed to have been made at the time any Subsidiary is
designated as an
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Unrestricted Subsidiary in an amount (proportionate to the Company's percentage
Common Equity Interest in such Subsidiary) equal to the greatest of (a) the net
book value of such Investments at the time of such designation, (b) the fair
market value of such Investments at the time of such designation and (c) the
original fair market value of such Investments at the time they were made; (ii)
at any date the aggregate of all Restricted Payments made as Investments since
the Issue Date shall exclude and be reduced by an amount (proportionate to the
Company's percentage Common Equity Interest in such Subsidiary) equal to the net
worth of any Unrestricted Subsidiary at the time that such Unrestricted
Subsidiary is designated a Subsidiary, not to exceed, in the case of any such
redesignation of an Unrestricted Subsidiary as a Subsidiary, the amount of
Investments previously made by the Company and its Subsidiaries in such
Unrestricted Subsidiary (in each case (i) and (ii) "net worth" to be calculated
based upon the fair market value of the assets of such Subsidiary as of any such
date of designation); and (iii) any property transferred to or from an
Unrestricted Subsidiary shall be valued at its fair market value at the time of
such transfer.
The Indenture provides that notwithstanding the foregoing, the Board of
Directors of the Company may not designate a Subsidiary of the Company to be an
Unrestricted Subsidiary unless such Subsidiary: (a) has no Indebtedness other
than Non-Recourse Debt; (b) is not party to any agreement, contract, arrangement
or understanding with the Company or any Subsidiary of the Company unless the
terms of any such agreement, contract, arrangement or understanding are no less
favorable to the Company or such Subsidiary than those that might be obtained at
the time from Persons who are not Affiliates of the Company; (c) is a Person
with respect to which neither the Company nor any of its Subsidiaries has any
direct or indirect obligation (1) to subscribe for additional Equity Interests
or (2) to maintain or preserve such Person's financial condition or to cause
such Person to achieve any specified levels of operating results; (d) does not
guarantee or otherwise directly or indirectly provide credit support for any
Indebtedness of the Company or any of its Subsidiaries; and (e) has at least one
director on its board of directors that is not a director or executive officer
of the Company or any of its Subsidiaries and has at least one executive officer
that is not a director or executive officer of the Company or any of its
Subsidiaries.
If, at any time, any Unrestricted Subsidiary would fail to meet the
definition of an Unrestricted Subsidiary, it shall thereafter cease to be an
Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of
such Person shall be deemed to be incurred by a Subsidiary of the Company as of
such date (and, if such Indebtedness is not permitted to be incurred as of such
date under the covenant described under the caption "-- Limitation on Additional
Indebtedness," the Company shall be in default of such covenant).
Limitation on Additional Indebtedness
The Indenture provides that the Company and the Guarantors will not, and
will not permit any of their Subsidiaries to, directly or indirectly, incur (as
defined) any Indebtedness (including Acquired Indebtedness) other than Permitted
Indebtedness, provided, however, that the Company and the Guarantors may incur
Indebtedness (including Acquired Indebtedness) if (a) after giving effect on a
pro forma basis to the incurrence of such Indebtedness and to the extent set
forth in the definition of Consolidated Fixed Charge Coverage Ratio the receipt
and application of the proceeds thereof, the Company's Consolidated Fixed Charge
Coverage Ratio would be greater than (i) 2.00 if such Indebtedness is to be
incurred on or before December 1, 1999; and (ii) 2.25 if such Indebtedness is to
be incurred after December 1, 1999; and (b) no Default or Event of Default shall
have occurred and be continuing at the time or as a consequence of the
incurrence of such Indebtedness. Notwithstanding any other provision of this
covenant, a guarantee of Indebtedness will not constitute a separate incurrence
of Indebtedness, if the Indebtedness being guaranteed was incurred in compliance
with the terms of the Indenture.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Indebtedness described in the definition thereof or is
otherwise entitled to be incurred pursuant to the first paragraph of this
covenant, the Company shall, in its sole discretion, classify such item of
Indebtedness in any manner that complies with this covenant and such item of
Indebtedness will be treated as having been incurred as so classified.
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Limitation on Liens
The Company will not, and will not permit any of its Subsidiaries to,
create, assume, incur or otherwise cause or suffer to exist or become effective
any Liens of any kind (other than Permitted Liens) upon any property or asset of
the Company or any Subsidiary of the Company whether owned on the Issue Date, or
acquired after the Issue Date or on any shares of stock or debt of any
Subsidiary, now owned or hereafter acquired, or on any income or profits
therefrom, or assign or otherwise convey any right to receive income or profits
thereon unless (i) if such Lien secures Senior Indebtedness, the Notes or such
Guarantee are secured on an equal and ratable basis with the obligation so
secured until such time as such obligation is no longer secured by a Lien or
(ii) if such Lien secures Subordinated Indebtedness, such Lien shall be
subordinated to a Lien granted to the Holders on the same collateral as that
securing such Lien to the same extent as such Subordinated Indebtedness is
subordinated to the Notes or such Guarantee.
Limitation on Transactions with Affiliates
The Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly, enter into or suffer to exist any transaction or series
of related transactions (including, without limitation, the sale, purchase,
exchange or lease of assets, property or services) with any Affiliate of the
Company (including entities in which the Company or any Subsidiary thereof owns
a minority interest) (each such transaction, an "Affiliate Transaction") or
extend, renew, waive or otherwise modify the terms of any Affiliate Transaction
entered into prior to the Issue Date unless (i) such Affiliate Transaction is
solely between or among the Company and its Wholly-Owned Subsidiaries; (ii) such
Affiliate Transaction is solely between or among Wholly-Owned Subsidiaries of
the Company; or (iii) the terms of such Affiliate Transaction are fair and
reasonable to the Company or such Subsidiary, as the case may be, and the terms
of such Affiliate Transaction are at least as favorable as the terms which could
be obtained by the Company or such Subsidiary, as the case may be, in a
comparable transaction made on an arm's-length basis between unaffiliated
parties. In any Affiliate Transaction involving an amount or having a value in
excess of $1.0 million in any one year which is not permitted under clause (i)
or (ii) above, the Company or such Subsidiary, as the case may be, must obtain a
resolution of its Board of Directors certifying that such Affiliate Transaction
complies with clause (iii) above. In transactions with a value in excess of $5.0
million which are not permitted under clause (i) or (ii) above, the Company or
such Subsidiary, as the case may be, must obtain a written opinion as to the
fairness of such a transaction, from a financial point of view, from an
Independent Financial Advisor.
The foregoing provisions will not apply to (i) any transaction with any
current or former officer, director or employee of the Company (in his or her
capacity as such) (or the estate, heirs or legatees of any such individual)
entered into in the ordinary course of business, including entering into
employment agreements, indemnification agreements and compensation and employee
benefit plans, (ii) Restricted Payments to the extent not prohibited by the
covenant described under "-- Limitation on Restricted Payments" and other
transactions specifically excluded from the definition of "Restricted Payments"
by reason of exceptions set forth in such definition and (iii) issuances of
Equity Interests of the Company.
Limitation on Issuances and Sales of Equity Interests of Subsidiaries
The Indenture provides that the Company (i) will not, and will not permit
any Subsidiary to, transfer, convey, sell, lease or otherwise dispose of any
Equity Interests of any Subsidiary to any Person other than the Company or a
Wholly-Owned Subsidiary (except directors' qualifying shares or shares required
to be held by foreign nationals, in each case to the extent mandated by
applicable law), unless (a) such transfer, conveyance, sale, lease or other
disposition is of all the Equity Interests of such Subsidiary and (b) the net
cash proceeds from such transfer, conveyance, sale, lease or other disposition
are applied in accordance with the "-- Asset Sales" covenant, and (ii) will not
permit any Subsidiary to issue any of its Equity Interests (except directors'
qualifying shares or shares required to be held by foreign nationals, in each
case to the extent mandated by applicable law) to any Person other than to the
Company or a Wholly-Owned Subsidiary.
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Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries
The Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly, create or otherwise cause or suffer to exist or become
effective any consensual encumbrance or restriction of any kind on the ability
of any of its Subsidiaries to (a) pay dividends or make any other distributions
in cash or otherwise to the Company or any Subsidiary on its Equity Interests,
(b) pay any Indebtedness owed to the Company or any Subsidiary, (c) make loans
or advances to the Company or any Subsidiary thereof, (d) transfer any of its
properties or assets to the Company or any Subsidiary thereof (other than
customary restrictions on transfer of property subject to a Permitted Lien under
the term of the agreements creating such Permitted Lien (other than a Lien on
cash not constituting proceeds of non-cash property subject to a Permitted Lien)
which would not materially adversely affect the Company's ability to satisfy its
obligations under the Notes), or (e) guarantee the Notes, except, in each case,
for such encumbrances or restrictions existing under or contemplated by or by
reason of (i) the Notes or the Indenture; (ii) any restrictions existing under
or contemplated by agreements evidencing the New Credit Facility as in effect as
of the Issue Date, and any amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings thereof,
provided that such amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings are no more restrictive
with respect to such dividend and other payment restrictions affecting
Subsidiaries than those contained in the New Credit Facility as in effect on the
Issue Date; (iii) any restrictions with respect to a Subsidiary of the Company
that was not a Subsidiary of the Company on the Issue Date, which are in
existence at the time such Person becomes a Subsidiary of the Company (but not
created in connection with or contemplation of such Person becoming a Subsidiary
of the Company and which encumbrance or restriction is not applicable to any
Person or the property or assets of any Person other than such Person or the
property or assets of such Person so acquired); (iv) any agreement that governs
Refinancing Indebtedness, provided, however, that the terms and conditions of
any such restrictions are not materially less favorable in the aggregate to the
holders of the Notes than those under or pursuant to the agreement evidencing
the Indebtedness being refinanced or replaced; (v) customary non-assignment
provisions in any contract or licensing agreement entered into by the Company or
any Subsidiary of the Company in the ordinary course of business or in any lease
governing any leasehold interest of the Company or a Subsidiary; (vi) purchase
money obligations for property acquired in the ordinary course of business that
impose restrictions of the nature described in clause (d) above on the property
so acquired; (vii) restrictions existing by reason of or under Indebtedness
existing on the Issue Date; (viii) any restrictions existing under any agreement
entered into with respect to the sale or disposition of all or substantially all
the Equity Interests or assets of a Subsidiary provided that the disposition or
sale is governed by the restrictions described under "Repurchase at the Option
of Holders"; or (ix) restrictions contained in agreements governing other
Indebtedness permitted to be incurred in accordance with the Indenture provided
that the restrictions are not materially more restrictive in the aggregate than
the restrictions contained in the Indenture.
Limitation on Sale and Lease-Back Transactions
The Company will not, and will not permit any of its Subsidiaries to, enter
into any Sale and Lease-Back Transaction unless (i) the consideration received
in such Sale and Lease-Back Transaction is at least equal to the fair market
value of the property sold, (ii) immediately prior to and after giving effect to
the Attributable Indebtedness in respect of such Sale and Lease-Back
Transaction, the Company could incur at least $1.00 of additional Indebtedness
(other than Permitted Indebtedness) in compliance with the covenant described
under "Limitation on Additional Indebtedness" and (iii) the net cash proceeds
received by the Company or its Subsidiaries from the Sale and Lease-Back
Transaction are applied in accordance with the provisions described above under
"Repurchase at the Option of Holders -- Asset Sales."
Payments for Consent
Neither the Company nor any of its Subsidiaries shall, directly or
indirectly, pay or cause to be paid any consideration, whether by way of
interest, fee or otherwise, to any holder of any Notes for or as an inducement
to any consent, waiver or amendment of any of the terms or provisions of the
Indenture or the Notes unless
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such consideration is offered to be paid or agreed to be paid to all holders of
the Notes which so consent, waive or agree to amend within any time period set
forth in the solicitation documents relating to such consent, waiver or
agreement.
Additional Guarantees
The Indenture provides that if the Company or any of its Subsidiaries
organized under the laws of the United States or any state thereof (a "domestic
Subsidiary") shall acquire or create another domestic Subsidiary after the Issue
Date, then such newly acquired or created domestic Subsidiary will be required
to execute a Guarantee and deliver an opinion of counsel, in accordance with the
terms of the Indenture.
Line of Business
The Company will not, and will not permit any of its Subsidiaries to,
engage as a material part of its business in any business other than the
business conducted by the Company and its Subsidiaries as of the Issue Date or
any other business determined by the Company's Board of Directors, in good
faith, to be reasonably related to the foregoing.
Limitation on Status as Investment Company
The Indenture prohibits the Company and its Subsidiaries from being
required to register as an "investment company" (as that term is defined in the
Investment Company Act of 1940, as amended), or from otherwise becoming subject
to regulation as an investment company.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Company will not consolidate with, merge with or into, or sell, assign,
lease, convey, transfer or otherwise dispose of (a "transfer") all or
substantially all of its assets (as an entirety or substantially as an entirety
in one transaction or a series of related transactions), to any Person unless:
(i) the Company shall be the continuing Person, or the Person (if other than the
Company) formed by such consolidation or into which the Company is merged or to
which the properties and assets of the Company are transferred shall be a
corporation organized and existing under the laws of the United States or any
State thereof or the District of Columbia and shall expressly assume, by a
supplemental indenture, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all of the obligations of the Company under the
Notes and the Indenture, and the obligations under the Indenture shall remain in
full force and effect; (ii) immediately before and immediately after giving
effect to such transaction, no Default or Event of Default shall have occurred
and be continuing; and (iii) except in the case of a merger or consolidation of
the Company with or into a Wholly-Owned Subsidiary of the Company, the Company
or the Person formed by or surviving any such consolidation or merger (if other
than the Company), or to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made (a) immediately after
giving effect to such transaction on a pro forma basis could incur at least
$1.00 of additional Indebtedness (other than Permitted Indebtedness) under the
covenant set forth under "Limitation on Additional Indebtedness" and (b)
immediately thereafter shall have a Consolidated Net Worth equal to or greater
than the Consolidated Net Worth of the Company immediately prior to such
transaction.
In connection with any consolidation, merger or transfer of assets
contemplated by this provision, the Company shall deliver, or cause to be
delivered, to the Trustee, in form and substance reasonably satisfactory to the
Trustee, an Officers' Certificate and an opinion of counsel, each stating that
such consolidation, merger or transfer and the supplemental indenture in respect
thereto comply with this provision and that all conditions precedent herein
provided for relating to such transaction or transactions have been complied
with.
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EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(i) default in payment of any principal of, or premium, if any, on the
Notes when such principal or premium becomes due and payable;
(ii) default for 30 days in the payment of any interest on or
Liquidated Damages, if any, with respect to the Notes after such interest
or Liquidated Damages becomes due and payable;
(iii) the failure of the Company or its Subsidiaries to comply with
any purchase or payment obligations set forth in "-- Repurchase at the
Option of Holders" or "-- Certain Covenants -- Limitation on Restricted
Payments" or "-- Merger, Consolidation or Sale of Assets";
(iv) default by the Company or its subsidiaries in the observance or
performance of any other provision in the Notes or the Indenture for 30
days after written notice from the Trustee or the holders of not less than
25% in aggregate principal amount of the Notes then outstanding;
(v) default under any agreement, mortgage, indenture or instrument
under which there may be issued or by which there may be secured or
evidenced any Indebtedness for money borrowed by the Company or any of its
Subsidiaries (or the payment of which is guaranteed by the Company or any
of its Subsidiaries), whether such Indebtedness or guarantee now exists or
is created after the Issue Date, which default (a) is caused by a failure
to pay principal of or premium, if any, or interest on such Indebtedness at
final maturity (a "Payment Default") or (b) results in the acceleration of
such Indebtedness prior to its express maturity and, in each case, the
principal amount of any such Indebtedness, together with the principal
amount of any other such Indebtedness under which there has been a Payment
Default or the maturity of which has been so accelerated, aggregates $5.0
million or more;
(vi) any final judgment or judgments which can no longer be appealed
for the payment of money in excess of $5.0 million (which are not paid or
covered by third party insurance by financially sound insurers that have
not disclaimed or threatened to disclaim coverage) shall be rendered
against the Company or any Subsidiary thereof, and shall not be discharged
for any period of 60 consecutive days during which a stay of enforcement
shall not be in effect;
(vii) any Guarantee of a Significant Subsidiary shall be held in any
judicial proceeding to be unenforceable or invalid or shall cease for any
reason to be in full force and effect or any Guarantor that is a
Significant Subsidiary shall deny or disaffirm its obligations under its
Guarantee; and
(viii) certain events involving bankruptcy, insolvency or
reorganization of the Company or any Subsidiary of the Company.
The Indenture provides that the Trustee may withhold notice to the holders
of the Notes of any default (except in payment of principal or premium, if any,
or interest on the Notes or that resulted from the failure of the Company to
comply with the provisions of "-- Repurchase at the Option of Holders") if the
Trustee considers it to be in the best interest of the holders of the Notes to
do so.
The Indenture provides that if an Event of Default (other than an Event of
Default resulting from certain events of bankruptcy, insolvency or
reorganization) shall have occurred and be continuing, then the Trustee or the
holders of not less than 25% in aggregate principal amount of the Notes then
outstanding may declare to be immediately due and payable the entire principal
amount of all the Notes then outstanding plus accrued interest and Liquidated
Damages to the date of acceleration, provided, however, that after such
acceleration but before a judgment or decree based on such acceleration is
obtained by the Trustee, the holders of a majority in aggregate principal amount
of outstanding Notes may, under certain circumstances, rescind and annul such
acceleration if all Events of Default, other than nonpayment of accelerated
principal, premium, interest and Liquidated Damages, have been cured or waived
as provided in the Indenture. In case an Event of Default resulting from certain
events of bankruptcy, insolvency or reorganization shall occur, the principal,
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premium and interest amount with respect to all of the Notes shall ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or the holders of the Notes.
The holders of a majority in principal amount of the Notes then outstanding
shall have the right to waive any existing default or compliance with any
provision of the Indenture or the Notes and to direct the time, method and place
of conducting any proceeding for any remedy available to the Trustee, subject to
certain limitations specified in the Indenture. In the event of a declaration of
acceleration of the Notes because an Event of Default has occurred and is
continuing as a result of a Payment Default on or the acceleration of any
Indebtedness described in clause (v) in the first paragraph above, the
declaration of acceleration of the Notes shall be automatically rescinded and
annulled if such Payment Default is waived or cured or the holders of such
Indebtedness described in such clause (v) have rescinded the declaration of
acceleration in respect of such Indebtedness, as appropriate, within 30 days
from the date of such declaration and if (i) the rescission and annulment of the
acceleration of the Notes would not conflict with any judgment or decree of a
court of competent jurisdiction and (ii) all existing Events of Default, except
non-payment of principal, interest or premium on the Notes that became due
solely because of the acceleration of the Notes, have been cured or waived.
No holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such holder shall
have previously given to the Trustee written notice (if a continuing Event of
Default) and unless also the holders of at least 25% in aggregate principal
amount of the outstanding Notes shall have made written request and offered
reasonable indemnity to the Trustee to institute such proceeding as a trustee,
and unless the Trustee shall not have received from the holders of a majority in
aggregate principal amount of the outstanding Notes a direction inconsistent
with such request and shall have failed to institute such proceeding within 60
days. However, such limitations do not apply to a suit instituted on such Note
on or after the respective due dates expressed in such Note.
In the case of any Event of Default occurring solely by reason of any
willful action (or inaction) taken (or not taken) by or on behalf of the Company
with the intention of avoiding payment of the premium that the Company would
have had to pay if the Company then had elected to redeem the Notes pursuant to
the optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, INCORPORATORS AND
STOCKHOLDERS
As more fully set forth in the Indenture, no director, officer, employee,
incorporator, stockholder, partner, affiliate, or beneficiary, as such, past,
present or future, of the Company or any Subsidiary or any successor corporation
(other than the Company and its Subsidiaries in their capacity as stockholders),
as such, shall have any liability for any obligations of the Company or such
Subsidiary under the Notes, any Guarantee thereof, the Indenture or for any
claim based on, in respect of, or by reason of, such obligations or their
creation. Each holder of Notes by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the Notes. Such waiver may not be effective to waive liabilities under the
federal securities laws and it is the view of the Commission that such a waiver
is against public policy.
DEFEASANCE AND COVENANT DEFEASANCE
The Indenture provides that the Company may elect either (a) to defease and
be discharged (and discharge the obligations of the Guarantors under the
Guarantees) from any and all obligations with respect to the Notes (except for
the obligations to register the transfer or exchange of the Outstanding Notes,
to replace temporary or mutilated, destroyed, lost or stolen Notes, to maintain
an office or agency in respect of the Notes and to hold monies for payment in
trust) ("defeasance") or (b) to be released from its and its Subsidiaries'
obligations with respect to the Notes under certain covenants contained in the
Indenture and described above under "Covenants" ("covenant defeasance"), upon
the deposit with the Trustee (or other qualifying trustee), in trust for such
purpose, of money and/or U.S. Government Obligations which through the payment
of principal and interest in accordance with their terms will provide money, in
an amount sufficient to pay the
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principal of, premium, if any, and interest on the Notes, on the scheduled due
dates therefor or on a selected date of redemption in accordance with the terms
of the Indenture. Such a trust may only be established if, among other things,
the Company has delivered to the Trustee an Opinion of Counsel (as specified in
the Indenture) describing either a private ruling concerning the Notes or a
published ruling of the Internal Revenue Service, to the effect that holders of
the Notes or persons in their positions will not recognize income, gain or loss
for federal income tax purposes as a result of such deposit, defeasance and
discharge and will be subject to federal income tax on the same amount and in
the same manner and at the same times, as would have been the case if such
deposit, defeasance and discharge had not occurred.
MODIFICATION OF INDENTURE
From time to time, the Company, the Guarantors and the Trustee may, without
the consent of holders of the Notes, modify, amend, waive or supplement the
provisions of the Indenture or the Notes for certain specified purposes,
including providing for uncertificated Notes in addition to certificated Notes,
and curing any ambiguity, defect or inconsistency, or making any other change
that, in each case, does not adversely affect the rights of any holder. The
Indenture contains provisions permitting the Company, the Guarantors and the
Trustee, with the consent of holders of at least a majority in principal amount
of the outstanding Notes, to modify, amend, waive or supplement the Indenture,
the Notes or Guarantees, except that no such modification shall, without the
consent of each holder affected thereby, (i) reduce the amount of Notes whose
holders must consent to an amendment, supplement, or waiver to the Indenture or
the Notes, (ii) reduce the rate of or change the time for payment of interest on
any Note, (iii) reduce the principal of or premium or Liquidated Damages on or
change the stated maturity of any Note, (iv) make any Note payable in money
other than that stated in the Note or change the place of payment to outside of
the United States, (v) change the amount or time of any payment required by the
Notes or reduce the premium payable upon any redemption of Notes or change the
time before which no such redemption may be made, (vi) waive a default on the
payment of the principal of, interest, premium or Liquidated Damages on, or
redemption payment with respect to any Note (except a rescission of acceleration
of the Notes by holders of at least a majority in aggregate principal amount of
the Notes and a waiver of the payment default that resulted from such
acceleration), (vii) subordinate in right of payment, or otherwise subordinate
the Notes or any Guarantee to any other Indebtedness or obligation of the
Company or the Guarantors, (viii) amend, alter, change or modify the obligation
of the Company to make and consummate a Change of Control Offer in the event of
a Change of Control or make and consummate an Excess Proceeds Offer or waive any
Default in the performance of any such offers or modify any of the provisions or
definitions with respect to any such offers, (ix) except pursuant to the
Indenture, release any Guarantor from its obligations under its Guarantee, or
change any Guarantee in a manner that adversely affects holders of the Notes or
(x) take any other action otherwise prohibited by the Indenture to be taken
without the consent of each holder affected thereby.
REPORTS TO HOLDERS
So long as any of the Notes are outstanding, whether or not the Company is
required to be subject to Section 13(a) or 15(d) of the Exchange Act, the
Company will furnish the information required thereby to the Commission, the
holders of the Notes and to the Trustee. The Indenture provides that even if the
Company is entitled under the Exchange Act not to furnish such information to
the Commission or to the holders of the Notes, it will nonetheless continue to
furnish such information to the Commission, the holders of the Notes and the
Trustee and make such information available to securities analysts and
prospective investors upon request. In addition, the Company and its
Subsidiaries will agree that, for so long as any Notes remain outstanding, they
will furnish to the holders and to securities analysts and prospective
investors, upon their request, the information required to be delivered pursuant
to Rule 144A(d)(4) under the Securities Act.
COMPLIANCE CERTIFICATE
The Company will deliver to the Trustee on or before 90 days after the end
of the Company's fiscal year and on or before 45 days after the end of each of
the first, second and third fiscal quarters in each year an
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Officers' Certificate stating whether or not the signers know of any Default or
Event of Default that has occurred. If they do, the certificate will describe
the Default or Event of Default and its status.
THE TRUSTEE
The Trustee under the Indenture initially will be the Registrar and Paying
Agent with regard to the Notes. The Indenture provides that, except during the
continuance of an Event of Default, the Trustee will perform only such duties as
are specifically set forth in the Indenture. During the existence of an Event of
Default, the Trustee will exercise such rights and powers vested in it under the
Indenture and use the same degree of care and skill in its exercise as a prudent
person would exercise under the circumstances in the conduct of such person's
own affairs.
TRANSFER AND EXCHANGE
Holders of the Notes may transfer or exchange Notes in accordance with the
Indenture. The Registrar under such Indenture may require a holder, among other
things, to furnish appropriate endorsements and transfer documents, and to pay
any taxes and fees required by law or permitted by the Indenture. The Registrar
is not required to transfer or exchange any Note selected for redemption. Also,
the Registrar is not required to transfer or exchange any Note for a period of
15 days before selection of the Notes to be redeemed.
The registered holder of a Note may be treated as the owner of it for all
purposes.
BOOK-ENTRY, DELIVERY AND FORM
The Exchange Notes initially will be issued in the form of one Global
Exchange Note (the "Global Exchange Note"). The Global Exchange Note will be
deposited on the Exchange Date with the Depositary and registered in the name of
Cede & Co., as nominee of the Depositary (the "Global Exchange Note Holder").
Except as set forth below, the Global Exchange Note may be transferred, in whole
and not in part, only to another nominee of the Depositary or to a successor of
the Depositary or its nominee.
The Depositary has advised the Company as follows: The Depositary is a
limited-purpose trust company that was created to hold securities for its
participating organizations (collectively, the "Participants" or the
"Depositary's Participants") and to facilitate the clearance and settlement of
transactions in such securities between Participants through electronic
book-entry changes in accounts of its Participants. The Depositary's
Participants include securities brokers and dealers (including the Initial
Purchasers), banks and trust companies, clearing corporations and certain other
organizations. Access to the Depositary's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively, the
"Indirect Participants" or the "Depositary's Indirect Participants") that clear
through or maintain a custodial relationship with a Participant, either directly
or indirectly. Persons who are not Participants may beneficially own securities
held by or on behalf of the Depositary only through the Depositary's
Participants or the Depositary's Indirect Participants.
The Company expects that, pursuant to procedures established by the
Depositary, (i) upon deposit of the Global Exchange Note, the Depositary will
credit on its internal system the principal amounts of the Exchange Notes of the
individual beneficial interests represented by such Global Exchange Note to the
respective accounts of exchanging holders who have accounts with the Depositary
and (ii) ownership of such interest in the Global Exchange Note will be shown
on, and the transfer of ownership thereof will be effected only through, records
maintained by the Depositary (with respect to the interests of the Depositary's
Participants), the Depositary's Participants and the Depositary's Indirect
Participants. Prospective purchasers are advised that the laws of some states
require that certain persons take physical delivery in definitive form of
securities that they own. Consequently, the ability to transfer Exchange Notes
evidenced by the Global Exchange Note will be limited to such extent.
So long as the Global Exchange Note Holder is the registered owner of any
Exchange Notes, the Global Exchange Note Holder will be considered the sole
holder under the Indenture of any Exchange Notes evidenced by the Global
Exchange Note. Beneficial owners of Exchange Notes evidenced by the Global
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Exchange Note will not be considered the owners or holders thereof under the
Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the Trustee thereunder. Neither the
Company nor the Trustee will have any responsibility or liability for any aspect
of the records of the Depositary or for maintaining, supervising or reviewing
any records of the Depositary relating to the Exchange Notes.
Payments in respect of the principal of and premium, interest and
Liquidated Damages, if any, on any Exchange Notes registered in the name of the
Global Exchange Note Holder on the applicable record date will be payable by the
Trustee to or at the direction of the Global Exchange Note Holder in its
capacity as the registered holder under the Indenture. Under the terms of the
Indenture, the Company and the Trustee may treat the persons in whose names
Exchange Notes, including the Global Exchange Note, are registered as the owners
thereof for the purpose of receiving such payments. Consequently, neither the
Company nor the Trustee has or will have any responsibility or liability for the
payment of such amounts to beneficial owners of Exchange Notes. The Company
believes, however, that it is currently the policy of the Depositary to
immediately credit the accounts of the relevant Participants with such payments,
in amounts proportionate to their respective holdings of beneficial interests in
the relevant security as shown on the records of the Depositary. Payments by the
Depositary's Participants and the Depositary's Indirect Participants to the
beneficial owners of Exchange Notes will be governed by standing instructions
and customary practice and will be the responsibility of the Depositary's
Participants or the Depositary's Indirect Participants.
Certificated Securities
Subject to certain conditions, any person having a beneficial interest in
the Global Exchange Note may, upon request to the Trustee, exchange such
beneficial interest for Exchange Notes in the form of Certificated Securities.
Upon any such issuance, the Trustee is required to register such Certificated
Securities in the name of, and cause the same to be delivered to, such person or
persons (or the nominee of any thereof). In addition, if (i) the Company
notifies the Trustee in writing that the Depositary is no longer willing or able
to act as a depositary and the Company is unable to locate a qualified successor
within 90 days or (ii) the Company, at its option, notifies the Trustee in
writing that it elects to cause the issuance of Exchange Notes in the form of
Certificated Securities under the Indenture, then, upon surrender by the Global
Exchange Note Holder of the Global Exchange Notes, Exchange Notes in such form
will be issued to each person that the Global Note Exchange Holder and the
Depositary identify as being the beneficial owner of the related Exchange Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Exchange Note Holder or the Depositary in identifying the beneficial
owners of Exchange Notes and the Company and the Trustee may conclusively rely
on, and will be protected in relying on, instructions from the Global Note
Exchange Holder or the Depositary for all purposes.
Same-Day Settlement and Payment
The Indenture requires that payments in respect of the Notes represented by
the Global Exchange Note (including principal, premium, interest and Liquidated
Damages, if any) be made by wire transfer of immediately available funds to the
accounts specified by the Global Note Exchange Holder. With respect to
Certificated Securities, the Company will make all payments of principal,
premium, interest and Liquidated Damages, if any, by wire transfer of
immediately available funds to the accounts specified by the Holders thereof or,
if no such account is specified, by mailing a check to each such Holder's
registered address.
The Exchange Notes represented by the Global Exchange Notes are expected to
trade in the Depositary's Same-Day Funds Settlement System, and any permitted
secondary market trading activity in such Exchange Notes will, therefore, be
required by the Depositary to be settled in immediately available funds. The
Company expects the secondary trading in the Certificated Securities will also
be settled in immediately available funds.
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REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Company and the Initial Purchasers entered into the Registration Rights
Agreement in connection with the issuance of the Outstanding Notes. Pursuant to
the Registration Rights Agreement, the Company agreed to file with the
Commission the Exchange Offer Registration Statement on the appropriate form
under the Securities Act with respect to the Exchange Notes. If (i) the Company
is not required to file the Exchange Offer Registration Statement or permitted
to consummate the Exchange Offer because the Exchange Offer is not permitted by
applicable law or Commission policy or (ii) any holder of Transfer Restricted
Securities notifies the Company prior to the 20th day following consummation of
the Exchange Offer that (a) it is prohibited by law or Commission policy from
participating in the Exchange Offer or (b) that it may not resell the Exchange
Notes acquired by it in the Exchange Offer to the public without delivering a
prospectus and the prospectus contained in the Exchange Offer Registration
Statement is not appropriate or available for such resales or (c) that it is a
broker-dealer and owns Notes acquired directly from the Company or an affiliate
of the Company, the Company will file with the Commission a Shelf Registration
Statement to cover resales of the Notes by the holders thereof who satisfy
certain conditions relating to the provision of information in connection with
the Shelf Registration Statement. The Company will use its best efforts to cause
the applicable registration statement to be declared effective as promptly as
possible by the Commission. For purposes of the foregoing, "Transfer Restricted
Securities" means each Note until (i) the date on which such Note has been
exchanged by a person other than a broker-dealer for an Exchange Note in the
Exchange Offer, (ii) following the exchange by a broker-dealer in the Exchange
Offer of a Note for an Exchange Note, the date on which such Exchange Note is
sold to a purchaser who receives from such broker-dealer on or prior to the date
of such sale a copy of the prospectus contained in the Exchange Offer
Registration Statement, (iii) the date on which such Note has been effectively
registered under the Securities Act and disposed of in accordance with the Shelf
Registration Statement or (iv) the date on which such Note is distributed to the
public pursuant to Rule 144 under the Act.
The Registration Rights Agreement provides that (i) the Company will file
an Exchange Offer Registration Statement with the Commission on or prior to 45
days after the Issue Date, (ii) the Company will use its best efforts to have
the Exchange Offer Registration Statement declared effective by the Commission
on or prior to 90 days after the Issue Date, (iii) unless the Exchange Offer
would not be permitted by applicable law or Commission policy, the Company will
commence the Exchange Offer and use its best efforts to issue, on or prior to 30
business days after the date on which the Exchange Offer Registration Statement
was declared effective by the Commission, Exchange Notes in exchange for all
Notes tendered prior thereto in the Exchange Offer and (iv) if obligated to file
the Shelf Registration Statement, the Company will use its best efforts to file
the Shelf Registration Statement with the Commission on or prior to 30 days
after such filing obligation arises and to cause the Shelf Registration to be
declared effective by the Commission on or prior to 90 days after such
obligation arises. If (a) the Company fails to file any of the Registration
Statements required by the Registration Rights Agreement on or before the date
specified for such filing, (b) any of such Registration Statements is not
declared effective by the Commission on or prior to the date specified for such
effectiveness (the "Effectiveness Target Date"), (c) the Company fails to
consummate the Exchange Offer within 30 business days of the Effectiveness
Target Date with respect to the Exchange Offer Registration Statement or (d) the
Shelf Registration Statement or the Exchange Offer Registration Statement is
declared effective but thereafter ceases to be effective or usable in connection
with resales of Transfer Restricted Securities during the periods specified in
the Registration Rights Agreement (each such event referred to in clauses (a)
through (d) above a "Registration Default"), then the Company will pay
Liquidated Damages to each holder of Notes, with respect to the first 90-day
period immediately following the occurrence of the first Registration Default,
in an amount equal to one-half of one percentage point (0.5%) per annum of the
principal amount of Notes held by such holder. The amount of the Liquidated
Damages will increase by an additional one-half of one percent (0.5%) per annum
for each subsequent 90-day period until all Registration Defaults have been
cured, up to a maximum amount of one and one-half percent (1.5%) per annum. All
accrued Liquidated Damages will be paid by the Company on each interest payment
date to the Global Note Holder by wire transfer of immediately available funds
or by federal funds check and to holders of Certificated Securities by wire
transfer to the accounts specified by them or by mailing checks to their
registered addresses if no such accounts have been specified. The filing of a
Registration Statement after
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the date specified for such filing, the declaration of effectiveness of a
Registration Statement after the Effectiveness Target Date or the consummation
of the Exchange Offer at any time, as appropriate, shall constitute a cure of
the related Registration Default. Following the cure of all Registration
Defaults, the accrual of Liquidated Damages will cease.
Holders of Notes will be required to make certain representations to the
Company as described elsewhere in this Prospectus and in the Registration Rights
Agreement in order to participate in the Exchange Offer and, with respect to the
Shelf Registration Statement, if any, will be required to deliver information to
be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the time periods set forth
in the Registration Rights Agreement in order to have their Notes included in
the Shelf Registration Statement and benefit from the provisions regarding
Liquidated Damages set forth above.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants contained in the Indenture. Reference is made to the Indenture for the
full definition of all such terms as well as any other capitalized terms used
herein for which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Subsidiary or assumed in connection with an Asset
Acquisition from such Person.
"Adjusted Net Assets" of a Guarantor at any date shall mean the lesser of
the amount by which (x) the fair value of the property of such Guarantor exceeds
the total amount of liabilities, including, without limitation, contingent
liabilities (after giving effect to all other fixed and contingent liabilities
(including, without limitation, any guarantees of Indebtedness)), but excluding
liabilities under the Guarantee, of such Guarantor at such date and (y) the
present fair salable value of the assets of such Guarantor exceeds the total
amount of its debts (after giving effect to all other fixed and contingent
liabilities (including, without limitation, any guarantees of Indebtedness) and
after giving effect to any collection from any Subsidiary of such Guarantor in
respect of the obligations of such Subsidiary under the Guarantee), excluding
Indebtedness in respect of the Guarantee, as they become absolute and matured.
"Affiliate" of any specified Person means any other Person which directly
or indirectly through one or more intermediaries controls, or is controlled by,
or is under common control with, such specified Person. For the purposes of this
definition, "control" (including, with correlative meanings, the terms
"controlling," "controlled by," and "under common control with"), as used with
respect to any Person, means the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of such
Person, whether through the ownership of voting securities, by agreement or
otherwise; provided that beneficial ownership of 10% or more of the voting
securities of a Person shall be deemed to be control.
"Asset Acquisition" means (a) an Investment by the Company or any
Subsidiary of the Company in any other Person pursuant to which such Person
shall become a Subsidiary of the Company, or shall be merged with or into the
Company or any Subsidiary of the Company, (b) the acquisition by the Company or
any Subsidiary of the Company of the assets of any Person (other than a
Subsidiary of the Company) which constitute all or substantially all of the
assets of such Person or (c) the acquisition by the Company or any Subsidiary of
the Company of any division or line of business of any Person (other than a
Subsidiary of the Company).
"Asset Sale" means the direct or indirect sale, transfer, issuance,
conveyance, lease (other than operating leases entered into in the ordinary
course of business pursuant to ordinary business terms), assignment or other
disposition (including, without limitation, by eminent domain, condemnation or
similar governmental proceeding) and any merger or consolidation of any
Subsidiary of the Company with or into another Person (other than the Company or
any Wholly-Owned Subsidiary of the Company) whereby such Subsidiary shall cease
to be a Wholly-Owned Subsidiary (each, a "disposition" or "issuance") involving
in any consecutive twelve month period property or assets with a fair market
value in excess of $1,000,000 of (a) any Equity Interest in any Subsidiary, (b)
real property owned by the Company or any Subsidiary thereof, or a division,
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line of business or comparable business segment of the Company or any Subsidiary
thereof or (c) other property, assets or rights (including, without limitation
leasehold rights) of the Company or any Subsidiary thereof, provided, however,
that, except as noted in the last sentence of this paragraph, Asset Sales shall
not include (i) dispositions or issuances to the Company or to a Subsidiary
thereof or to any other Person if after giving effect to such disposition or
issuance such other Person becomes a Wholly-Owned Subsidiary of the Company,
(ii) transactions involving the Company which are subject to and effected in
compliance with "Merger, Consolidation or Sale of Assets" above, (iii)
dispositions of services and products in the ordinary course of business, (iv) a
disposition that is an Investment or a Restricted Payment not prohibited by the
"Limitation on Restricted Payments" covenant, (v) a disposition that complies
with the covenant described under "-- Repurchase at the Option of
Holders -- Change of Control Offer," (vi) exchanges of assets that comply with
the requirements described in the final paragraph under "-- Repurchase at the
Option of Holders -- Asset Sales," (vii) a designation of a Subsidiary as an
Unrestricted Subsidiary if permitted under the Indenture, (viii) the grant in
the ordinary course of business of any license, (ix) the disposition of any
Temporary Cash Investment (x) any disposition of defaulted receivables for
collection, (xi) the grant of any Lien securing Indebtedness permitted under the
Indenture and (xii) the disposition of assets received in settlement of
obligations (including, without limitation, under any bankruptcy or similar
proceeding) owing to the Company or any Subsidiary, which obligations were
incurred in the ordinary course of business. Notwithstanding any provision of
the Indenture to the contrary, the expiration or non-renewal of any lease of
property at the normal expiration date thereof shall not constitute an Asset
Sale. For purposes of the definition of Consolidated Fixed Charge Coverage
Ratio, transactions referred to in clauses (iv), (v), (vi) or (vii) shall be
included as Asset Sales.
"Asset Sale Proceeds" means, with respect to any Asset Sale, (i) cash
received by the Company or any Subsidiary thereof from such Asset Sale after (a)
provision for all income or other taxes measured by or resulting from such Asset
Sale, (b) payment of all brokerage commissions, underwriting, legal, accounting,
title and other fees, costs and expenses related to such Asset Sale, (c)
provision for minority interest holders in any Subsidiary or in any asset
subject to such Asset Sale as a result of such Asset Sale, (d) payments made to
retire Indebtedness secured by the assets subject to such Asset Sale or
otherwise required to be paid and (e) deduction of appropriate amounts to be
provided by the Company or a Subsidiary thereof as a reserve, in accordance with
GAAP, against any liabilities associated with the assets disposed of in such
Asset Sale and retained by the Company or a Subsidiary thereof after such Asset
Sale including, without limitation, pension and other post employment benefit
liabilities and liabilities related to environmental matters or against any
indemnification obligations associated with the assets disposed of in such Asset
Sale and (ii) any securities, notes or other obligations received by the Company
or any Subsidiary thereof from such Asset Sale upon the liquidation or
conversion of such securities, notes or other obligations into cash prior to the
Reinvestment Date.
"Attributable Indebtedness" when used with respect to any Sale and
Lease-Back Transaction means, as at the time of determination, the present value
(discounted at a rate equivalent to the interest rate implicit in the lease,
compounded on a semi-annual basis) of the total obligations of the lessee for
rental payments (after excluding all amounts required to be paid on account of
maintenance and repairs, insurance, taxes, utilities and other similar expenses
payable by the lessee pursuant to the terms of the lease) during the remaining
term of the lease included in any such Sale and Lease-Back Transaction or until
the earliest date on which the lessee may terminate such lease without penalty
or upon payment of a penalty (in which case the rental payments shall include
such penalty).
"Board of Directors" means, as to any Person, the board of directors or any
duly authorized committee thereof of such Person or, if such Person is a
partnership (or other non-corporate Person), of the managing general partner or
partners (or Persons serving an analogous function) of such Person.
"Capital Lease Obligations" means Indebtedness represented by obligations
under a lease that is required to be capitalized for financial reporting
purposes in accordance with GAAP, and the amount of such Indebtedness shall be
the capitalized amount of such obligations determined in accordance with GAAP.
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"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange
Act); (ii) the adoption of a plan relating to the liquidation or dissolution of
the Company; (iii) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
"person" (as defined above), other than an Excluded Person, is or becomes the
"beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under
the Exchange Act, except that a person shall be deemed to have "beneficial
ownership" of all securities that such person has the right to acquire, whether
such right is currently exercisable or is exercisable only upon the occurrence
of a subsequent condition), directly or indirectly, of more than 35% of the
Common Equity Interest of the Company (measured by voting power rather than
number of shares or equivalent units); or (iv) the first day on which less than
a majority of the members of the Board of Directors of the Company are
Continuing Directors.
"Common Equity Interest" of any Person means all Equity Interests of such
Person that are generally entitled to (i) vote in the election of directors of
such Person or (ii) if such Person is not a corporation, vote or otherwise
participate in the selection of the governing body, partners, managers or others
that will control the management and policies of such Person.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus, to the extent
deducted in computing such Consolidated Net Income, (i) an amount equal to any
extraordinary loss plus any net loss realized in connection with an Asset Sale,
(ii) provision for taxes based on income or profits, (iii) consolidated interest
expense whether paid or accrued and whether or not capitalized (including,
without limitation, amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations) and (iv) depreciation and
amortization (including amortization of goodwill and other intangibles but
excluding amortization of prepaid cash expenses that were paid in a prior
period) in each case, on a consolidated basis and determined in accordance with
GAAP. Notwithstanding the foregoing, the provision for taxes based on the income
or profits of, and the depreciation and amortization of, a Subsidiary of a
Person shall be added to Consolidated Net Income to compute Consolidated Cash
Flow only to the extent (and in the same proportion) that the Net Income of such
Subsidiary was included in calculating the Consolidated Net Income of such
Person and only if a corresponding amount would be permitted at the date of
determination to be dividended to the Company by such Subsidiary without prior
approval (that has not been obtained) pursuant to the terms of its charter and
all agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to such Subsidiary or its stockholders.
"Consolidated Fixed Charge Coverage Ratio" means with respect to any
Person, the ratio of the aggregate amount of Consolidated Cash Flow of such
Person for the four full fiscal quarters immediately preceding the date of the
transaction (the "Transaction Date") giving rise to the need to calculate the
Consolidated Fixed Charge Coverage Ratio (such four full fiscal quarter period
being referred to herein as the "Four Quarter Period") to the aggregate amount
of Consolidated Fixed Charges of such Person for the Four Quarter Period. In
addition to and without limitation of the foregoing, for purposes of this
definition, "Consolidated Cash Flow" and "Consolidated Fixed Charges" shall be
calculated after giving effect on a pro forma basis for the period of such
calculation to, without duplication, (a) the incurrence of any Indebtedness of
such Person or any of its Subsidiaries (and the application of the net proceeds
thereof) during the period commencing on the first day of the Four Quarter
Period to and including the Transaction Date (the "Reference Period"),
including, without limitation, the incurrence of the Indebtedness giving rise to
the need to make such calculation (and the application of the net proceeds
thereof), as if such incurrence (and application) occurred on the first day of
the Four Quarter Period (it being understood that with respect to Indebtedness
incurred under a revolving facility used primarily to finance working capital,
the average daily principal amount outstanding during the Reference Period shall
be deemed to be the amount incurred during
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the Reference Period), and (b) any Asset Sales or Asset Acquisitions (including,
without limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of such Person or one of its Subsidiaries (including any
Person who becomes a Subsidiary as a result of the Asset Acquisition) incurring,
assuming or otherwise being liable for Acquired Indebtedness) occurring during
the Reference Period, as if such Asset Sale or Asset Acquisition occurred on the
first day of the Four Quarter Period. Furthermore, in calculating "Consolidated
Fixed Charges" for purposes of determining this "Consolidated Fixed Charge
Coverage Ratio," (i) interest on outstanding Indebtedness determined on a
fluctuating basis as of the Transaction Date and which will continue to be so
determined thereafter shall be deemed to have accrued at a fixed rate per annum
equal to the rate of interest on such Indebtedness in effect on the Transaction
Date; and (ii) if interest on indebtedness actually incurred on the Transaction
Date may optionally be determined at an interest rate based upon a factor of a
prime or similar rate, a eurocurrency interbank offered rate, or other rates,
then the interest rate in effect on the Transaction Date will be deemed to have
been in effect during the Four Quarter Period. In calculating the Consolidated
Fiscal Charge Coverage Ratio and giving pro forma effect to the incurrence of
Indebtedness during a Reference Period, pro forma effect shall be given to use
of proceeds thereof to permanently repay or retire Indebtedness. If such Person
or any of its Subsidiaries directly or indirectly guarantees Indebtedness of a
third Person, for purposes of determining the "Consolidated Fixed Charge
Coverage Ratio," effect shall be given to the incurrence of such guaranteed
Indebtedness as if such Person or such Subsidiary had directly incurred or
otherwise assumed such guaranteed Indebtedness.
"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum of, without duplication, the amounts for such period of (i) the
consolidated interest expense of such Person and its Subsidiaries for such
period, whether paid or accrued (including, without limitation, amortization of
debt issuance costs and original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest component
of all payments associated with Capital Lease Obligations, commissions,
discounts and other fees and charges incurred in respect of letter of credit or
bankers' acceptance financings, and net payments (if any) pursuant to Hedging
Obligations), (ii) the consolidated interest expense of such Person and its
Subsidiaries that was capitalized during such period, (iii) any interest expense
on Indebtedness of another Person that is guaranteed by such Person or one of
its Subsidiaries or secured by a Lien on assets of such Person or one of its
Subsidiaries (whether or not such guarantee or Lien is called upon) and (iv) the
product of (a) all dividend payments, whether or not in cash, on any series of
Disqualified Equity Interests of such Person or any of its Subsidiaries, other
than dividend payments on Disqualified Equity Interests payable solely in Equity
Interests of the Company, times (b) a fraction, the numerator of which is one
and the denominator of which is one minus the then current combined federal,
state and local statutory tax rate of such Person, expressed as a decimal, in
each case, on a consolidated basis and in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that (i) the Net Income (but not loss) of any Person that is not a Subsidiary or
that is accounted for by the equity method of accounting shall be included only
to the extent of the amount of dividends or distributions paid in cash to the
referent Person or a Wholly-Owned Subsidiary thereof, (ii) the Net Income of any
Subsidiary shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by that Subsidiary of that Net Income is not
at the date of determination permitted without any prior governmental approval
(that has not been obtained) or, directly or indirectly, by operation of the
terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to that Subsidiary or its
stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded, (iv) the cumulative effect of a change in accounting principles
shall be excluded and (v) any non-cash compensation expense in connection with
the issuance of employee stock options shall be excluded.
"Consolidated Net Worth" means, with respect to any Person at any date, the
consolidated stockholders' equity of such Person less the amount of such
stockholders' equity attributable to Disqualified Equity Interests of such
Person and its Subsidiaries, as determined in accordance with GAAP, less (i) all
write-ups (other than write-ups of tangible assets of a going concern business
made within 12 months after the acquisition of
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such business) subsequent to the Issue Date in the book value of any asset owned
by such Person or a consolidated Subsidiary of such Person, (ii) all investments
as of such date in unconsolidated Subsidiaries and in Persons that are not
Subsidiaries and (iii) all unamortized debt discount and expense and unamortized
deferred charges as of such date, in each case determined in accordance with
GAAP.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Equity Interests" means any Equity Interest which, by its
terms (or by the terms of any security into which it is convertible or for which
it is exchangeable at the option of the holder), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the option of the holder thereof,
in whole or in part, on or prior to the date that is 91 days following the
maturity date of the Notes, for cash or securities constituting Indebtedness;
provided, however, that Preferred Equity Interests of the Company or any
Subsidiary thereof that are issued with the benefit of provisions requiring a
change of control offer or asset sale proceeds offer to be made for such
Preferred Equity Interest in the event of a change of control or sale of assets
of the Company or such Subsidiary, which provisions have substantially the same
effect as the provisions of the Indenture described under "Change of Control" or
"Asset Sales" shall not be deemed to be Disqualified Equity Interests solely by
virtue of such provisions.
"Equity Interests" means, with respect to any Person, any and all shares or
other equivalents (however designated) of capital stock, partnership interests
or any other participation, right or other interests in the nature of an equity
interest in such Person or any option, warrant or other security convertible
into or exchangeable for any of the foregoing.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Excluded Person" means C. Wayne Bazzle and Cheryl C. Bazzle and any
Related Party of either of them.
"Existing Credit Facility" means that certain Credit Agreement, dated as of
October 31, 1996, as amended prior to the Issue Date, among the Company, Texas
Commerce Bank National Association, and the other parties thereto.
"fair market value" or "fair value" means, with respect to any assets or
property, the price which could be negotiated in an arm's-length free market
transaction, for cash, between a willing seller and a fully informed, willing
and able buyer, neither of whom is under undue pressure or compulsion to
complete the transaction, all as reasonably determined by a majority of the
Board of Directors acting in good faith, such determination to be evidenced by a
board resolution delivered to the Trustee. No such determination need be
supported by an appraisal or expert opinion.
"GAAP" means generally accepted accounting principles consistently applied
as in effect in the United States on the Issue Date.
"Hedging Obligations" means, for any Person, any interest rate swap
agreement, interest rate cap agreement, interest rate collar agreement or other
similar agreement designed to protect the party indicated therein against
fluctuations in interest rates, currency exchange rates or commodity prices.
"incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), assume,
guarantee or otherwise become, directly or indirectly, liable in respect of such
Indebtedness or other obligation or the recording, as required pursuant to GAAP
or otherwise, of "incurrence," "incurred," "incurrable," and "incurring" shall
have meanings correlative to the foregoing), provided, however, that a change in
GAAP that results in an obligation of such Person that exists
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at such time becoming Indebtedness shall not be deemed an incurrence of such
Indebtedness and provided, further that accrual of interest, the accretion of
accreted value and the payment of interest in the form of additional
Indebtedness will not be deemed to be an incurrence of Indebtedness. Any
Indebtedness or Equity Interests of a Person existing at the time such Person
becomes a Subsidiary (whether by merger, consolidation, acquisition or
otherwise) shall be deemed to be incurred by such Person at the time it becomes
a Subsidiary. Indebtedness consisting of reimbursement obligations in respect of
a letter of credit will be deemed to be incurred when the letter of credit is
issued or renewed.
"Indebtedness" means (without duplication), with respect to any Person, any
indebtedness at any time outstanding, secured or unsecured, contingent or
otherwise, which is for borrowed money (whether or not the recourse of the
lender is to the whole of the assets of such Person or only to a portion
thereof), or evidenced by bonds, notes, debentures or similar instruments or
representing the balance deferred and unpaid of the purchase price of any
property (excluding, without limitation, any balances that constitute accounts
payable or trade payables, and other liabilities arising in the ordinary course
of business) and shall also include, to the extent not otherwise included (i)
any Capital Lease Obligations, (ii) obligations of Persons other than such
Person secured by a Lien to which the property or assets owned or held by such
Person is subject, whether or not the obligation or obligations secured thereby
shall have been incurred or assumed by such Person, (iii) all Indebtedness of
others of the types described in the other clauses of this definition (including
all dividends of other Persons) the payment of which is guaranteed, directly or
indirectly, by such Person or that is otherwise its legal liability or which
such Person has agreed to purchase or repurchase or in respect of which such
Person has agreed contingently to supply or advance funds (whether or not such
items would appear upon the balance sheet of the guarantor), (iv) all
obligations for the reimbursement of any obligation or on any letter of credit,
banker's acceptance or similar credit transaction, (v) Disqualified Equity
Interests, (vi) Hedging Obligations of any such Person and (vii) Attributable
Indebtedness. The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and, with respect to contingent obligations, the maximum liability upon
the occurrence of the contingency giving rise to the obligation, provided,
however, that (i) the amount outstanding at any time of any Indebtedness issued
with original issue discount, including the Notes, if applicable, is the
principal amount of such Indebtedness less the remaining unamortized portion of
the original issue discount of such Indebtedness at such time as determined in
conformity with GAAP, and (ii) Indebtedness shall not include any liability for
federal, state, local or other taxes. Notwithstanding any other provision of the
foregoing definition, any trade payable arising from the purchase of goods or
materials or for services obtained in the ordinary course of business shall not
be deemed to be "Indebtedness" for purposes of this definition. Furthermore,
guarantees of (or obligations with respect to letters of credit supporting)
Indebtedness otherwise included in the determination of such amount shall not
also be included.
"Independent Financial Advisor" means an accounting, appraisal, investment
banking or consulting firm of nationally recognized standing that is, in the
good faith judgment of the Board of Directors of the Company, qualified to
perform the task for which such firm has been engaged.
"Investments" means, directly or indirectly, any advance, account
receivable (other than an account receivable arising in the ordinary course of
business (including accounts receivable arising in the ordinary course of
business and acquired as a part of the assets acquired by the Company or a
Subsidiary in connection with an acquisition of assets which is otherwise
permitted by the terms of the Indenture)), loan or capital contribution to (by
means of transfers of property to others, payments for property or services for
the account or use of others or otherwise), the purchase of any stock, bonds,
notes, debentures, partnership or joint venture interests or other securities
of, the acquisition, by purchase or otherwise, of all or substantially all of
the business or stock or other evidence of beneficial ownership of, any Person,
the guarantee or assumption of the Indebtedness of any other Person (except for
an assumption of Indebtedness for which the assuming Person receives
consideration with a fair market value at least equal to the principal amount of
the Indebtedness assumed), the designation of a Subsidiary as an Unrestricted
Subsidiary or the making of any investment in any Person and all other items
that would be classified as investments on a balance sheet of such Person
prepared in accordance with GAAP. Investments shall exclude (i) extensions of
trade credit on commercially reasonable terms in accordance with normal trade
practices, (ii) endorsements of negotiable instruments for
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collection or deposit in the ordinary course of business, (iii) commission,
travel, payroll and similar advances to directors, officers and employees made
in the ordinary course of business and (iv) workers' compensation, utility,
lease and similar deposits and prepaid expenses in the ordinary course of
business.
"Issue Date" means the closing date for the sale and original issuance of
the Notes to the Initial Purchasers.
"Lien" means with respect to any property or assets of any Person, any
mortgage or deed of trust, pledge, hypothecation, assignment, deposit
arrangement, security interest, lien, charge, easement, encumbrance, preference,
priority, or other security agreement or preferential arrangement of any kind or
nature whatsoever on or with respect to such property or assets (including
without limitation, any Capital Lease Obligation, conditional sales, or other
title retention agreement having substantially the same economic effect as any
of the foregoing).
"Net Income" means, with respect to any Person for any period, the net
income (loss) of such Person determined in accordance with GAAP and before any
reduction in respect of dividends on Preferred Equity Interests, excluding,
however, (i) any gain (but not loss, except the loss to be incurred in the
fourth quarter of 1997 relating to the extinguishment of the Existing Credit
Facility), together with any related provision for taxes on such gain (but not
loss, except as specifically permitted above), realized in connection with (a)
any Asset Sale or (b) the disposition of any securities by such Person or any of
its Subsidiaries or the extinguishment of any Indebtedness of such Person or any
of its Subsidiaries and (ii) any extraordinary or nonrecurring gain (or loss
incurred prior to the Issue Date, but not loss incurred after the Issue Date),
together with any related provision for taxes on such extraordinary or
nonrecurring gain (but not loss, except to the extent referred to above).
"Net Investments" means the excess of (i) the aggregate of all Investments
made by the Company or a Subsidiary thereof on or after the Issue Date (in the
case of an Investment made other than in cash, the amount shall be the fair
market value of such Investment at the time made as determined in good faith by
the Board of Directors of the Company) over (ii) the sum of (a) the aggregate
amount returned in cash on such Investments (in the case of a noncash return on
such Investments, the amount thereof shall be the fair market value of such
noncash consideration at the time of receipt thereof as determined in good faith
by the Board of Directors of the Company) whether through interest payments,
principal payments, dividends or other distributions and (b) the net cash
proceeds received by the Company or such Subsidiary from the disposition of all
or any portion of such Investments (other than to a Subsidiary of the Company),
provided, however, that with respect to all Investments made in Unrestricted
Subsidiaries the sum of clauses (a) and (b) above with respect to such
Investments shall not exceed the aggregate amount of all Investments made in all
Unrestricted Subsidiaries.
"New Credit Facility" means that certain Second Amended and Restated Credit
Agreement, dated as of December 1, 1997, among the Company, the banks parties
thereto and Texas Commerce Bank National Association, as agent, including any
related notes, guarantees (by subsidiaries of the Company or otherwise),
collateral documents, instruments and agreements executed in connection
therewith, and in each case as amended, restated, modified, renewed, refunded,
replaced or refinanced (in each case, in whole or in part, and without
limitation as to amount, terms, conditions, covenants and other provisions),
with the same or other agents and lenders, in whole or in part, from time to
time and any agreement (and related documents) governing Indebtedness incurred
to refinance or refund borrowings and commitments then outstanding or permitted
to be outstanding under such credit facility or a successor New Credit Facility,
whether by the same or other agent lender or group of lenders.
"Non-Recourse Debt" means Indebtedness: (i) as to which neither the Company
nor any of its Subsidiaries (a) provides credit support of any kind (including
any undertaking, agreement or instrument that would constitute Indebtedness),
(b) is directly or indirectly liable (as a guarantor or otherwise) or (c)
constitutes the lender; (ii) no default with respect to which (including any
rights that the holders thereof may have to take enforcement action against an
Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any
holder of any other Indebtedness of the Company or any of its Subsidiaries to
declare a default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its
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stated maturity; and (iii) as to which the lenders have been notified in writing
that they will not have any recourse to the stock or assets of the Company or
any of its Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Officers' Certificate" means, with respect to any Person, a certificate
signed by the Chief Executive Officer, the President or any Vice President and
the Chief Financial Officer or any Treasurer or assistant Treasurer of such
Person (or, in the case of a Person that is a partnership (or other
non-corporate Person), of a general partner (or analogous individuals) of such
Person in such capacity) that shall comply with applicable provisions of the
Indenture.
"Permitted Indebtedness" means:
(i) Indebtedness (plus interest, premium, fees and other obligations
associated therewith) of the Company or any Subsidiary thereof arising
under or in connection with the New Credit Facility of up to $20.0 million;
(ii) Indebtedness under the Notes and the Guarantees;
(iii) Hedging Obligations;
(iv) Additional Indebtedness of the Company or any Guarantor (which
may be Indebtedness under the New Credit Facility) in an aggregate
principal amount outstanding at any time not to exceed $3.0 million;
(v) Indebtedness of a Wholly-Owned Subsidiary issued to and held by
the Company or a Wholly-Owned Subsidiary or Indebtedness of the Company to
a Wholly-Owned Subsidiary in respect of intercompany advances or
transactions;
(vi) Indebtedness outstanding on the Issue Date after giving effect to
the application of the proceeds of this Offering (including repayment of
all obligations under the Existing Credit Agreement);
(vii) Refinancing Indebtedness;
(viii) Indebtedness constituting an agreement or commitment to pay a
dividend that has been declared or otherwise to make a payment or
distribution as described in clause (i) of the second paragraph of the
covenant entitled "Limitation on Restricted Payments";
(ix) Capital Lease Obligations and Purchase Money Indebtedness in a
combined aggregate principal amount not to exceed $3.0 million at any time
outstanding; and
(x) Indebtedness in connection with one or more letters of credit,
guarantees, bid, surety or performance bonds or other reimbursement
obligations or banker's acceptances, in each case issued in the ordinary
course of business and not in connection with the borrowing of money or the
obtaining of advances or credit.
"Permitted Investments" means, for any Person, Investments made on or after
the Issue Date consisting of:
(i) Temporary Cash Investments;
(ii) (A) Investments in the Company or a Wholly-Owned Subsidiary of
the Company, (B) Investments in any Person, if (1) as a result of such
Investment (y) such Person or a Subsidiary of such Person becomes a
Wholly-Owned Subsidiary of the Company or (z) such Person or a Subsidiary
of such Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is liquidated
into, the Company or a Wholly-Owned Subsidiary thereof and (2) after giving
effect to such Investment the Company is in compliance with the covenant
described under "Line of Business" above and (C) Net Investments in any
Persons, provided, however, that the aggregate
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amount of all such Net Investments made pursuant to this clause (C) shall
not exceed $2.0 million at any one time outstanding;
(iii) Investments represented by accounts receivable created or
acquired in the ordinary course of business;
(iv) Advances to employees, officers and directors in the ordinary
course of business not to exceed an aggregate of $500,000 outstanding at
any one time;
(v) Investments under or pursuant to Hedging Obligations;
(vi) An Investment that is made by the Company or a Subsidiary thereof
in the form of any Equity Interests, Indebtedness or other assets received
as partial consideration for the consummation of a transaction that is
otherwise permitted under the covenant described under "Limitation of
Certain Asset Sales";
(vii) Investments in the Notes otherwise permitted under the
Indenture;
(viii) Investments existing on the Issue Date;
(ix) any Investment acquired solely in exchange for, by conversion of,
or out of the net cash proceeds of, the issuance of Equity Interests (other
than Disqualified Equity Interests) of the Company;
(x) stocks, obligations or other securities received in settlement of
debts (including, without limitation, under any bankruptcy or other similar
proceeding) owing to the Company or any of its Subsidiaries as a result of
foreclosure, perfection, enforcement or settlement of any Indebtedness or
Liens in favor of the Company or a Subsidiary; and
(xi) guarantees not prohibited by the "Limitation of Indebtedness"
covenant.
"Permitted Liens" means, without duplication, (i) Liens existing on the
Issue Date, (ii) Liens in favor of the Company or any Subsidiary thereof, (iii)
Liens on the Equity Interests or property of a Person existing at the time such
Person becomes a Subsidiary of, or is acquired by, merged into or consolidated
with the Company or any Subsidiary thereof, or such property is acquired by the
Company or a Subsidiary, provided, however, that such Liens (a) were not created
in connection with or in anticipation of such acquisition, merger or
consolidation or such Person becoming a Subsidiary and (b) are not applicable to
any other property of the Company or any of the other Subsidiaries of the
Company, (iv) Liens for taxes, assessments or governmental charges or claims
that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently conducted, provided,
however, that any reserve or other appropriate provision as shall be required in
conformity with GAAP shall have been made therefor, (v) landlords', carriers',
warehousemen's, mechanics', materialmen's, repairmen's or other like Liens
arising in the ordinary course of business (whether contractual, statutory or
constitutional in nature) and with respect to amounts which are not yet
delinquent or are being contested in good faith by appropriate proceedings, (vi)
pledges or deposits made in the ordinary course of business in connection with
(a) leases, performance bonds and similar obligations, (b) workers'
compensation, unemployment insurance and other social security legislation, or
(c) securing the performance of surety bonds and appeal bonds required (1) in
the ordinary course of business or in connection with the enforcement of rights
or claims of the Company or a Subsidiary thereof or (2) in connection with
judgments that do not give rise to an Event of Default, (vii) easements,
rights-of-way, restrictions, minor defects or irregularities in title and other
similar encumbrances which, in the aggregate, do not materially detract from the
value of the property subject thereto or materially interfere with the ordinary
conduct of the business of the Company or any Subsidiary in connection
therewith, (viii) Liens to secure Purchase Money Indebtedness that is otherwise
permitted under the Indenture, provided, however, that (a) any such Lien is
created solely for the purpose of securing Indebtedness representing, or
incurred to finance, refinance or refund, the cost (including commissions, sales
and excise taxes, installation and delivery charges and other direct costs of,
and other direct expenses paid or charged in connection with, such purchase or
construction and such financing) of such Property, (b) the principal amount of
the Indebtedness secured by such Lien does not exceed 100% of such costs, and
(c) such Lien does not extend to or cover any Property other than such item of
Property and any improvements on such item, (ix) Liens securing the New Credit
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Facility (x) Liens securing Capital Lease Obligations permitted to be incurred
under the Indenture, provided, however, that such Lien does not extend to any
property other than that subject to the underlying lease, (xi) Liens pursuant to
leases and subleases of real property which do not interfere with the ordinary
conduct of the business of the Company or any of its Subsidiaries and which are
made on customary and usual terms applicable to similar properties and do not
extend to any property of the Company or a Subsidiary other than the personal
property located on such real property, (xii) Liens securing reimbursement
obligations under commercial letters of credit, but only in or upon the goods
the purchase of which were financed by such letters of credit, (xiii) Liens
arising under the Indenture in favor of the Trustee for its own benefit or for
the benefit of the holders, (xiv) Liens resulting from the deposit of funds or
government securities in trust for the purpose of decreasing or defeasing
Indebtedness of the Company and its Subsidiaries so long as such deposit of
funds or government securities and such decreasing or defeasing of Indebtedness
are permitted under the "Restricted Payments" covenant, (xv) Liens constituting
licenses not otherwise prohibited under the terms of the Indenture, (xvi)
setoff, chargeback and other rights of depository and collecting banks and other
regulated financial institutions with respect to money or instruments of the
Company or its Subsidiaries on deposit with or in the possession of such
institutions, (xvii) any interest or title of a lessor in the property subject
to any Capital Lease Obligation permitted under the Indenture or operating
lease, (xviii) Liens on Equity Interests of Unrestricted Subsidiaries, (xix)
judgment or attachment Liens not giving rise to an Event of Default, (xx) Liens
in connection with Sale and Leaseback Transactions otherwise permitted under the
Indenture, and (xxi) Liens securing Refinancing Indebtedness, provided, however,
that such Liens extend only to the assets (plus improvements thereon and
additions thereto) securing the Indebtedness being extended, refinancing,
renewed or replaced, and such Indebtedness was previously secured by such assets
and provided, further, the terms of such Liens taken as a whole are no less
favorable to the holders of the Notes than the Liens being extended, refinanced,
renewed or replaced.
"Person" means any individual, corporation, partnership, limited liability
company or partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government (including any agency or political
subdivision thereof).
"Preferred Equity Interest" means any Equity Interest of a Person, however
designated, which entitles the holder thereof to a preference with respect to
dividends, distributions or liquidation proceeds of such Person over the holders
of any other Equity Interest issued by such Person.
"Property" or "property" of any Person means all types of real, personal,
tangible, intangible or mixed property owned by such Person whether or not
included in the most recent consolidated balance sheet of such Person and its
Subsidiaries under GAAP.
"Public Equity Offering" means, with respect to any Person, a public
offering by such Person of some or all of its Common Equity Interests other than
Disqualified Equity Interests (however designated and whether voting or
nonvoting) and any and all rights, warrants or options to acquire such Equity
Interests.
"Purchase Money Indebtedness" means any Indebtedness incurred in the
ordinary course of business by a Person to finance the cost (including the cost
of construction) of an item of property, the principal amount of which
Indebtedness does not exceed the sum of (i) 100% of such cost and (ii) fees and
expenses of such Person incurred in connection therewith. The acquisition of a
business or substantially all the assets of a business shall not be considered
to be in the ordinary course.
"Refinancing Indebtedness" means Indebtedness that refunds, refinances,
renews or replaces ("refinances") any Indebtedness of the Company or its
Subsidiaries outstanding on the Issue Date or other Indebtedness permitted to be
incurred by the Company or its Subsidiaries pursuant to the terms of the
Indenture, whether involving the same or any other lender or creditor or group
of lenders or creditors, but only to the extent that (i) the Refinancing
Indebtedness is subordinated to the Notes or the Guarantees, as applicable, to
at least the same extent as the Indebtedness being refinanced, if at all, (ii)
the Refinancing Indebtedness is scheduled to mature either (a) no earlier than
the Indebtedness being refinanced, or (b) after the maturity date of the Notes,
(iii) except where such Refinancing Indebtedness is Attributable Indebtedness,
has a weighted average life to maturity at the time such Refinancing
Indebtedness is incurred that is equal to or greater than the weighted average
life to maturity of the Indebtedness being refinanced, (iv) except
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where such Refinancing Indebtedness is Attributable Indebtedness, such
Refinancing Indebtedness is in an aggregate principal amount that is less than
or equal to the aggregate principal or accreted amount (in the case of any
Indebtedness issued with original issue discount, as such) then outstanding
under the Indebtedness being refinanced plus the amount of all fees and expenses
(including premiums and penalties) associated with such refinancing) and (v)
such Refinancing Indebtedness is incurred by the same Person that initially
incurred the Indebtedness being refinanced, except that the Company or a
Guarantor may incur Refinancing Indebtedness to refinance Indebtedness of the
Company or any Wholly-Owned Subsidiary of the Company.
"Related Party" with respect to an Excluded Person means (i) any
Wholly-Owned Subsidiary, or spouse or immediate family member of such Excluded
Person or (ii) any trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or persons beneficially holding a
controlling interest of which consist of such Excluded Person and/or such other
Persons referred to in the immediately preceding clause (i).
"Restricted Payment" means any of the following: (i) the declaration or
payment of any dividend or any other distribution or payment on Equity Interests
of the Company or any Subsidiary thereof (including, without limitation, any
payment in connection with any merger or consolidation including the Company) or
any payment made to the direct or indirect holders (in their capacities as such)
of Equity Interests of the Company or any Subsidiary or Affiliate thereof (other
than (a) dividends or distributions payable solely in Equity Interests of the
Company (other than Disqualified Equity Interests) or in options, warrants or
other rights to purchase Equity Interests of the Company (other than
Disqualified Equity Interests) or (b) dividends or distributions payable to the
Company or to a Wholly-Owned Subsidiary of the Company), (ii) the purchase,
redemption or other acquisition or retirement for value of any Equity Interests
of the Company or any Subsidiary or Affiliate thereof (other than Equity
Interests owned by the Company or a Wholly-Owned Subsidiary, excluding
Disqualified Equity Interests), (iii) the making of any principal payment on, or
the purchase, defeasance, repurchase, redemption or other acquisition or
retirement for value, prior to any scheduled maturity, scheduled repayment or
scheduled sinking fund payment, of any Subordinated Indebtedness (except, if no
Default or Event of Default is continuing or would result therefrom, any such
payment, purchase, defeasance, repurchase, redemption or other acquisition or
retirement for value made (a) out of Excess Proceeds available for general
corporate purposes if (1) such payment or other action is required by the
indenture or other agreement or instrument pursuant to which such Subordinated
Indebtedness was issued and (2) the Company has purchased all Notes and other
Senior Indebtedness properly tendered pursuant to an Asset Sale Offer required
under "-- Repurchase at the Option of Holders -- Asset Sales" or (b) upon the
occurrence of a Change of Control if (1) such payment or other action is
required by the indenture or other agreement or instrument pursuant to which
such Subordinated Indebtedness was issued and (2) the Company has purchased all
Notes and other Senior Indebtedness properly tendered pursuant to the Change of
Control Offer resulting from such Change of Control), or (iv) the making of any
Investment other than a Permitted Investment. For purposes of determining the
amount expended for Restricted Payments, cash distributed or invested shall be
valued at the face amount thereof and property other than cash shall be valued
at its fair market value.
"Sale and Lease-Back Transaction" means any arrangement with any Person
providing for the leasing by the Company or any Subsidiary of the Company of any
real or tangible personal property, which (i) property has been or is to be
sold, conveyed or transferred by the Company or such Subsidiary to such Person
in contemplation of such leasing and (ii) constitutes an Asset Sale permitted
under "-- Repurchase at the Option of Holders -- Asset Sales."
"Senior Indebtedness" means Indebtedness of any Person which is not
Subordinated Indebtedness.
"Significant Subsidiary" shall have the meaning set forth in Rule 1-02 of
Regulation S-X promulgated by the Commission.
"Subordinated Indebtedness" means Indebtedness of the Company or any
Guarantor which is expressly subordinated in right of payment to the Notes or a
Guarantee, as the case may be.
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"Subsidiary" of any specified Person means any corporation, partnership,
joint venture, association or other business entity, whether now existing or
hereafter organized or acquired, (i) in the case of a corporation, of which more
than 50% of the total voting power of the Equity Interests entitled (without
regard to the occurrence of any contingency) to vote in the election of
directors, officers or trustees thereof is held by such first-named Person or
any of its Subsidiaries; or (ii) in the case of a partnership, joint venture,
association or other business entity, with respect to which such first-named
Person or any of its Subsidiaries has the power to direct or cause the direction
of the management and policies of such entity by contract or otherwise or if in
accordance with GAAP such entity is consolidated with the first-named Person for
financial statement purposes. Notwithstanding the foregoing, an Unrestricted
Subsidiary shall not be deemed a Subsidiary of the Company other than for
purposes of the definition of Unrestricted Subsidiary, unless the Company shall
have designated such Unrestricted Subsidiary as a "Subsidiary" by written notice
to the Trustee. An Unrestricted Subsidiary may be designated as a Subsidiary at
any time by the Company by written notice to the Trustee, provided, however,
that (i) no Default or Event of Default shall have occurred and be continuing or
would arise therefrom and (ii) if such Unrestricted Subsidiary is an obligor of
any Indebtedness, any such designation shall be deemed to be an incurrence as of
the date of such designation by the Company of such Indebtedness and immediately
after giving effect to such designation, the Company could incur $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
covenant described under "Limitation on Additional Indebtedness."
"Temporary Cash Investments" means (i) United States dollars, (ii) any
evidence of Indebtedness issued or directly and fully guaranteed or insured by
the United States government or any agency or instrumentality thereof (provided
the full faith and credit of the United States government is behind such
obligation) having maturities of not more than 12 months from the date of
acquisition, (iii) certificates of deposit and eurodollar time deposits with
maturities of 12 months or less from the date of acquisition, demand deposits,
bankers' acceptances with maturities not exceeding six months and overnight bank
deposits, in each case with any domestic commercial bank that is a member of the
Federal Reserve System and having capital and surplus in excess of $500.0
million, or whose short-term debt has the highest rating obtainable from Moody's
Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings Group ("S&P"),
(iv) any money market deposit account issued or offered by a domestic commercial
bank that is a member of the Federal Reserve System and having capital and
surplus in excess of $500.0 million, or whose short-term debt has the highest
rating obtainable from Moody's or S&P, (v) repurchase obligations with a term of
not more than seven days for underlying securities of the types described in
clauses (ii) and (iii) above entered into with any financial institution meeting
the qualifications specified in clause (iii) above, (vi) commercial paper having
the highest rating obtainable from Moody's or S&P, and in each case maturing
within 270 days after the date of acquisition and (vii) investments in money
market funds having assets in excess of $500.0 million, substantially all of
which consist of investments of the types described in (i) through (vi) above.
"Unrestricted Subsidiary" means, any Subsidiary of the Company which shall
have been designated as an Unrestricted Subsidiary in accordance with the
Indenture. An Unrestricted Subsidiary may be designated as a Subsidiary at a
later date in the manner provided in the definition of "Subsidiary" above.
"Wholly-Owned Subsidiary" means any Subsidiary, all of the outstanding
Equity Interests (except directors' qualifying shares or shares required to be
held by foreign nationals, in each case to the extent mandated by applicable
law) of which are owned, directly or indirectly, by the Company.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain United States federal income tax
consequences resulting from the acquisition, ownership and disposition of the
Exchange Notes which may be relevant to a holder or prospective purchaser of one
or more of such Exchange Notes. The following summary is of a general nature
only and is not intended to be, and should not be construed to be, legal or tax
advice to any prospective investor and no representation with respect to the tax
consequences of any particular investor is made. Accordingly, prospective
investors should consult with their own tax advisors for advice with respect to
the income tax consequences to them having regard to their own particular
circumstances, including any consequences of an
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investment in the Exchange Notes arising under state, provincial or local tax
laws or tax laws of jurisdictions outside the United States.
IN ADDITION, PERSONS CONSIDERING THE ACQUISITION OF THE EXCHANGE NOTES
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE APPLICATION OF U.S. FEDERAL
INCOME TAX LAWS, AS WELL AS THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING
JURISDICTION, TO THEIR PARTICULAR SITUATIONS AND THE POSSIBLE EFFECT OF CHANGES
IN U.S. FEDERAL OR OTHER TAX LAWS.
The legal conclusions expressed in this summary are based upon current
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
applicable Treasury regulations ("Regulations"), judicial authority and
administrative rulings and practice, all as in effect as of the date of this
Prospectus, and all of which are subject to change, either prospectively or
retroactively. There can be no assurance that the Internal Revenue Service (the
"Service") will not take a contrary view, and no rulings from the Service have
been or will be sought with respect to any matter involving the tax aspects of
the purchase, ownership or exchange or other disposition of the Notes.
Legislative, judicial or administrative changes or interpretations may be
forthcoming that could alter or modify the statements and conclusions set forth
herein. Any such changes or interpretations may or may not be retroactive and
could affect the tax consequences to holders.
This summary deals only with persons who will hold the Exchange Notes as
capital assets within the meaning of Section 1221 of the Code, and does not
address tax considerations applicable to investors who may be subject to special
tax rules, such as financial institutions, tax-exempt organizations, foreign
corporations, foreign individuals, insurance companies, dealers in securities or
currencies, persons who hold Exchange Notes as a hedge or as a position in a
"straddle" for tax purposes, and persons who have a "functional currency" other
than the U.S. dollar.
In addition, the description does not consider the effect of any applicable
foreign, state, local or other tax laws or estate or gift tax considerations.
U.S. HOLDERS
The following discussion is limited to the United States federal income tax
consequences relevant to a holder of the Notes that is a U.S. Holder. The term
"U.S. Holder" refers to a person that is classified for U.S. federal tax
purposes as a United States person. For this purpose, a United States person
includes (i) a resident (within the meaning of Section 7701(b) of the Code) or
current or former citizen of the United States, (ii) a corporation, limited
liability company, partnership or other business entity created or organized in
the United States or under the laws of the United States or of any state or
political subdivision thereof (iii) an estate or trust whose income is
includable in gross income for U.S. federal income tax purposes regardless of
its source or (iv) a person whose worldwide income or gain is otherwise subject
to U.S. federal income taxation on a net basis.
The Exchange Offer. Pursuant to recently finalized Regulations, the
exchange of Outstanding Notes for Exchange Notes pursuant to the Exchange Offer
should not constitute a significant modification of the terms of the Outstanding
Notes and, accordingly, such exchange should be treated as a "non-event" for
federal income tax purposes. Therefore, such exchange should have no federal
income tax consequences to U.S. Holders of Outstanding Notes who exchange such
notes for Exchange Notes, the holding period of an Exchange Note should include
the holding period of the Outstanding Note for which it was exchanged, the basis
of an Exchange Note should be the same as the basis of the Outstanding Note for
which it was exchanged, and each U.S. Holder of Exchange Notes should continue
to be required to include interest on the Outstanding Notes in its gross income
in accordance with its method of accounting for federal income tax purposes.
Payment of Interest. Interest on a Note generally will be includable in the
income of a U.S. Holder as ordinary income at the time such interest is received
or accrued, in accordance with such U.S. Holder's method of accounting for
United States federal income tax purposes.
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The Company is obligated to pay additional interest amounts in the event of
a Registration Default (as defined). Under the Regulations, certain contingent
payments on debt instruments must be accrued into gross income by a holder
(regardless of such holder's method of accounting). However, any payment subject
to a remote or incidental contingency (i.e., there is a remote likelihood that
the contingency will occur or the potential amount of the contingent payment is
insignificant relative to the total expected amount of remaining payments) is
not treated as a contingent payment and is ignored until payment, if any, is
actually made. The Company intends to take the position that the additional
interest payments resulting from a Registration Default are subject to a remote
or incidental contingency. Accordingly, a U.S. Holder of a Note should report
any additional interest payments resulting from a Registration Default as
ordinary income in accordance with such holder's method of accounting for United
States federal income tax purposes.
Original Issue Discount. If the Notes are not issued at a discount or are
deemed to be issued with no discount because such discount is de minimis, a U.S.
Holder will include in income as ordinary interest income the gross amount of
interest paid or payable in respect of the Notes as provided above in
"-- Payment of Interest." An original issue discount ("OID") will be considered
de minimis and, thus, will be treated as zero discount if the OID is less than
one-fourth ( 1/4) of one percent of the stated redemption price at maturity,
multiplied by the number of complete years to maturity. The Company expects that
the Notes will not have OID.
Market Discount. If a U.S. Holder purchases a Note for less than the stated
redemption price at maturity (the sum of all payments on the Note other than
qualified stated interest), the difference is considered "market discount,"
unless such difference is de minimis. A discount will be considered de minimis
if it is less than one-fourth ( 1/4) of one percent of the Note Issue Price
multiplied by the number of complete years to maturity (after the holder
acquires the Note). Under the market discount rules, any gain realized by the
U.S. Holder on a taxable disposition of a Note having "market discount," as well
as on any partial principal payment made with respect to such Note, will be
treated as ordinary income to the extent of the then "accrued market discount"
of the Note. An overview of the rules concerning the calculation of "accrued
market discount" is set forth in the paragraph immediately below. In addition, a
U.S. Holder of such Note may be required to defer the deduction of all or a
portion of the interest expense on any indebtedness incurred or continued to
purchase or carry a Note.
Any market discount will accrue ratably from the date of acquisition to the
maturity date of the Note, unless the U.S. Holder elects, irrevocably, to accrue
market discount on a constant interest rate method. The constant interest rate
method generally accrues interest at times and in amounts equivalent to the
result which would have occurred had the market discount been original issue
discount computed from the U.S. Holder's acquisition of the Note through the
maturity date. The election to accrue market discount on a constant interest
rate method is irrevocable but may be made separately as to each Note held by
the U.S. Holder. Accrual of market discount will not cause the accrued amounts
to be included currently in a U.S. Holder's taxable income, in the absence of a
disposition of, or principal payment on, the Note. However, a U.S. Holder of a
Note may elect to include market discount in income currently as it accrues on
either a ratable or constant interest rate method. In such event, interest
expense relating to the acquisition of a Note which would otherwise be deferred
would be currently deductible to the extent otherwise permitted by the Code. The
election to include market discount in income currently, once made, applies to
all market discount obligations acquired by such holder on or after the first
day of the first taxable year to which the election applies, and may not be
revoked without the consent of the Service. Accrued market discount which is
included in a U.S. Holder's gross income will increase the adjusted tax basis of
the Note in the hands of the U.S. Holder.
Amortizable Bond Premium. If a subsequent U.S. Holder acquires a Note for
an amount which is greater than the amount payment at maturity, such holder will
be considered to have purchased such Note with "amortizable bond premium" equal
to the amount of such excess. The U.S. Holder may elect to amortize the premium,
using a constant yield method employing six-month compounding, over the period
from the acquisition date to the maturity date of the Note. The "amount payable
at maturity" will be determined as of an earlier call date, using the call price
payable on such earlier date, if the combination of such earlier date and call
price will produce a smaller amortizable bond premium than would result from
using the scheduled maturity date and its amount payable. If an earlier call
date is used and the Note is not called, the Note will be
92
<PAGE> 94
treated as having matured on such earlier call date and then as having been
reissued on such date for the amount so payable. Amortized amounts may be offset
only against interest payments due under the Note and will reduce the U.S.
Holder's adjusted tax basis in the Note to the extent so used.
Once made, an election to amortize and offset interest on bonds, such as
the Notes, will apply to all bonds in respect of which the election was made
that were owned by the taxpayer on the first day of the taxable year to which
the election relates and to all bonds of such class or classes subsequently
acquired by such taxpayer. Such election may only be revoked with the consent of
the Service. If a U.S. Holder of a Note does not elect to amortize the premium,
the premium will decrease the gain or increase the loss which would otherwise be
recognized upon disposition of the Note.
Sale, Exchange or Retirement of Notes. Upon the sale, exchange, redemption,
retirement, or other disposition of a Note, other than the exchange of a Note
for an Exchange Note (see "-- The Registered Exchange Offer" above), a U.S.
Holder of a Note generally will recognize gain or loss in an amount equal to the
difference between the amount of cash and the fair market value of any property
received on the sale, exchange or retirement of the Note (other than in respect
of accrued and unpaid interest on the Note, which such amounts are treated as
ordinary interest income) and such U.S. Holder's adjusted tax basis in the Note.
If a U.S. Holder holds the Note as a capital asset, such gain or loss will be
capital gain or loss, except to the extent of any accrued market discount (see
"-- Market Discount" above), and will be long-term capital gain or loss if the
Note has a holding period of more than one year at the time of sale, exchange or
retirement (and may be subject to lower tax rates applicable to capital gains
depending on the U.S. Holder's status and the length of the holding period of
the Note).
Backup Withholding and Information Reporting. In general, information
reporting requirements will apply to interest payments on the Notes made to U.S.
Holders other than certain exempt recipients (such as corporations) and to
proceeds realized by such U.S. Holders on dispositions of Notes. A 31% backup
withholding tax will apply to such amounts if the U.S. Holder (i) fails to
furnish its social security or other taxpayer identification number ("TIN")
within a reasonable time after request therefor, (ii) furnishes an incorrect
TIN, (iii) fails to report properly interest or dividend income, or (iv) fails,
under certain circumstances, to provide a certified statement, signed under
penalty of perjury, that the TIN provided is its correct number and that it is
not subject to backup withholding. Any amount withheld from a payment to a U.S.
Holder under the backup withholding rules is allowable as a refund or as a
credit against such U.S. Holder's federal income tax liability, provided that
the required information is furnished to the Service. U.S. Holders of Notes
should consult their tax advisors as to their qualification for exemption from
backup withholding and the procedure for obtaining such an exemption.
NON-U.S. HOLDERS
This Section summarizes certain U.S. federal tax consequences of the
ownership and disposition of Notes by "Non-U.S. Holders." The term "Non-U.S.
Holder" refers to a person that is not classified for U.S. federal tax purposes
as a "United States person," as defined in "-- U.S. Holders" above.
Interest on Notes. In general, a Non-U.S. Holder will not be subject to
U.S. federal income tax or regular withholding tax with respect to stated
interest received or accrued on the Notes so long as (a) such interest is not
effectively connected with the conduct of a trade or business within the United
States, (b) the Non-U.S. Holder does not actually or constructively own 10% or
more of the total combined voting power of all classes of stock of the Company
entitled to vote, (c) the Non-U.S. Holder is not controlled by a foreign
corporation that is related to the Company actually or constructively through
stock ownership, and (d) either (i) the beneficial owner of the Note certifies
to the Company or its agent, under penalties of perjury, that it is not a U.S.
Holder and provides its name and address on U.S. Treasury Form W-8 (or on a
suitable substitute form) or (ii) the Note is held by a securities clearing
organization, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business (a "financial
institution") on behalf of such Non-U.S. Holder and such financial institution
certifies under penalties of perjury that such a Form W-8 (or suitable
substitute form) has been received from the beneficial owner by it or by a
financial institution between it and the beneficial owner and furnishes the
payor with a copy thereof.
93
<PAGE> 95
If interest received on the Notes by a Non-U.S. Holder is effectively
connected to the conduct by such Non-U.S. Holder of a trade or business within
the United States, such interest will be subject to U.S. federal income tax on a
net basis at the rates applicable to U.S. persons generally (and, with respect
to corporate holders under certain circumstances, may also be subject to a 30%
branch profits tax). If payments are subject to U.S. federal income tax on a net
basis in accordance with the rules described in the preceding sentence, such
payments will not be subject to U.S. withholding tax so long as the Non-U.S.
Holder provides the Company or their paying agent with a properly executed Form
4224.
Non-U.S. Holders should consult any applicable income tax treaties, which
may provide for a lower rate of withholding tax, or other rules different from
those described above.
Gain on Disposition of Notes. Non-U.S. Holders generally will not be
subject to U.S. federal income taxation on gain recognized on a disposition of
Notes so long as (i) the gain is not effectively connected with the conduct by
the Non-U.S. Holder of a trade or business within the United States and (ii) in
the case of a Non-U.S. Holder who is an individual, either such Non-U.S. Holder
is not present in the United States for 183 days or more in the taxable year of
disposition or such Non-U.S. Holder does not have a "tax home" (within the
meaning of section 911(d)(3) of the Code) in the United States.
U.S. Information Reporting Requirements and Backup Withholding. Generally,
payments of interest, OID, premium or principal on the Notes to Non-U.S. Holders
will not be subject to information reporting or backup withholding if the
Non-U.S. Holder complies with the certification requirements set forth in clause
(d) under "-- Interest on Notes" above.
Non-U.S. Holders will not be subject to information reporting or backup
withholding with respect to the payment of proceeds from the disposition of
Notes, effected by, to or through the foreign office of a broker; provided,
however, that if the broker is a U.S. person or a U.S.-related person,
information reporting (but not backup withholding) would apply unless the broker
has documentary evidence in its records as to the Non-U.S. Holder's foreign
status (and has not actual knowledge to the contrary), or the Non-U.S. Holder
certifies as to its non-U.S. status under penalty of perjury or otherwise
establishes an exemption. Non-U.S. Holders will be subject to information
reporting and back withholding at a rate of 31% with respect to the payment of
proceeds from the disposition of Notes effected by, to or through the U.S.
office of a broker, unless the Non-U.S. Holder certifies as to its Non-U.S.
Holder status under penalty of perjury or otherwise establishes an exemption.
The Service has proposed Regulations that, if issued as final Regulations,
would require Non-U.S. Holders to provide additional information in order to
establish an exemption from, or reduce the rate of, withholding tax or backup
withholding tax and, in particular, would require certain Non-U.S. Holders, and
foreign partners of partnerships that are Non-U.S. Holders, to provide certain
information and comply with certain certification requirements not required
under existing law, including requirements that the Non-U.S. Holder furnish its
name, address and taxpayer identification number. Such proposed Regulations are
proposed to be effective generally for payments made after December 31, 1997. It
is not possible to predict whether, or in what form, the proposed Regulations
ultimately will be adopted.
Amounts withheld under the backup withholding rules do not constitute a
separate U.S. federal income tax. Rather, amounts withheld under the backup
withholding rules from a payments to a Non-U.S. Holder will be allowed as a
credit against such Non-U.S. Holder's U.S. federal income tax liability and any
amounts withheld in excess of such Non-U.S. Holder's U.S. federal income tax
liability would be refunded, provided that the required information is furnished
to the Service.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Prospectus,
as it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of Exchange Notes received in exchange
for Outstanding Notes where such Outstanding Notes were acquired as a result of
market-making activities or other trading activities. The
94
<PAGE> 96
Company has agreed that, for a period of 180 days after the Expiration Date, it
will make this Prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with such resale. In addition, until 25 days
after the Expiration Date, all dealers effecting transactions in the Exchange
Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such Exchange Notes. Any broker-dealer
that resells Exchange Notes that were received by it for its own account
pursuant to the Exchange Offer and any broker or dealer that participates in a
distribution of such Exchange Notes may be deemed to be an "underwriter" within
the meaning of the Securities Act and any profit on any such resale of Exchange
Notes and any commission or concessions received by any such persons may be
deemed to be underwriting compensation under the Securities Act. The Letter of
Transmittal states that, by acknowledging that it will deliver and by delivering
a Prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one counsel for the
Holders of the Notes) other than commissions or concessions of any brokers or
dealers and will indemnify the Holders of the Notes (including any broker-
dealers) against certain liabilities, including liabilities under the Securities
Act.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Akin, Gump,
Strauss, Hauer & Feld, L.L.P., Dallas, Texas.
EXPERTS
The audited consolidated financial statements of HealthCor Holdings, Inc.
and its subsidiaries, included in this Prospectus, to the extent and for the
periods indicated in their reports, have been audited by Arthur Andersen LLP,
independent public accountants, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
95
<PAGE> 97
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
Report of Independent Public Accountants.................. F-2
Consolidated Balance Sheets as of December 31, 1995 and
1996................................................... F-3
Consolidated Statements of Income for the Years Ended
December 31, 1994, 1995, and 1996...................... F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1994, 1995, and 1996.......... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1995,
and 1996............................................... F-6
Notes to Consolidated Financial Statements................ F-7
Schedule: Valuation and Qualifying Accounts............... F-19
Unaudited Condensed Consolidated Balance Sheets as of
September 30, 1997..................................... F-20
Unaudited Condensed Consolidated Statements of Income for
the Three Months Ended September 30, 1996 and 1997 and
Nine Months Ended September 30, 1996 and 1997.......... F-21
Unaudited Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1996 and
1997................................................... F-22
Notes to Unaudited Condensed Consolidated Financial
Statements............................................. F-23
</TABLE>
F-1
<PAGE> 98
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors,
HealthCor Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of HealthCor
Holdings, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1995
and 1996, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of HealthCor
Holdings, Inc. and subsidiaries as of December 31, 1995 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Dallas, Texas,
March 11, 1997
F-2
<PAGE> 99
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 1,627,940 $ --
Accounts receivable, net of allowance for doubtful
accounts of $2,056,000 and $5,101,000 in 1995 and 1996,
respectively........................................... 11,465,655 26,843,981
Federal income tax refund receivable...................... -- 833,538
Supplies inventory........................................ 1,709,355 3,219,815
Prepaid expenses and other................................ 1,456,958 2,040,698
Deferred income taxes..................................... 2,003,328 1,837,173
----------- ------------
Total current assets.............................. 18,263,236 34,775,205
Property and equipment, net of accumulated depreciation of
$7,946,627 and $15,163,931 in 1995 and 1996,
respectively.............................................. 11,054,255 22,287,540
Excess of cost of acquired businesses over fair values of
net assets acquired, net of accumulated amortization of
$1,186,000 and $2,037,800 in 1995 and 1996,
respectively.............................................. 23,220,167 40,838,391
Other assets................................................ 35,290 2,401,862
----------- ------------
Total assets...................................... $52,572,948 $100,302,998
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued ESOP contribution................................. $ 1,477,915 $ --
Accrued payroll and related expenses...................... 4,836,735 7,020,813
Accounts payable and accrued expenses..................... 5,054,465 6,755,011
Line of credit payable.................................... 2,475,000 8,950,000
Current portion of long-term debt......................... 3,981,563 3,582,096
Current portion of capital lease obligations.............. 862,505 2,369,300
Income taxes payable...................................... 1,311,920 324,309
----------- ------------
Total current liabilities......................... 20,000,103 29,001,529
Deferred income taxes and other............................. 2,905,809 7,216,476
Long-term debt.............................................. 10,668,632 7,114,778
Capital lease obligations................................... 1,596,604 2,415,667
----------- ------------
Total liabilities................................. 35,171,148 45,748,450
Commitments and contingencies
Redeemable Convertible Preferred Stock, $.01 par value,
10,000,000 shares authorized
Series A Preferred Stock, 2,000,000 shares issued and
outstanding in 1995, none in 1996...................... 20,000 --
Series B Preferred Stock, 1,071,438 shares issued and
outstanding in 1995, none in 1996...................... 10,714 --
Additional paid-in capital on Series A and B Preferred
Stocks................................................. 5,309,100 --
Stockholders' equity:
Common stock, $.01 par value, 40,000,000 shares
authorized; 3,062,803 and 10,015,967 shares issued and
outstanding in 1995 and 1996, respectively............. 30,628 100,159
Additional paid-in capital................................ 2,471,129 39,562,152
Retained earnings......................................... 9,560,229 14,892,237
----------- ------------
Total stockholders' equity........................ 12,061,986 54,554,548
----------- ------------
Total liabilities and stockholders' equity........ $52,572,948 $100,302,998
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 100
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
1994 1995 1996
----------- ----------- ------------
<S> <C> <C> <C>
Net revenues....................................... $57,151,154 $81,557,284 $106,785,152
Direct expenses.................................... 30,336,777 41,392,250 48,313,631
----------- ----------- ------------
Gross profit....................................... 26,814,377 40,165,034 58,471,521
Other costs and expenses:
General and administrative....................... 21,279,888 30,663,552 41,417,970
Depreciation and amortization.................... 789,222 1,239,728 2,578,751
Provision for doubtful accounts.................. 1,115,705 1,488,885 3,580,394
----------- ----------- ------------
Total costs and expenses................. 23,184,815 33,392,165 47,577,115
----------- ----------- ------------
Income from operations............................. 3,629,562 6,772,869 10,894,406
Other income (expense):
Interest income.................................. 61,345 162,283 44,454
Interest expense................................. (304,953) (1,149,260) (2,188,466)
----------- ----------- ------------
Total other income and expense........... (243,608) (986,977) (2,144,012)
----------- ----------- ------------
Income before income taxes......................... 3,385,954 5,785,892 8,750,394
Provision for income taxes......................... 1,359,398 2,202,367 3,418,386
----------- ----------- ------------
Net income......................................... $ 2,026,556 $ 3,583,525 $ 5,332,008
=========== =========== ============
Net income per common share........................ $ .31 $ .55 $ .66
=========== =========== ============
Weighted average common shares outstanding......... 6,489,563 6,545,615 8,040,250
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 101
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
---------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993......... 2,712,500 $ 27,125 $ 1,068,234 $ 3,950,148 $ 5,045,507
Conversion of Series B preferred
stock to common stock......... 223,220 2,232 -- -- 2,232
Net income....................... -- -- -- 2,026,556 2,026,556
---------- -------- ----------- ----------- -----------
Balance, December 31, 1994......... 2,935,720 29,357 1,068,234 5,976,704 7,074,295
Issuance of common stock
to ESOP....................... 125,000 1,250 1,398,750 -- 1,400,000
Issuance of common stock......... 2,083 21 4,145 -- 4,166
Net income....................... -- -- -- 3,583,525 3,583,525
---------- -------- ----------- ----------- -----------
Balance, December 31, 1995......... 3,062,803 30,628 2,471,129 9,560,229 12,061,986
Exercise of common stock
warrants...................... 150,000 1,500 298,500 -- 300,000
Conversion of Series A and B
preferred stock to common
stock......................... 3,339,297 33,393 5,306,421 -- 5,339,814
Issuance of common stock in
initial public offering,
net........................... 3,300,000 33,000 29,835,101 -- 29,868,101
Issuance of common stock
to ESOP....................... 130,000 1,300 1,466,200 -- 1,467,500
Exercise of stock options........ 33,867 338 78,229 -- 78,567
Tax benefit from early
dispositions of option
stock......................... -- -- 106,572 -- 106,572
Net income....................... -- -- -- 5,332,008 5,332,008
---------- -------- ----------- ----------- -----------
Balance, December 31, 1996......... 10,015,967 $100,159 $39,562,152 $14,892,237 $54,554,548
========== ======== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 102
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
1994 1995 1996
------------ ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income...................................... $ 2,026,556 $ 3,583,525 $ 5,332,008
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................ 1,439,751 2,299,357 4,773,892
Loss on disposition of fixed assets.......... 14,299 61,784 69,855
Changes in operating assets and liabilities,
net of acquired businesses:
Accounts receivable, net................... 3,306,421 (4,790,507) (13,099,993)
Supplies inventory......................... 80,685 109,842 (755,657)
Prepaid expenses and other assets.......... (228,140) (688,745) (1,295,126)
Deferred income taxes...................... 309,994 (821,616) 1,124,060
Accrued ESOP contribution.................. 1,497,242 (23,376) (60,079)
Third-party payor settlement............... (1,745,349) 42,116 (322,566)
Accounts payable and accrued expenses...... (18,696) 3,258,275 3,330,133
Income taxes payable/receivable............ (422,957) 919,447 (1,821,149)
Deferred revenue........................... -- 2,092,767 3,281,537
------------ ------------ -----------
Net cash provided by operating
activities............................ 6,259,806 6,042,869 556,915
------------ ------------ -----------
Cash flows from investing activities:
Payments for business acquisitions, net of cash
acquired..................................... (2,745,689) (17,458,780) (21,032,649)
Additions to property and equipment............. (866,001) (7,179,800) (7,866,845)
------------ ------------ -----------
Net cash used in investing activities... (3,611,690) (24,638,580) (28,899,494)
------------ ------------ -----------
Cash flows from financing activities:
Proceeds from issuance of debt, net............. 3,287,698 47,385,571 65,896,628
Payments on debt and capital lease
obligations.................................. (1,603,333) (32,340,934) (69,535,229)
Issuance of common stock, net................... -- 1,404,166 30,353,240
Payments on loans from related parties.......... (1,063,854) -- --
------------ ------------ -----------
Net cash provided by financing
activities............................ 620,511 16,448,803 26,714,639
------------ ------------ -----------
Net increase (decrease) in cash and cash
equivalents..................................... 3,268,627 (2,146,908) (1,627,940)
Cash and cash equivalents, beginning of period.... 506,221 3,774,848 1,627,940
------------ ------------ -----------
Cash and cash equivalents, end of period.......... $ 3,774,848 $ 1,627,940 $ --
============ ============ ===========
Supplemental disclosure of cash flow information:
Debt issued in acquisitions..................... $ 857,241 $ 1,567,321 $ 3,266,068
Liabilities and debt assumed in acquisitions.... 217,441 566,340 635,753
Issuance of capital lease obligations........... 172,000 2,530,000 3,530,474
Issuance of common stock to employee stock
option plan.................................. -- 1,400,000 1,467,500
Interest paid................................... 315,000 828,000 2,025,000
Income taxes paid............................... 1,481,000 1,826,000 4,055,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 103
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995, AND 1996
1. GENERAL:
Organization
HealthCor Holdings, Inc., a Delaware corporation, and subsidiaries (the
"Company") commenced operations in October 1989 and provide home healthcare
services to patients including nursing, respiratory therapy, infusion therapy,
and medical equipment. The Company has operations in Arizona, Colorado, Kansas,
Missouri, Oklahoma, Texas, New Mexico, Louisiana and Arkansas.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation and Presentation
The consolidated financial statements of the Company include the accounts
of HealthCor Holdings, Inc. and its wholly owned subsidiaries, HealthCor, Inc.
(HealthCor), HealthCor Oxygen & Medical Equipment, Inc. (HOME), HealthCor
Pharmacy, Inc., Physicians Home Health Network, Inc., HealthCor Rehabilitation
Services, Inc., HealthCor Personnel Services, Inc., and HealthCor Foundation.
All significant intercompany transactions and accounts have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets 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. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Supplies Inventory
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist primarily of medical supplies sold directly to patients for
use in their homes.
Property and Equipment
Property and equipment are stated at cost or fair market value at the
acquisition date (see Note 4). The cost of equipment held under capital leases
is equal to the lower of the net present value of the minimum lease commitments
or the fair value of the leased property at the inception of the lease (see Note
8). Property and equipment is depreciated using the straight-line method over
the following useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Furniture and equipment..................................... 5-10
Transportation equipment.................................... 5
Leasehold improvements (life of the lease).................. 3-10
Medical equipment........................................... 5
Computer equipment.......................................... 3-5
Software development costs.................................. 10
</TABLE>
F-7
<PAGE> 104
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Excess of Costs of Acquired Businesses Over the Fair Values of Assets Acquired
The value of excess cost of acquired businesses over the fair values of
assets acquired (goodwill) is recorded at the dates of acquisition. Goodwill is
being amortized on a straight-line basis over a 40-year period in accordance
with the provisions of APB No. 17.
The Company reviews the carrying value of goodwill at least annually on a
market-by-market basis to determine if facts and circumstances exist which would
suggest that goodwill may be impaired or that the amortization period needs to
be modified. Among the factors the Company considers in making the evaluation
are changes in the Company's market position, reputation, profitability and
geographic penetration. If indicators are present which may indicate impairment
is probable, the Company will prepare a projection of the undiscounted cash
flows of the specific market and determine if goodwill is recoverable based on
these undiscounted cash flows. If impairment is indicated, then an adjustment
will be made to reduce the carrying amount of the goodwill to its fair value.
Similar reviews are made of other long-lived assets. No such adjustments were
required at December 31, 1995 or 1996.
Income Taxes
Deferred income taxes are provided for temporary differences between the
financial statement and income tax basis of assets and liabilities in accordance
with SFAS No. 109 "Accounting for Income Taxes."
Net Income Per Common Share
Net income per common share (both primary and fully diluted) has been
computed by dividing net income by the weighted average number of common and
common equivalent shares outstanding each year. The Company has treated the
redeemable convertible preferred stocks as common shares outstanding for all
periods presented.
The Company has adopted Statement of Financial Accounting Standards No. 123
("SFAS No. 123"), "Accounting for Stock-Based Compensation," effective January
1, 1996. SFAS No. 123 allows companies adopting the pronouncement to either
change the actual accounting methods for stock-based compensation in the
financial statements or to disclose certain pro forma results of operations as
if the pronouncement had been adopted in the financial statements. The Company
will continue to account for its stock options granted under the provisions of
Accounting Principles Board Opinion No. 25 ("APB No. 25") and has disclosed the
pro forma information required by SFAS No. 123 in Note 12.
Net Revenues and Estimated Settlements with Third-Party Payors
Revenues are recognized on the date services and related products are
provided to patients and are recorded at estimated net realizable amounts from
patients, third-party payors, and others for services rendered. For the years
ended December 31, 1994, 1995, and 1996, approximately 70%, 67% and 50% of net
patient service revenues were derived under federal third-party reimbursement
programs which are based on cost reimbursement and case payment principles.
These revenues are subject to audit and retroactive adjustment by the respective
third-party fiscal intermediary. In the opinion of management, retroactive
adjustments, if any, will not be material to the financial position or results
of operations of the Company. Settlements based on third-party reimbursement
program audits are recorded in the year they become known.
Certain capital expenditures relating to the implementation of a new
management information system have been appropriately expensed for third-party
reimbursement purposes resulting in deferred revenue of approximately $2,399,000
and $5,903,000 at December 31, 1995 and 1996, respectively. This deferred
revenue will be amortized over ten years, the expected useful life of the
management information system, using the straight-line method.
F-8
<PAGE> 105
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Direct expenses
Direct expenses include salaries, wages and related benefits, medical
supplies, equipment and related depreciation, and other direct costs of
delivering home medical services.
Reclassifications
Certain amounts for prior periods have been reclassified to conform to the
current year presentation.
3. ACCRUED PAYROLL AND RELATED EXPENSES:
Accrued payroll and related expenses consist of the following:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Salaries.................................................... $2,391,660 $3,434,656
Workers' compensation....................................... 853,018 724,478
Other....................................................... 1,592,057 2,861,679
---------- ----------
$4,836,735 $7,020,813
========== ==========
</TABLE>
4. ACQUISITIONS:
1995 Acquisitions
On January 1, 1995, the Company acquired, in separate transactions, for
$3,675,000 in cash, $254,000 in deferred payments, and $400,000 in debt, the net
assets of Home Hospital Equipment, Inc. and Medi-Networks, Inc. Both are
respiratory therapy companies located in Texas, specializing in providing home
medical and respiratory equipment and supplies to patients.
On June 30, 1995, the Company acquired, in separate transactions, for
$1,870,000 in cash and $546,000 in debt, the net assets of McDuffie's Rentals,
Inc. and Southwest Professional Registry, Inc. Both respiratory therapy
companies are located in Texas, specializing in providing home respiratory
equipment and supplies.
On July 31, 1995, the Company acquired for $6,400,000 in cash and
$1,000,000 in debt, the net assets of RTA Homecare and Subsidiaries (RTA). RTA,
located in Arizona, is a respiratory therapy company specializing in providing
home medical and respiratory equipment, supplies, and pharmaceuticals to
patients.
On August 31, 1995, the Company acquired for $700,000 in cash and $100,000
in debt, the net assets of Colorado I.V. Associates, Inc./Specialized Nursing
Services, Inc. ("Colorado IV"). Colorado IV, located in Colorado, is a
pharmaceutical company specializing in providing home infusion therapy.
On September 30, 1995, in separate transactions, the Company acquired for
$597,000 in cash, the net assets of Newborn Nursing Services, Inc. ("Newborn
Nursing") and Charlie's Discount Drug, Inc. ("Charlie's"). Newborn Nursing,
located in Oklahoma, is a nursing company specializing in providing pediatric
nursing care services and the leasing and selling of medical equipment.
Charlie's, located in Oklahoma, is a respiratory company specializing in
providing home respiratory equipment and supplies.
On October 31, 1995, in separate transactions, the Company acquired for
$2,952,000 in cash and $450,000 in debt, the net assets of A.M. Medical/Discount
Medical Equipment Company ("A.M. Medical"), Cross Timbers Visiting Nurses, Inc.
("Cross Timbers"), Specialty Med-Equip, Inc. ("Specialty Med-Equip"), and
Superior Med-Equip, Inc. ("Superior Med-Equip"). A.M. Medical, Cross Timbers,
Specialty Med-Equip, and Superior Med-Equip are located in Texas. Cross Timbers
specializes in providing home nursing services. A.M. Medical, Specialty
Med-Equip, and Superior Med-Equip specialize in providing home respiratory
equipment and supplies.
F-9
<PAGE> 106
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1996 Acquisitions
On April 1, 1996, the Company acquired, for $800,000 in cash and $200,000
in debt, the net assets of All Medical, Inc., a company located in Wichita
Falls, Texas, engaged in selling and leasing medical equipment and supplies to
the home health care industry.
Effective May 1, 1996, the Company acquired, for $11,750,000 in cash and
$566,000 in debt, the net assets of I Care of Arkansas, Inc. and all of the
outstanding capital stock of I Care, Inc. (d/b/a I Care Health Services) and I
Care Home IV Affiliates, Inc. (collectively "I Care"), which provide infusion
therapy services and respiratory therapy equipment throughout Arkansas.
Effective September 1, 1996, the Company acquired, for $5,000,000 in cash
and $600,000 in debt, the net assets of Southern Medical Mart, Inc., a
respiratory therapy/medical equipment company with four locations in Louisiana.
Southern Medical Mart is engaged primarily in the sale and rental of medical
equipment.
The Company also completed the acquisition of six companies during the last
fiscal quarter of 1996 for $3,700,000 in cash and $1,900,000 in debt. Three of
the companies specialize in providing home nursing care services, two provide
respiratory therapy/medical equipment services and products, and one provides
personnel placement services. The companies are located in Oklahoma and Texas.
The 1995 and 1996 acquisitions have been accounted for using the purchase
method of accounting. Accordingly, the purchase price was allocated to the
assets acquired (including all identifiable intangible assets, if material) and
liabilities assumed based upon their estimated fair values at the dates of
acquisition in accordance with APB No. 16. The results of operations of the
acquired practices are included in the consolidated financial statements from
the respective dates of acquisition. None of the acquisition agreements contain
any significant earn-out provisions with the sellers.
The following is a summary of the net assets acquired and liabilities
assumed in connection with the foregoing acquisitions in 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
ASSETS ACQUIRED:
Cash and cash equivalents............................... $ 679,274 $ 380,024
Accounts receivable, net................................ 2,906,494 3,294,833
Supplies inventory...................................... 1,093,074 754,803
Prepaid expenses and other.............................. 106,041 98,964
----------- -----------
Total current assets............................ 4,784,883 4,528,624
Property and equipment, net............................. 1,886,322 3,770,208
----------- -----------
Total assets.................................... 6,671,205 8,298,832
LIABILITIES ASSUMED:
Current liabilities..................................... 1,480,595 1,326,723
Other liabilities....................................... 311,903 706,978
----------- -----------
Total liabilities............................... 1,792,498 2,033,701
----------- -----------
NET ASSETS ACQUIRED....................................... 4,878,707 6,265,131
PURCHASE PRICE, INCLUDING ACQUISITION COSTS............... 18,197,366 24,678,741
----------- -----------
EXCESS COST OF BUSINESSES ACQUIRED........................ $13,318,659 $18,413,610
=========== ===========
</TABLE>
F-10
<PAGE> 107
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pro Forma Information
The following unaudited pro forma information reflects the effects on the
consolidated statements of income assuming that significant acquisitions were
consummated as of January 1, 1995 and 1996. This information does not purport to
be indicative of the results that would have actually been obtained if the
acquisitions had occurred on such dates. Therefore, pro forma information cannot
be considered indicative of future operations. The unaudited pro forma
information for the years ended December 31, 1995 and 1996 is as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1995 1996
---------- ----------
(UNAUDITED)
<S> <C> <C>
Net revenues................................................ $128,672 $129,026
Net income.................................................. 4,537 5,737
Net income per common share................................. .69 .71
</TABLE>
5. BANK CREDIT FACILITY:
At December 31, 1995, the Company had a bank credit facility consisting of
a $5,000,000 revolving credit line and a $20,000,000 term loan for acquisitions
of which $2,475,000 and $14,230,000, respectively, were outstanding. On May 16,
1996, the Company replaced this bank credit facility with a $35,000,000 bank
credit facility consisting of a $10,000,000 revolving credit line and a
$25,000,000 term loan facility for financing acquisitions. All of the term loan
facility was used by May 31, 1996. On September 3, 1996, the Company amended the
May 16, 1996, bank credit facility to make available an additional $10,000,000
under the term loan facility.
On October 31, 1996, the Company amended and restated its bank credit
facility. The new agreement provides for an aggregate $75,000,000 bank credit
facility, consisting of a $15,000,000 revolving credit line and a $60,000,000
term loan for acquisitions. Use of the term loan facility is limited to
$52,500,000 at the Company's current stockholders' equity level, with the
remaining $7,500,000 available when the Company's stockholders' equity reaches
$57,300,000. The term loan facility is available for acquisitions until October
31, 1998, and is repayable in quarterly installments of principal and interest
using a five-year amortization period through October 31, 2001.
The revolving credit line contains certain financial covenants with respect
to maintenance of a maximum ratio of funded debt to adjusted earnings, a minimum
fixed charge coverage ratio, consolidated stockholders' equity of not less than
$53,550,000 (as adjusted), and a funded debt to total capitalization ratio of no
greater than 50%. There is also a limitation of $10,000,000 annually on capital
expenditures. The revolving credit line expires on October 31, 1999, and
provides for the quarterly payment to the bank of a .25% commitment fee
(escalating to .375% if the funded debt to adjusted earnings ratio exceeds 1.75
to 1) on the unused portion of the line. The Company was not in compliance with
the financial covenant regarding capital expenditures at December 31, 1996. This
covenant was waived by the lender at December 31, 1996.
Interest is payable quarterly at (a) the greater of the bank's prime rate
or the federal funds effective rate plus 1/2%, both rates adjustable in certain
circumstances, or (b) at the Eurodollar rate plus a specified adjustable margin
ranging from 1.25% to 2.75%. At December 31, 1996, the weighted average interest
rate on the revolving credit line outstanding was 8.25%. In addition to the
borrowings of $8,950,000 at December 31, 1996, the Company has committed
$465,000 of the line to a letter of credit issued in connection with the
Company's workers' compensation insurance coverage. In 1997, the letter of
credit will be increased to $617,000.
F-11
<PAGE> 108
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The term loan facility is used to finance the Company's acquisition program
and contains the same financial covenants, commitment fees, and interest rates
as for the revolving credit line. The outstanding balance of the term loan
facility at December 31, 1996, was $7,540,000, with repayment terms as discussed
in Note 6. At December 31, 1996, the weighted average interest rate on the term
loan facility outstanding was 6.9%.
Borrowings on both the revolving credit line and the term loan facility are
collateralized by substantially all operating assets of the Company. The Company
is currently negotiating with the banks to shift a portion of the available term
loan facility to the revolving credit line.
6. LONG-TERM DEBT:
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Notes payable to individuals in connection with
acquisitions; principal and interest payable monthly at
rates ranging from 7.5% to 8.0%, matures through October
1999, unsecured......................................... $ 1,661,066 $ 3,146,457
Acquisition term loan facility with a bank; principal and
interest payable quarterly at rates ranging from (a) the
greater of the bank's prime rate or the federal funds
effective rate plus 1/2% or (b) at the Eurodollar rate
plus 1.25% to 2.75% , matures through October 2001...... 12,973,144 7,540,000
Other..................................................... 15,985 10,417
----------- -----------
14,650,195 10,696,874
Less: current portion................................... (3,981,563) (3,582,096)
----------- -----------
$10,668,632 $ 7,114,778
=========== ===========
</TABLE>
Aggregate maturities of long-term obligations subsequent to December 31,
1996, are as follows:
<TABLE>
<S> <C>
1997.................................................... $ 3,582,096
1998.................................................... 2,006,861
1999.................................................... 1,796,493
2000.................................................... 1,467,212
2001.................................................... 1,844,212
-----------
10,696,874
Less -- Current portion................................. (3,582,096)
-----------
Total......................................... $ 7,114,778
===========
</TABLE>
F-12
<PAGE> 109
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1995 1996
----------- ------------
<S> <C> <C>
Furniture and equipment.................................. $ 2,691,563 $ 4,031,607
Transportation equipment................................. 689,953 1,247,255
Leasehold improvements................................... 301,295 854,462
Medical equipment........................................ 8,236,435 15,363,664
Computer equipment....................................... 4,274,718 9,034,231
Software development costs............................... 2,806,918 6,920,252
----------- ------------
19,000,882 37,451,471
Less -- Accumulated depreciation......................... (7,946,627) (15,163,931)
----------- ------------
Property and equipment, net.............................. $11,054,255 $ 22,287,540
=========== ============
</TABLE>
8. LEASE COMMITMENTS:
The Company leases office space, furniture, and equipment under
noncancelable operating lease agreements which expire on various dates to 2006
and contain renewal options for up to 5 years.
The Company leases various office equipment under capital lease
arrangements. The capitalized value of leases amounted to approximately
$4,217,000 and $7,600,000 at December 31, 1995 and 1996, respectively, and net
book value amounted to approximately $2,584,000 and $4,473,000 at December 31,
1995 and 1996, respectively. Future minimum lease payments at December 31, 1996,
under the capital leases and noncancelable operating leases with initial or
remaining terms of one year or more are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- -----------
<S> <C> <C>
1997........................................................ $2,984,273 $ 2,824,679
1998........................................................ 2,332,330 2,206,350
1999........................................................ 1,774,280 904,801
2000........................................................ 1,483,782 39,130
2001 and thereafter......................................... 1,274,532 73,731
---------- -----------
Total minimum payments...................................... $9,849,197 6,048,691
==========
Amount representing interest................................ (1,263,724)
-----------
Present value of minimum payments........................... 4,784,967
Current portion............................................. (2,369,300)
-----------
Total....................................................... $ 2,415,667
===========
</TABLE>
Rent expense under all operating leases was approximately $1,428,000,
$2,270,000, and $3,050,000 for the years ended December 31, 1994, 1995, and
1996, respectively.
F-13
<PAGE> 110
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES:
The provision for income taxes includes the following components:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ----------- ----------
<S> <C> <C> <C>
Current:
Federal..................................... $1,017,755 $ 2,896,714 $2,571,912
State....................................... 138,553 329,962 326,233
---------- ----------- ----------
1,156,308 3,226,676 2,898,145
---------- ----------- ----------
Deferred:
Federal..................................... 193,317 (944,878) 468,175
State....................................... 9,773 (79,431) 52,066
---------- ----------- ----------
203,090 (1,024,309) 520,241
---------- ----------- ----------
Total............................... $1,359,398 $ 2,202,367 $3,418,386
========== =========== ==========
</TABLE>
The reconciliation of the provision for income taxes to the federal
statutory rate is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Income taxes at statutory rate................. $1,151,224 $1,967,204 $2,975,134
Amortization................................... 77,351 108,954 148,931
State taxes, net of federal tax effect......... 97,895 165,350 249,691
Tax credits utilized........................... -- (92,500)
Other.......................................... 32,928 53,359 44,630
---------- ---------- ----------
$1,359,398 $2,202,367 $3,418,386
========== ========== ==========
</TABLE>
Deferred tax assets and deferred tax liabilities consist of the following
items:
<TABLE>
<CAPTION>
1995 1996
---------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts.......................... $ 598,991 $ 424,590
Self-insurance and workers' compensation................. 542,254 567,034
Amounts due to third-party payor......................... 554,361 710,549
Accrued payroll and related expenses..................... 193,841 186,222
State income taxes....................................... 106,702 (92,039)
Other.................................................... 7,179 40,817
---------- -----------
Total............................................ 2,003,328 1,837,173
---------- -----------
Deferred tax liabilities:
Depreciation and amortization............................ (469,169) (884,101)
Deferred software cost, net of deferred revenue.......... -- (388,417)
Deferred compensation expense............................ -- (425,118)
Other.................................................... -- (54,874)
---------- -----------
Total............................................ (469,169) (1,752,510)
---------- -----------
Other tax liability........................................ (37,147) (89,663)
---------- -----------
Total net tax (liabilities) assets......................... $1,497,012 $ (5,000)
========== ===========
</TABLE>
F-14
<PAGE> 111
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. REDEEMABLE CONVERTIBLE PREFERRED STOCK:
In 1992, the Company sold 2,000,000 shares of its Series A preferred stock
($.01 par value) for $2,000,000, less issuance costs of $85,532 to an unrelated
entity. The shares were converted into 2,000,000 shares of the Company's common
stock coincident with the Company's initial public offering (IPO) on August 8,
1996.
In 1992, the Company issued 1,071,438 shares of its Series B preferred
stock ($.01 par value) for $3,000,025 to the Series A preferred stock investor
and an unrelated investor and 178,575 shares of its Series B preferred stock for
$500,010 to the Company's Employee Stock Ownership Plan (ESOP). The Company paid
$72,636 in costs associated with these two issuances. The Series B preferred
shares were convertible into 1,562,517 shares of the Company's common stock. The
conversion rate was subject to adjustment of up to 1.25 for one (312,503
additional shares) common share based on the Company's post issuance earnings
level. On November 28, 1994, the 178,575 Series B preferred shares held by the
ESOP were converted to 223,220 common shares. The remaining Series B preferred
shares were converted into 1,339,297 shares of common stock coincident with the
Company's IPO on August 8, 1996.
11. COMMON STOCK:
The Company completed an initial public offering (IPO) of 3,000,000 shares
of its common stock, $.01 par value, on August 8, 1996, and on September 11,
1996, the underwriters exercised their overallotment option to purchase an
additional 300,000 shares. The Company used the net proceeds from the IPO of
approximately $29,800,000 to repay outstanding indebtedness under its bank
credit facilities and for general corporate purposes. In addition, on July 26,
1996, the Company declared a 5 for 2 stock split in the form of a stock dividend
of its common stock. The accompanying consolidated financial statements give
retroactive effect to the stock split.
12. EMPLOYEE BENEFIT PLANS:
The Company has two qualified incentive stock option plans and has reserved
387,500 shares of the Company's common stock for issuance under the 1989 plan
and 237,500 shares under the 1996 plan. Options for 6,000 shares have been
granted under the 1996 stock option plan and 231,500 are available for future
grant. The Company accounts for its stock option plans in accordance with the
provisions of APB No. 25 and related interpretations, under which no
compensation cost is recognized for financial statement purposes. Had
compensation cost for stock options granted in 1995 and 1996 been determined
based on the fair value at the grant dates for options awarded consistent with
the provisions of SFAS No. 123, the Company's net income and net income per
common share for the years ended December 31, 1995 and 1996, would have been
reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Net income
As reported............................................... $3,583,525 $5,332,008
Pro forma................................................. $3,537,259 $5,206,173
Net income per common share
As reported............................................... $ .55 $ .66
Pro forma................................................. $ .54 $ .65
</TABLE>
Since the provisions of SFAS No. 123 have not been applied to options granted
prior to January 1, 1995, the resulting pro forma compensation cost is not
representative of the pro forma compensation expected to be presented in future
years.
F-15
<PAGE> 112
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Options to purchase shares of the Company's common stock have been granted
to nonofficer and noninvestor directors and key employees. Options are granted
at fair market value at the dates of grant. Options granted become exercisable
at the rate of 1/3 per year, and expire 10 years after the date of grant.
Information on stock options is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ----------------------- ------------------------
WTD. AVG. WTD. AVG.
SHARES SHARES EX. PRICE SHARES EX. PRICE
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 148,750 301,375 $ 3.79 359,627 $ 4.68
Granted.................. 163,875 118,253 7.04 48,250 10.13
Exercised................ -- (2,083) 2.00 (33,867) 2.32
Forfeited................ (11,250) (57,918) 5.00 (17,084) 5.04
---------- ---------- ---------- ----------- ----------
Outstanding at end of
year................... 301,375 359,627 $ 4.68 356,926 $ 5.63
========== ========== ========== =========== ==========
Exercisable at end of
year................... 93,338 157,940 $ 2.70 198,884 $ 4.06
========== ========== ========== =========== ==========
Price range.............. $.80-$6.00 $.80-$7.04 $.80-$11.50
========== ========== ===========
Weighted-average fair
value of options
granted during the
year................... $ 2.96 $ 4.26
========== ===========
</TABLE>
The fair value of each option grant is estimated as of the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996, respectively: Risk-free interest
rates of 6.5%; expected dividend yield of zero; expected option lives until
exercise date of 6.5 years; and expected price volatility of 25%.
The following table summarizes information about stock options that are
exercisable at December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF OPTIONS REMAINING WEIGHTED AVERAGE
OPTION GRANT DATE EXERCISABLE CONTRACTUAL LIFE EXERCISE PRICE
----------------- ----------------- ---------------- ----------------
<S> <C> <C> <C>
August 1990 through April 1993........ 83,800 4.8 Years $1.65
December 1993 through December 1995... 115,084 7.9 Years $5.82
-------
Total exercisable..................... 198,884 $4.06
=======
</TABLE>
On April 1, 1990, the Company established an Employee Stock Ownership Plan
(ESOP), which will award shares of the Company's common stock on a
noncontributory basis to eligible employees of the Company. Contributions of
common stock and cash by the Company, when declared at the discretion of the
Board of Directors, are allocated to the accounts of participants based on the
ratio each participant's compensation for the year bears to all participants'
compensation for that year. The Company contributed 125,000 and 130,000 common
shares in 1995 and 1996. Participants are not vested in any amounts allocated to
them until they have completed at least 1,000 hours of service per year for one
year. After five such years, a participant is 100% vested in such amounts.
Generally, a participant also will be fully vested upon attaining age 65 or in
the event of total and permanent disability, death or termination of the ESOP.
ESOP shares which are committed to be released are treated as outstanding for
earnings per share computations. Compensation expense for the ESOP was
approximately $1,500,000 for the years ended December 31, 1995 and 1994,
respectively. During 1996, the Board of Directors authorized no contribution to
the ESOP. At
F-16
<PAGE> 113
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1996, the Company recorded approximately $1,100,000 related to
accumulated plan forfeitures as deferred compensation expense in the
accompanying consolidated balance sheets.
Effective April 1, 1991, the Company formed a deferred compensation plan
structured under Section 401(k) of the Internal Revenue Code. The plan covers
substantially all employees meeting certain minimum service requirements. Under
the plan, contributions are made by the employees and matched by the Company
subject to certain limitations. The Company's contribution to this plan was
approximately $101,000, $105,000, and $157,000 for the years ended December 31,
1994, 1995, and 1996, respectively.
13. COMMITMENTS AND CONTINGENCIES:
The Company, in the normal course of business, is party to various matters
of litigation. Management is of the opinion that the eventual outcome of these
matters will not have a material adverse effect on the Company's financial
position or results of operations.
The Company self-insures its employees and their dependents for injury and
hospitalization. The Company self-insures claims up to $75,000 per person, with
an insurance company covering claims in excess of this amount up to a maximum of
$1,000,000 per person. A liability is accrued for claims incurred but not yet
reported (IBNR) based on historical claims paid information as provided by the
respective insurance company. The IBNR liability at December 31, 1995 and 1996,
was approximately $522,000 and $468,000, respectively. The Company has paid
claims of approximately $1,375,000, $1,700,000, and $1,101,000 for the years
ended December 31, 1994, 1995, and 1996, respectively.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS:
On January 1, 1995, the Company adopted SFAS No. 107, "Disclosure About
Fair Value of Financial Instruments." Cash and cash equivalents, accounts
receivable, and accounts payable and accrued liabilities are reflected in the
consolidated financial statements at fair value because of the short-term
maturity of those instruments. In addition, the fair value of the Company's
long-term debt and capital lease obligations were determined to approximate its
carrying value since (i) a substantial amount of the December 31, 1996, long-
term debt and capital lease obligations were issued at fair market value during
1996, and (ii) certain long-term debt amounts are interest rate variable in
nature.
F-17
<PAGE> 114
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. CONSOLIDATED QUARTERLY DATA (UNAUDITED):
The following is a summary of the consolidated quarterly results of
operations of the Company for the years ended December 31, 1995 and 1996:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1995
Net revenues........................... $17,553 $18,368 $21,577 $24,059
Gross profit........................... 8,161 8,318 10,703 12,983
Income from operations................. 1,260 1,229 1,854 2,430
Income before income taxes ............ 1,141 1,096 1,538 2,011
Net income............................. 703 677 958 1,246
Net income per common share............ .11 .10 .15 .19
Weighted average common shares
outstanding......................... 6,489 6,612 6,503 6,548
1996
Net revenues........................... $24,254 $25,968 $27,254 $29,309
Gross profit........................... 12,734 14,273 15,374 16,090
Income from operations................. 2,134 2,520 2,880 3,360
Income before income taxes ............ 1,648 1,868 2,355 2,880
Net income............................. 971 1,175 1,462 1,723
Net income per common share............ .15 .18 .17 .17
Weighted average common shares
outstanding......................... 6,543 6,592 8,575 10,187
</TABLE>
During December 1996, the Company reduced depreciation expense by
approximately $530,000 related to depreciation of the new management information
system, which depreciation had been expensed in earlier quarters of 1996. The
original depreciation expense was based on estimates of when the new management
information system was expected to be placed in service. Upon evaluation of the
actual dates the system was placed in service, the following depreciation
amounts were eliminated: Periods ended March 31 -- $78,000; June 30 -- $183,000;
September 30 -- $269,000. Revenues previously amortized to income from deferred
revenue in approximately the same amounts were similarly reversed, and the net
credit to income during the fourth quarter of 1996 was minimal.
F-18
<PAGE> 115
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
<TABLE>
<CAPTION>
ADDITIONS ADDITIONS
BALANCE AT CHARGED TO FROM BALANCE
BEGINNING COSTS AND ACQUIRED AT END
CLASSIFICATION OF PERIOD EXPENSES COMPANIES DEDUCTIONS OF PERIOD
-------------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
December 31, 1994:
Allowance for Doubtful
Accounts...................... $1,814,000 $1,116,000 $ -- $(1,645,000)(b) $1,285,000
Accumulated Amortization of
Intangible Assets............. 472,000 245,000 -- -- 717,000
---------- ---------- ---------- ----------- ----------
Total Reserves and
Allowances............. $2,286,000 $1,361,000 $ -- $(1,645,000) $2,002,000
========== ========== ========== =========== ==========
December 31, 1995:
Allowance for Doubtful
Accounts...................... $1,285,000 $1,489,000 $ 624,000 $(1,342,000)(b) $2,056,000
Accumulated Amortization of
Intangible Assets............. 717,000 469,000 -- -- 1,186,000
---------- ---------- ---------- ----------- ----------
Total Reserves and
Allowances............. $2,002,000 $1,958,000 $ 624,000 $(1,342,000) $3,242,000
========== ========== ========== =========== ==========
December 31, 1996:
Allowance for Doubtful
Accounts...................... $2,056,000 $3,580,000 $2,753,000 $(3,288,000)(b) $5,101,000
Accumulated Amortization of
Intangible Assets............. 1,186,000 852,000 -- -- 2,038,000
---------- ---------- ---------- ----------- ----------
Total Reserves and
Allowances............. $3,242,000 $4,432,000 $2,753,000 $(3,288,000) $7,139,000
========== ========== ========== =========== ==========
</TABLE>
- ---------------
(a) This schedule should be read in conjunction with the Company's audited
consolidated financial statements and related notes thereto.
(b) Write-off of uncollectible receivables net of recoveries.
F-19
<PAGE> 116
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ -- $ --
Accounts receivable, net.................................. 26,843,981 43,103,092
Income tax refund receivable.............................. 833,538 1,627,725
Supplies inventory........................................ 3,219,815... 4,013,616
Prepaid expenses and other................................ 2,040,698 1,225,963
Deferred income taxes..................................... 1,837,173 2,644,329
------------ ------------
Total current assets.............................. 34,775,205 52,614,725
Property and equipment, net................................. 22,287,540 29,042,468
Excess of cost of acquired businesses over fair values of
net assets acquired, net.................................. 40,838,391 54,270,979
Other assets................................................ 2,401,862 2,025,148
------------ ------------
Total assets...................................... $100,302,998 $137,953,320
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 6,755,011 $ 11,584,284
Accrued payroll and related expenses...................... 7,020,813 6,348,914
Line of credit payable.................................... 8,950,000 24,885,000
Current portion of long-term debt......................... 3,582,096 23,480,229
Current portion of capital lease obligations.............. 2,369,300 5,761,059
Income taxes payable...................................... 324,309 --
------------ ------------
Total current liabilities......................... 29,001,529 72,059,486
Deferred income taxes and other............................. 7,216,476 6,355,130
Long-term debt.............................................. 7,114,778 1,284,100
Capital lease obligations................................... 2,415,667 3,706,141
------------ ------------
Total liabilities................................. 45,748,450 83,404,857
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 40,000,000 shares
authorized; 10,015,967 and 10,064,096 shares issued and
outstanding in 1996 and 1997, respectively............. 100,159 100,641
Additional paid-in capital................................ 39,562,152 39,790,766
Retained earnings......................................... 14,892,237 14,657,056
------------ ------------
Total stockholders' equity........................ 54,554,548 54,548,463
------------ ------------
Total liabilities and stockholders' equity........ $100,302,998 $137,953,320
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
F-20
<PAGE> 117
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
1996 1997 1996 1997
----------- ----------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues............................... $27,253,682 $40,504,088 $77,476,115 $108,582,680
Direct expenses............................ 11,879,545 17,451,773 35,095,128 48,981,775
----------- ----------- ----------- ------------
Gross profit............................... 15,374,137 23,052,315 42,380,987 59,600,905
Other costs and expenses:
General and administrative............... 10,731,990 16,214,442 30,387,223 46,048,540
Depreciation and amortization............ 924,557 1,285,725 2,173,262 3,616,038
Provision for doubtful accounts.......... 837,125 1,960,557 2,286,502 6,738,472
----------- ----------- ----------- ------------
Total costs and expenses......... 12,493,672 19,460,724 34,846,987 56,403,050
----------- ----------- ----------- ------------
Income from operations..................... 2,880,465 3,591,591 7,534,000 3,197,855
Interest expense, net...................... 525,447 1,437,301 1,663,374 3,214,765
----------- ----------- ----------- ------------
Income (loss) before income taxes.......... 2,355,018 2,154,290 5,870,626 (16,910)
Provision for income taxes................. 892,632 861,716 2,261,543 218,271
----------- ----------- ----------- ------------
Net income (loss).......................... $ 1,462,386 $ 1,292,574 $ 3,609,083 $ (235,181)
=========== =========== =========== ============
Net income (loss) per common share......... $ .17 $ .13 $ .49 $ (.02)
=========== =========== =========== ============
Weighted average common shares
outstanding.............................. 8,575,019 10,159,210 7,324,030 10,042,957
=========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-21
<PAGE> 118
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1996 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 3,609,083 $ (235,181)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 3,615,382 6,029,171
Proceeds on disposition on assets...................... -- 31,427
Changes in operating assets and liabilities, net of
acquired businesses:
Accounts receivable, net............................. (8,341,820) (16,153,174)
Prepaid expenses and other assets.................... (726,219) 813,299
Deferred income taxes................................ 1,056,514 (721,598)
Accounts payable and accrued expenses................ 754,777 3,552,943
Income taxes payable/receivable...................... (1,589,148) (1,146,174)
Deferred revenue..................................... 2,057,545 (946,904)
------------ ------------
Net cash provided by (used in) operating
activities...................................... 436,114 (8,776,191)
------------ ------------
Cash flows from investing activities:
Payments for business acquisitions, net of cash
acquired............................................... (17,381,259) (13,433,786)
Additions to property and equipment....................... (5,369,007) (4,744,404)
------------ ------------
Net cash used in investing activities............. (22,750,266) (18,178,190)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of debt............................ 35,592,469 30,946,579
Payments on debt and capital lease obligations............ (44,539,027) (4,221,294)
Issuance of common stock.................................. 30,639,500 229,096
------------ ------------
Net cash provided by financing activities......... 21,692,942 26,954,381
------------ ------------
Net decrease in cash and cash equivalents................... (621,210) --
Cash and cash equivalents, beginning of period.............. 1,627,940 --
------------ ------------
Cash and cash equivalents, end of period.................... $ 1,006,730 $ --
============ ============
Supplemental disclosure of cash flow information:
Debt issued in acquisitions............................... $ 1,366,068 $ 1,450,000
Liabilities and debt assumed in acquisitions.............. 244,674 876,756
Issuance of capital lease obligations..................... 2,940,652 5,626,303
Issuance of common stock to employee stock option plan.... 1,467,500 --
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-22
<PAGE> 119
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
- --------------------------
The unaudited condensed consolidated financial statements include the
accounts of HealthCor Holdings, Inc. and subsidiaries (the "Company") for the
nine months ended September 30, 1996 and 1997. All significant intercompany
transactions have been eliminated. Direct expenses on the statements of
operations include all costs directly related to the production of net revenues,
such as salary and related benefit costs, depreciation of hand-held
point-of-care computers, billable medical supplies, product purchase costs, and
rental equipment depreciation. Depreciation costs not directly attributable to
the generation of net revenues are included in other costs and expenses. The
accompanying unaudited condensed consolidated financial statements and notes
should be read in conjunction with the Company's consolidated financial
statements and related notes for the year ended December 31, 1996 included in
this Offering Memorandum. Certain amounts in the statements of income have been
reclassified from earlier presentations.
2. ACQUISITIONS:
- ----------------
Effective January 1, 1997, the Company acquired Sterling Health Services,
Inc., a provider of home nursing services in Kansas City, Missouri.
Effective April 1, 1997, the Company acquired, for $900,000 in cash and
$100,000 in debt, the net assets of VNS Health Services, Inc. which provides
Medicare, Medicaid and private duty nursing services in Santa Fe and Espanola,
New Mexico.
Effective April 19, 1997, the Company acquired, for $8,500,000 in cash and
$1,000,000 in debt, all of the outstanding capital stock of CareNetwork, Inc.,
which provides nursing services in Little Rock, Ft. Smith, Lowell and Hot
Springs, Arkansas.
Effective June 1, 1997, the Company acquired, for $3,100,000 in cash and
$250,000 in debt, the net assets of American Medical Home Care, Inc. which sells
and leases home medical equipment, respiratory therapy services and
rehabilitation equipment in Tucson, Arizona.
During 1996, the Company acquired 8 home health care businesses and one
personnel placement company. The home health care businesses consisted of 27
offices in Texas, Oklahoma, Arkansas and Louisiana. The aggregate purchase price
for all companies included cash of approximately $21.4 million and notes payable
to sellers of approximately $3.3 million.
The cash amounts have been funded under the Company's bank acquisition
credit facility.
The 1996 and 1997 acquisitions have been accounted for using the purchase
method of accounting. Accordingly, the purchase price was allocated to the
assets acquired (including all identifiable intangible assets, if material) and
liabilities assumed based upon their estimated fair values at the dates of
acquisition in accordance with APB No. 16. The results of operations of the
acquired practices are included in the consolidated financial statements from
the respective dates of acquisition. None of the acquisition agreements contain
any significant earn-out provisions.
F-23
<PAGE> 120
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma information reflects the effect on the
consolidated statements of income assuming that all significant acquisitions
during 1996 and 1997 were consummated as of January 1, 1996 and 1997. This
information does not purport to be indicative of the results that would have
actually been obtained if the acquisitions had occurred on such dates.
Therefore, pro forma information cannot be considered indicative of future
operations.
<TABLE>
<CAPTION>
PRO FORMA
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1996 1997
--------- ---------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Net revenues............................................... $116,742 $116,311
Net income (loss).......................................... 4,467 (180)
Net income (loss) per common share......................... $ 0.61 $ (0.02)
Weighted average common shares outstanding................. 7,324 10,043
</TABLE>
During the nine months ended September 30, 1997, net revenues on a pro
forma basis are slightly lower as compared to the nine-month period ended
September 30, 1996, primarily as a result of a decline in cost-reimbursed
nursing business revenues offset by increases in respiratory therapy, infusion
therapy and commercial nursing revenues.
3. BANK CREDIT FACILITY:
- -------------------------
The Company is party to a bank credit agreement, dated as of October 31,
1996 (the "Existing Credit Facility") that provides for aggregate borrowings of
$75.0 million, originally consisting of a $15.0 million revolving credit line
and a $60.0 million term facility for acquisitions. The Existing Credit Facility
has been amended to increase the revolving credit line to $30.0 million and to
reduce the term facility to $45.0 million. The revolving credit line expires on
October 31, 1999, and the term facility expires on October 31, 1998, and is
repayable in quarterly installments of principal and interest through October
31, 2001. As of September 30, 1997, the Company had outstanding $24.9 million
under the revolving credit facility and $22.3 million under the term facility.
The Company is currently not in compliance with several of the financial
covenants contained in the Existing Credit Facility. The lenders have waived the
Company's existing defaults through December 1, 1997. The Company has classified
all the indebtedness under the Existing Credit Facility, together with certain
other indebtedness cross-defaulted with the Existing Credit Facility, as current
liabilities at September 30, 1997.
The Company has engaged Bear, Stearns & Co. Inc. and Chase Securities Inc.
to offer senior notes in the principal amount of $80.0 million to refinance
approximately $50.7 million of indebtedness outstanding under the Existing
Credit Facility. The Company has received commitments of $20.0 million for a new
revolving credit facility from lenders under the Existing Credit Facility.
4. EARNINGS (LOSS) PER SHARE:
- ---------------------------------
In February 1997 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128 entitled "Earnings Per Share"
which requires publicly held companies with potentially dilutive securities to
change their earnings per share computation for years ending after December 15,
1997, and show a basic earnings per share (based on the weighted average number
of common shares outstanding) and a diluted earnings per share (based on the
weighted average number of common shares outstanding plus the effect of all
dilutive securities, such as stock options and warrants). The new statement is
expected to result in a slightly favorable impact on earnings (loss) per share
for certain prior periods. The Company will adopt SFAS No. 128 in the fourth
quarter of 1997.
F-24
<PAGE> 121
======================================================
ALL TENDERED OUTSTANDING NOTES, EXECUTED LETTERS OF TRANSMITTAL AND OTHER
RELATED DOCUMENTS SHOULD BE DIRECTED TO THE EXCHANGE AGENT. QUESTIONS AND
REQUESTS FOR ASSISTANCE AND REQUESTS FOR ADDITIONAL COPIES OF THE PROSPECTUS,
THE LETTER OF TRANSMITTAL AND OTHER RELATED DOCUMENTS SHOULD BE ADDRESSED TO THE
EXCHANGE AGENT AS FOLLOWS:
BY REGISTERED OR CERTIFIED MAIL:
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
P.O. BOX 1517
MINNEAPOLIS, MINNESOTA 55480-1517
ATTENTION: CORPORATE TRUST OPERATIONS
BY OVERNIGHT DELIVERY:
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
NORWEST CENTER
6TH AND MARQUETTE
MINNEAPOLIS, MINNESOTA 55479-0069
ATTENTION: CORPORATE TRUST OPERATIONS
BY HAND DELIVERY:
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
NORTHSTAR EAST 12TH FLOOR
608 2ND AVENUE
MINNEAPOLIS, MINNESOTA 55479-0113
ATTENTION: CORPORATE TRUST OPERATIONS
BY FACSIMILE:
(612) 667-4927
CONFIRM BY TELEPHONE: (612) 667-9764
(ORIGINALS OF ALL DOCUMENTS SUBMITTED BY FACSIMILE SHOULD BE SENT PROMPTLY BY
HAND, OVERNIGHT DELIVERY, OR REGISTERED OR CERTIFIED MAIL.)
UNTIL 25 DAYS AFTER THE EXPIRATION DATE, ALL DEALERS EFFECTING TRANSACTIONS
IN THE EXCHANGE NOTES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITER AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS AND THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. NEITHER THE PROSPECTUS NOR THE ACCOMPANYING LETTER OF TRANSMITTAL
NOR BOTH TOGETHER CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH THE PROSPECTUS RELATES OR
AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS OR THE LETTER OF TRANSMITTAL OR BOTH TOGETHER NOR
ANY EXCHANGE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREIN OR THAT THERE HAS BEEN
NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
======================================================
======================================================
$80,000,000
[HEALTHCOR HOLDINGS, INC. LOGO]
HEALTHCOR HOLDINGS, INC.
11% SENIOR NOTES
DUE 2004
------------
PROSPECTUS
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 3
Disclosure Regarding Forward-Looking
Statements.......................... 4
Prospectus Summary.................... 5
Risk Factors.......................... 16
The Exchange Offer.................... 23
Use of Proceeds....................... 29
Selected Consolidated Historical
Financial Data...................... 30
Unaudited Pro Forma Condensed
Consolidated Financial Statements... 32
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 37
Business.............................. 42
Management............................ 52
Security Ownership.................... 59
Description of the New Credit
Facility............................ 60
Description of the Exchange Notes..... 61
Certain Federal Income Tax
Consequences........................ 90
Plan of Distribution.................. 94
Legal Matters......................... 95
Experts............................... 95
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
DATED FEBRUARY 10, 1998
======================================================
<PAGE> 122
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Eighth of the registrant's Amended and Restated Certificate of
Incorporation provides that the registrant shall indemnify its officers and
directors to the maximum extent allowed by the Delaware general Corporation Law.
Pursuant to Section 145 of the Delaware General Corporation Law, the registrant
generally has the power to indemnify its present and former directors and
officers against expenses and liabilities incurred by them in connection with
any suit to which they are, or are threatened to be made, a party by reason of
their serving in those positions so long as they acted in good faith and in a
manner they reasonable believed to be in, or not opposed to, the best interests
of the registrant, and with respect to any criminal action, so long as they had
no reasonable cause to believe their conduct was unlawful. With respect to suits
by or in the right of the registrant, however, indemnification is generally
limited to attorneys' fees and other expenses and is not available if the person
is adjudged to be liable to the registrant, unless the court determines that
indemnification is appropriate. The statute expressly provides that the power to
indemnify authorized thereby is not exclusive of any rights granted under any
bylaw, agreement, vote of stockholders or disinterested directors, or otherwise.
The registrant also has purchased and maintains insurance for its directors and
officers. Additionally, Article Eighth of the Company's Amended and Restated
Certificate of Incorporation provides that, in the event that an officer or
director files suit against the registrant seeking indemnification of
liabilities or expenses incurred, the burden will be on the registrant to prove
that the indemnification would not be permitted under the Delaware General
Corporation Law.
The preceding discussion of the registrant's Amended and Restated
Certificate of Incorporation and Section 145 of the Delaware general Corporation
Law is not intended to be exhaustive and is qualified in its entirety by the
Amended and Restated Certificate of Incorporation and Section 145 of the
Delaware General Corporation Law.
The registrant has entered into indemnification agreements with the
registrant's directors and officers. Pursuant to such agreements, the registrant
will, to the extent permitted by applicable law, indemnify such persons against
all expenses, judgments, fines and penalties incurred in connection with the
defense or settlement of any actions brought against them by reason of the fact
that they were directors or officers of the registrant or assumed certain
responsibilities at the direction of the registrant.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
1.1* -- Purchase Agreement dated November 24, 1997, by and among
the Company, the guarantors named on the signature pages
thereto, Bear, Stearns & Co. Inc. and Chase Securities
Inc.
3.1 -- Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to the Company's
Registration Statement on Form S-1 (File No. 333-5779),
as filed with the Commission on June 12, 1996).
3.2 -- Amended and Restated Bylaws of the Company (incorporated
by reference to the Company's Registration Statement on
Form S-1 (File No. 333-5779), as filed with the
Commission on June 12, 1996).
4.1 -- Specimen Stock Certificate of the Company (incorporated
by reference to the Company's Registration Statement on
Form S-1 (File No. 333-5779), as filed with the
Commission on June 12, 1996).
4.2* -- Indenture dated as of December 1, 1997, by and among the
Company, the Guarantors Signatories Thereto and Norwest
Bank Minnesota, National Association, as Trustee.
</TABLE>
II-1
<PAGE> 123
4.3* -- First Supplemental Indenture dated as of December 2, 1997
to Indenture dated as of December 1, 1997, by and among
the Company, the Guarantors Signatories Thereto and
Norwest Bank Minnesota, National Association, as Trustee.
4.4* -- Form of Global Note (included in Exhibit 4.2).
4.5* -- Registration Rights Agreement dated as of December 1,
1997, by and among Bear Stearns & Co. Inc., Chase
Securities Inc., the Company, and certain subsidiaries of
the Company, as Guarantors.
4.6* -- Second Amended and Restated Credit Agreement dated
December 1, 1997, by and among Texas Commerce Bank
National Association, as Agent and an Issuing Bank, the
Several Financial Institutions from time to time a party
thereto and the Company.
5.1** -- Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
10.1 -- Registration Rights Agreement, dated as of June 1, 1992
between the Company and certain stockholders of the
Company (incorporated by reference to the Company's
Registration Statement on Form S-1 (File No. 333-5779) as
filed with the Commission on June 12, 1996).
10.2 -- The Company Employee Stock Ownership Plan and Trust,
dated April 1, 1990, as amended (incorporated by
reference to the Company's Registration Statement on Form
S-1 (File No. 333-5779) as filed with the Commission on
June 12, 1996).
10.3 -- Form of HealthCor Holdings, Inc. 1996 Long-Term Incentive
Plan (incorporated by reference to the Company's
Registration Statement on Form S-1 (File No. 333-5779) as
filed with the Commission on June 12, 1996).
10.4 -- HealthCor Holdings, Inc. Employee Stock Ownership Plan
and Trust, dated April 1, 1990, as amended (incorporated
by reference to the Company's Registration Statement on
Form S-1 (File No. 333-5779) as filed with the Commission
on June 12, 1996).
10.5 -- Warrant Agreement between the Company and an individual
to purchase Common Stock of the Company, dated as of
November 1, 1994 (incorporated by reference to the
Company's Registration Statement on Form S-1 (File No.
333-5779) as filed with the Commission on June 12, 1996).
10.6 -- Form of Indemnification Agreement entered into between
the Company and its executive officers and directors
(incorporated by reference to the Company's Registration
Statement on Form S-1 (File No. 333-5779) as filed with
the Commission on June 12, 1996).
10.7 -- Stock Purchase Agreement, dated April 15, 1996, by and
between I Care Home I.V. Affiliates, Inc., I Care of
Arkansas, Inc., I Care, Inc. and the Company
(incorporated by reference to the Company's Registration
Statement on Form S-1 (File No. 333-5779) as filed with
the Commission on June 12, 1996).
10.8 -- Asset Purchase Agreement, dated as of September 1, 1996,
by and between HealthCor Oxygen and Medical Equipment,
Inc. and Southern Medical Mart, Inc. (incorporated by
reference to the Company's Current Report on Form 8-K, as
filed with the Commission on November 12, 1996).
10.9 -- Credit Agreement, dated as of October 31, 1996, by and
between HealthCor Holdings, Inc., HealthCor, Inc. and the
certain financial institutions named therein
(incorporated by reference to the Company's Annual Report
on Form 10-K, as filed with the Commission on March 31,
1997).
10.10* -- Form of Change of Control Agreement.
12.1* -- Computation of Ratio of Earnings to Fixed Charges.
21.1* -- List of Subsidiaries of the Company.
23.1** -- Consent of Arthur Andersen LLP, independent public
accountants.
23.2** -- Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
(included in Exhibit 5.1).
24.1* -- Powers of Attorney (included in signature pages to this
Registration Statement).
II-2
<PAGE> 124
25.1* -- Statement of Eligibility of Trustee on Form T-1 of
Norwest Bank Minnesota, National Association.
99.1** -- Form of Letter of Transmittal.
- ---------------
* Previously filed.
** Filed herewith.
(b) Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts.
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE> 125
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Amendment No. 1 to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas, on this 10th day of February, 1998.
HEALTHCOR HOLDINGS, INC.
By: /s/ S. WAYNE BAZZLE
----------------------------------
S. Wayne Bazzle,
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the registration statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ S. WAYNE BAZZLE Chairman of the Board, February 10, 1998
- ----------------------------------------------------- Chief Executive Officer and
S. Wayne Bazzle Director (Principal and
Executive Officer)
/s/ CHERYL C. BAZZLE* President, Chief Operating February 10, 1998
- ----------------------------------------------------- Officer and Director
Cheryl C. Bazzle
/s/ JOEL H. WILLIAMS* Vice President and Chief February 10, 1998
- ----------------------------------------------------- Financial Officer
Joel H. Williams (Principal Financial and
Accounting Officer)
/s/ MICHAEL J. FOSTER* Director February 10, 1998
- -----------------------------------------------------
Michael J. Foster
/s/ ROBERT B. CRATES* Director February 10, 1998
- -----------------------------------------------------
Robert B. Crates
/s/ JANE R. FINLEY, PH.D.* Director February 10, 1998
- -----------------------------------------------------
Jane R. Finley, Ph.D.
*By: /s/ S. WAYNE BAZZLE
------------------------------------------------
S. Wayne Bazzle
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 126
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<C> <S>
1.1* -- Purchase Agreement dated November 24, 1997, by and among
the Company, the guarantors named on the signature pages
thereto, Bear, Stearns & Co. Inc. and Chase Securities
Inc.
3.1 -- Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to the Company's
Registration Statement on Form S-1 (File No. 333-5779),
as filed with the Commission on June 12, 1996).
3.2 -- Amended and Restated Bylaws of the Company (incorporated
by reference to the Company's Registration Statement on
Form S-1 (File No. 333-5779), as filed with the
Commission on June 12, 1996).
4.1 -- Specimen Stock Certificate of the Company (incorporated
by reference to the Company's Registration Statement on
Form S-1 (File No. 333-5779), as filed with the
Commission on June 12, 1996).
4.2* -- Indenture dated as of December 1, 1997, by and among the
Company, the Guarantors Signatories Thereto and Norwest
Bank Minnesota, National Association, as Trustee.
4.3* -- First Supplemental Indenture dated as of December 2, 1997
to Indenture dated as of December 1, 1997, by and among
the Company, the Guarantors Signatories Thereto and
Norwest Bank Minnesota, National Association, as Trustee.
4.4* -- Form of Global Note (included in Exhibit 4.2).
4.5* -- Registration Rights Agreement dated as of December 1,
1997, by and among Bear Stearns & Co. Inc., Chase
Securities Inc., the Company, and certain subsidiaries of
the Company, as Guarantors.
4.6* -- Second Amended and Restated Credit Agreement dated
December 1, 1997, by and among Texas Commerce Bank
National Association, as Agent and an Issuing Bank, the
Several Financial Institutions from time to time a party
thereto and the Company.
5.1** -- Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
10.1 -- Registration Rights Agreement, dated as of June 1, 1992
between the Company and certain stockholders of the
Company (incorporated by reference to the Company's
Registration Statement on Form S-1 (File No. 333-5779) as
filed with the Commission on June 12, 1996).
10.2 -- The Company Employee Stock Ownership Plan and Trust,
dated April 1, 1990, as amended (incorporated by
reference to the Company's Registration Statement on Form
S-1 (File No. 333-5779) as filed with the Commission on
June 12, 1996).
10.3 -- Form of HealthCor Holdings, Inc. 1996 Long-Term Incentive
Plan (incorporated by reference to the Company's
Registration Statement on Form S-1 (File No. 333-5779) as
filed with the Commission on June 12, 1996).
10.4 -- HealthCor Holdings, Inc. Employee Stock Ownership Plan
and Trust, dated April 1, 1990, as amended (incorporated
by reference to the Company's Registration Statement on
Form S-1 (File No. 333-5779) as filed with the Commission
on June 12, 1996).
10.5 -- Warrant Agreement between the Company and an individual
to purchase Common Stock of the Company, dated as of
November 1, 1994 (incorporated by reference to the
Company's Registration Statement on Form S-1 (File No.
333-5779) as filed with the Commission on June 12, 1996).
10.6 -- Form of Indemnification Agreement entered into between
the Company and its executive officers and directors
(incorporated by reference to the Company's Registration
Statement on Form S-1 (File No. 333-5779) as filed with
the Commission on June 12, 1996).
</TABLE>
<PAGE> 127
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<C> <S>
10.7 -- Stock Purchase Agreement, dated April 15, 1996, by and
between I Care Home I.V. Affiliates, Inc., I Care of
Arkansas, Inc., I Care, Inc. and the Company
(incorporated by reference to the Company's Registration
Statement on Form S-1 (File No. 333-5779) as filed with
the Commission on June 12, 1996).
10.8 -- Asset Purchase Agreement, dated as of September 1, 1996,
by and between HealthCor Oxygen and Medical Equipment,
Inc. and Southern Medical Mart, Inc. (incorporated by
reference to the Company's Current Report on Form 8-K, as
filed with the Commission on November 12, 1996).
10.9 -- Credit Agreement, dated as of October 31, 1996, by and
between HealthCor Holdings, Inc., HealthCor, Inc. and the
certain financial institutions named therein
(incorporated by reference to the Company's Annual Report
on Form 10-K, as filed with the Commission on March 31,
1997).
10.10* -- Form of Change of Control Agreement.
12.1* -- Computation of Ratio of Earnings to Fixed Charges.
21.1* -- List of Subsidiaries of the Company.
23.1** -- Consent of Arthur Andersen LLP, independent public
accountants.
23.2** -- Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
(included in Exhibit 5.1).
24.1* -- Powers of Attorney (included in signature pages to this
Registration Statement).
25.1* -- Statement of Eligibility of Trustee on Form T-1 of
Norwest Bank Minnesota, National Association.
99.1** -- Form of Letter of Transmittal.
</TABLE>
- ---------------
* Previously filed.
** Filed herewith.
<PAGE> 1
EXHIBIT 5.1
[AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.]
February 10, 1998
HealthCor Holdings, Inc.
8150 North Central Expressway
Suite M2000
Dallas, Texas 75206
Ladies and Gentlemen:
We have acted as counsel for HealthCor Holdings, Inc. a Delaware corporation
(the "Company"), in connection with the proposed offer by the Company to
exchange (the "Exchange Offer") all outstanding 11% Senior Notes Due 2004 ($80
million principal amount outstanding) (the "Outstanding Notes") for 11% Senior
Notes Due 2004 ($80 million principal amount) (the "Exchange Notes"). The
Outstanding Notes have been, and the Exchange Notes will be, issued pursuant to
an Indenture dated as of December 1, 1997, as amended by the First Supplemental
Indenture dated as of December 2, 1997 (the "Indenture"), among the Company,
certain of its subsidiaries and Norwest Bank Minnesota, National Association,
as trustee (the "Trustee"). Unless otherwise defined herein capitalized terms
used in this opinion shall have the meanings set forth in the Indenture.
The law covered by the opinions expressed herein is limited to the Federal
laws of the United States, the laws of the State of New York and the General
Corporation Law of the State of Delaware. This firm is a registered limited
liability partnership organized under the laws of the State of Texas.
We have examined (i) the Indenture, (ii) the form of Exchange Notes, which
are filed as Exhibit 4.2 to the Registration Statement, (iii) the Registration
Statement on Form S-4, filed by the Company with the Securities and Exchange
Commission, for the registration of the Exchange Notes under the Securities Act
of 1933 (the Registration Statement as amended at the time it
<PAGE> 2
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
HealthCor Holdings, Inc.
February 10, 1998
Page 2
becomes effective being referred to as the "Registration Statement") and (iv)
such corporate records of the Company, certificates of public officials and
such other documents as we have deemed necessary or appropriate for the purpose
of this opinion.
For purposes of this opinion, we have assumed (i) the due authorization,
execution and delivery of the Indenture by the Trustee, (ii) that the Trustee
has the requisite power and authority to enter into the Indenture and to act as
trustee thereunder (and is eligible and duly qualified to act in such
capacity), and (iii) that the Indenture constitutes the legal, valid and
binding obligation of the Trustee, enforceable against the Trustee in
accordance with its terms.
Based upon such examination, review and assumptions, we are of the
opinion that:
The Exchange Notes proposed to be issued by the Company
pursuant to the Exchange Offer have been duly authorized for
issuance and, subject to the Registration Statement becoming
effective under the Securities Act of 1933, and to compliance
with any applicable state securities laws, the Exchange Notes
when executed by the Company, authenticated by the Trustee and
delivered and exchanged for Outstanding Notes in accordance
with the Indenture and the Registration Rights Agreement, will
be valid and binding obligations of the Company.
The opinion expressed herein as to the valid, binding and enforceable nature
of the Exchange Notes is subject to the exceptions that enforcement may be
limited by and subject to (i) bankruptcy, insolvency (including without
limitation, all laws relating to fraudulent transfers), reorganization,
moratorium or similar laws affecting enforcement of creditors' rights
generally, (ii) general principles of equity (regardless of whether enforcement
is considered in a proceeding in equity or at law), (iii) the power of the
courts to award damages in lieu of equitable remedies and (iv) the limitations
imposed by United States federal or state laws or the policies underlying such
laws on any right to indemnification or contribution contained in such
documents. In addition, the foregoing opinion is subject to the qualifications
that certain remedial, waiver and other similar provisions of the Indenture may
not be enforceable in whole or in part under the laws of the State of New York
or the United States, but such provisions do not void the Indenture or
frustrate the basic purpose thereof, and, subject to the other qualifications
set forth in this opinion the Indenture contains adequate provisions for the
practical realization of the rights and benefits afforded thereby, except for
the economic consequences of any judicial, administrative or other delay or
procedure which may be imposed by applicable federal and state law, rules,
regulations and court decisions and by constitutional requirements in and of
the State of New York or the United States. In addition, we express no opinion
as to the enforceability of any provisions contained in the Indenture
purporting to (i) waive the benefits of any stay, extension or usury law or
waive any rights under any applicable statutes or rules thereafter enacted or
promulgated, (ii) require payment of any interest at a rate or in an amount
which a court would
<PAGE> 3
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
HealthCor Holdings, Inc.
February 10, 1998
Page 3
determine in the circumstances under applicable law to be a penalty or a
forfeiture, or (iii) provide for separability of unenforceable provisions.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to the firm under "Legal Matters"
in the Prospectus forming a part of the Registration Statement.
Sincerely,
/s/ AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our firm) included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Dallas, Texas
February 10, 1998
<PAGE> 1
LETTER OF TRANSMITTAL
HEALTHCOR HOLDINGS, INC.
OFFER TO EXCHANGE 11% SENIOR NOTES DUE 2004,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT")
FOR
11% SENIOR NOTES DUE 2004
PURSUANT TO THE PROSPECTUS DATED
FEBRUARY 10, 1998
---------------------
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT
5:00 P.M., E.S.T., ON MARCH 25, 1998, UNLESS THE EXCHANGE OFFER IS EXTENDED
---------------------
DELIVER TO NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
(THE "EXCHANGE AGENT")
<TABLE>
<C> <C>
BY REGISTERED OR CERTIFIED MAIL: BY HAND DELIVERY:
Norwest Bank Minnesota, National Association Norwest Bank Minnesota, National Association
P.O. Box 1517 Northstar East 12th Floor
Minneapolis, Minnesota 55480-1517 608 2nd Avenue
Minneapolis, Minnesota 55479-0113
BY OVERNIGHT DELIVERY: BY FACSIMILE TRANSMISSION
Norwest Bank Minnesota, National Association (FOR ELIGIBLE INSTITUTIONS ONLY):
Norwest Center (612) 667-4927
6th and Marquette Avenue Confirm by Telephone: (612) 667-9764
Minneapolis, Minnesota 55479-0069
Attention: Corporate Trust Operations
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE WILL
NOT CONSTITUTE A VALID DELIVERY.
THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ
CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
The undersigned hereby acknowledges receipt of the Prospectus dated
February 10, 1998 (the "Prospectus") of HealthCor Holdings, Inc., a Delaware
corporation (the "Company"), and this Letter of Transmittal, which together
constitute the Company's offer (the "Exchange Offer") to exchange up to an
aggregate principal amount of $80,000,000 of its 11% Senior Notes due 2004 (the
"Exchange Notes," which have been registered under the Securities Act, pursuant
to a Registration Statement of which the Prospectus is a part), for a like
principal amount of its outstanding 11% Senior Notes due 2004 (the "Outstanding
Notes" and together with the Exchange Notes, the "Notes"). Capitalized terms
used but not defined herein have the meanings given to them in the Prospectus.
YOUR BANK OR BROKER CAN ASSIST YOU IN COMPLETING THIS FORM. THE
INSTRUCTIONS INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED.
QUESTIONS RELATING TO THE PROCEDURE FOR TENDERING AND REQUESTS FOR ADDITIONAL
COPIES OF THE PROSPECTUS AND THIS LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE
EXCHANGE AGENT. QUESTIONS RELATING TO THE EXCHANGE OFFER AND REQUESTS FOR
ASSISTANCE OR FOR ADDITIONAL COPIES OF THE PROSPECTUS AND THIS LETTER OF
TRANSMITTAL MAY BE DIRECTED TO THE COMPANY.
<PAGE> 2
This Letter of Transmittal is to be completed by a holder of Outstanding
Notes if (i) certificates are to be forwarded herewith, (ii) delivery of
Outstanding Notes is to be made by book-entry transfer to an account maintained
by the Exchange Agent at The Depository Trust Company (the "Book-Entry Transfer
Facility"), pursuant to the procedures set forth in "The Exchange
Offer -- Procedures for Tendering" in the Prospectus or (iii) tender of the
Outstanding Notes is to be made according to the guaranteed delivery procedures
described in the Prospectus under the caption "The Exchange Offer -- Guaranteed
Delivery Procedures." See Instruction 2. Delivery of documents to a book-entry
transfer facility does not constitute delivery to the Exchange Agent. It is
understood that participants in the Book-Entry Transfer Facility's book-entry
system will, in accordance with the Book-Entry Transfer Facility's Automated
Tender Offer Program procedures and in lieu of physical delivery to the Exchange
Agent of a Letter of Transmittal, electronically acknowledge receipt of, and
agreement to be bound by, the terms of this Letter of Transmittal.
Unless the context otherwise requires, the term "Holder" as used herein
with respect to the Exchange Offer means any person in whose name Outstanding
Notes are registered on the books of the Company or any other person who has
obtained a properly completed bond power from the registered holder. The
undersigned has completed, executed and delivered this Letter of Transmittal to
indicate the action the undersigned desires to take with respect to the Exchange
Offer. Holders who wish to tender their Outstanding Notes must complete this
Letter of Transmittal in its entirety.
Listed below are the Outstanding Notes to which this Letter of Transmittal
relates. If the space provided below is inadequate, the certificate numbers and
principal amounts should be listed on a separate signed schedule affixed hereto.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF OUTSTANDING NOTES TENDERED HEREBY
- ------------------------------------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) PRINCIPAL AMOUNT PRINCIPAL
EXACTLY AS NAME(S) APPEAR(S) ON NOTES CERTIFICATE REPRESENTED BY AMOUNT
(PLEASE FILL IN) NUMBERS* OUTSTANDING NOTES TENDERED**
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
Total
- ------------------------------------------------------------------------------------------------------------------------
* Need not be completed if Outstanding Notes are being tendered by book-entry transfer.
** Unless otherwise indicated, the Holder will be deemed to have tendered the full aggregate principal amount
represented by such Outstanding Notes. All tenders must be in integral multiples of $1,000.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
[ ]CHECK HERE IF TENDERED OUTSTANDING NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO AN ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH A BOOK-
ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution
- --------------------------------------------------------------------------------
Account Number
- --------------------------------------------------------------------------------
Transaction Code Number
- --------------------------------------------------------------------------------
Holders whose Notes are not immediately available or who cannot deliver
their Notes and all other documents required hereby to the Exchange Agent on or
prior to the Expiration Date must tender their Notes according to the guaranteed
delivery procedure set forth in the Prospectus under the caption "The Exchange
Offer -- Guaranteed Delivery Procedures." See Instruction 2.
2
<PAGE> 3
[ ]CHECK HERE IF TENDERED OUTSTANDING NOTES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND
COMPLETE THE FOLLOWING:
Name(s) of Registered Holder(s)
- --------------------------------------------------------------------------------
Date of Execution of Notice of Guaranteed Delivery
- -----------------------------------------------------------------
Name of Eligible Institution that Guaranteed Delivery
- -----------------------------------------------------------------
IF DELIVERED BY BOOK-ENTRY TRANSFER, COMPLETE THE FOLLOWING:
Account Number
- --------------------------------------------------------------------------------
Transaction Code Number
- --------------------------------------------------------------------------------
[ ]CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
3
<PAGE> 4
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 4 AND 5)
To be completed ONLY if the Exchange Notes and/or Outstanding Notes not
exchanged are to be issued in the name of and sent to someone other than the
undersigned, or if Outstanding Notes delivered by book-entry transfer which are
not accepted for exchange or Exchange Notes are to be returned by credit to an
account maintained at the Book-Entry Transfer Facility other than the account
indicated above.
Issue Exchange Notes and/or Outstanding Notes to:
Name(s):
- ---------------------------------------------
(Please Type or Print)
- ---------------------------------------------------------
(Please Type or Print)
Address:
- -----------------------------------------------
- ---------------------------------------------------------
(Including Zip Code)
- ---------------------------------------------------------
(Tax Identification or Social Security No.)
<TABLE>
<S> <C>
[ ] Credit unexchanged Outstanding Notes
and/or Exchange Notes delivered by
book-entry transfer to the Book-Entry
Transfer Facility account set forth
below.
</TABLE>
- ---------------------------------------------------------
(Book-Entry Transfer Facility
Account Number, if applicable)
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 4 AND 5)
To be completed ONLY if the Exchange Notes
and/or Outstanding Notes not exchanged are to be sent to someone other than the
undersigned, or to the undersigned at an address other than that shown under
"Description of Outstanding Notes Tendered Hereby."
Mail Exchange Notes and/or Outstanding Notes to:
Name(s):
- ---------------------------------------------
(Please Type or Print)
- ---------------------------------------------------------
(Please Type or Print)
Address:
- -----------------------------------------------
- ---------------------------------------------------------
(Including Zip Code)
IMPORTANT: THIS LETTER OR A FACSIMILE HEREOF (TOGETHER WITH THE CERTIFICATES FOR
OUTSTANDING NOTES OR A BOOK-ENTRY CONFIRMATION AND ALL OTHER REQUIRED DOCUMENTS
OR THE NOTICE OF GUARANTEED DELIVERY) MUST BE RECEIVED BY THE EXCHANGE AGENT
PRIOR TO 5:00 P.M., E.S.T., ON THE EXPIRATION DATE.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETING ANY BOX ABOVE.
4
<PAGE> 5
SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the principal amount of the
Outstanding Notes indicated above. Subject to, and effective upon, the
acceptance for exchange of such Outstanding Notes tendered hereby, the
undersigned hereby exchanges, sells, assigns and transfers to, or upon the order
of, the Company all right, title and interest in and to such Outstanding Notes
as are being tendered hereby, including all rights to accrued and unpaid
interest thereon. The undersigned hereby irrevocably constitutes and appoints
the Exchange Agent its true and lawful agent and attorney-in-fact with full
power of substitution (with full knowledge that said Exchange Agent acts as the
agent of the Company in connection with the Exchange Offer) to cause the
Outstanding Notes to be assigned, sold, transferred and exchanged. The Power of
Attorney granted in this paragraph shall be deemed irrevocable from and after
the Expiration Date and coupled with an interest.
The undersigned represents and warrants that it has full power and
authority to tender, sell, exchange, assign and transfer the Outstanding Notes
and to acquire Exchange Notes issuable upon the exchange of such tendered
Outstanding Notes, and that when the same are accepted for exchange, the Company
will acquire good and unencumbered title to the tendered Outstanding Notes, free
and clear of all liens, restrictions, charges and encumbrances and not subject
to any adverse claim.
The undersigned represents to the Company that (i) the Exchange Notes
acquired pursuant to the Exchange Offer are being obtained in the ordinary
course of business of the person receiving such Exchange Notes, whether or not
such person is the undersigned, and (ii) if the undersigned is not a
broker-dealer, neither the undersigned nor any such other person is engaged in,
or intends to engage in, or has an arrangement or understanding with any person
to participate in the distribution (within the meaning of the Securities Act) of
such Exchange Notes. If the undersigned or the person receiving the Exchange
Notes covered hereby is a broker-dealer that is receiving the Exchange Notes for
its own account in exchange for Outstanding Notes that were acquired as a result
of market-making activities or other trading activities, the undersigned
acknowledges that it or such other person will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such
Exchange Notes; however, by so acknowledging and by delivering a prospectus, the
undersigned will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. The undersigned and any such other person
acknowledge that, if they are participating in the Exchange Offer for the
purpose of distributing the Exchange Notes, (i) they cannot rely on the position
of the staff of the Securities and Exchange Commission enunciated in Exxon
Capital Holdings Corporation (available April 13, 1989) or similar no-action
letters and, in the absence of an exemption therefrom, must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with the resale transaction and (ii) failure to comply with such
requirements in such instance could result in the undersigned or any such other
person incurring liability under the Securities Act for which such persons are
not indemnified by the Company. If the undersigned or the person receiving the
Exchange Notes covered by this letter is an affiliate (as defined under Rule 405
of the Securities Act) of the Company, the undersigned represents to the Company
that the undersigned understands and acknowledges that such Exchange Notes may
not be offered for resale, resold or otherwise transferred by the undersigned or
such other person without registration under the Securities Act or an exemption
therefrom.
The undersigned also warrants that it will, upon request, execute and
deliver any additional documents deemed by the Exchange Agent or the Company to
be necessary or desirable to complete the exchange, sale, assignment and
transfer of tendered Outstanding Notes or transfer ownership of such Outstanding
Notes on the account books maintained by a Book-Entry Transfer Facility. The
undersigned further agrees that acceptance of any tendered Outstanding Notes by
the Company and the issuance of Exchange Notes in exchange therefor shall
constitute performance in full by the Company of its obligations under the
Registration Rights Agreement and that the Company shall have no further
obligations or liabilities thereunder for the registration of the Outstanding
Notes or the Exchange Notes.
The Exchange Offer is subject to certain conditions, including those set
forth in the Prospectus under the caption "The Exchange Offer." The undersigned
recognizes that as a result of these conditions (which may be waived, in whole
or in part, by the Company), as more particularly set forth in the Prospectus,
the Company may not be required to exchange any of the Outstanding Notes
tendered hereby and, in such event, the Outstanding Notes not exchanged will be
returned to the undersigned at the address shown below the signature of the
undersigned.
5
<PAGE> 6
All authority herein conferred or agreed to be conferred shall survive the
death or incapacity of the undersigned and every obligation of the undersigned
hereunder shall be binding upon the heirs, personal representatives, successors,
assigns, executors, administrators, trustees in bankruptcy and legal
representatives of the undersigned. Tendered Outstanding Notes may be withdrawn
at any time prior to the Expiration Date only in accordance with the terms set
forth in the Prospectus under the caption "The Exchange Offer -- Withdrawal of
Tenders."
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" above, please deliver the Exchange Notes (and, if applicable,
substitute certificates representing Outstanding Notes for any Outstanding Notes
not exchanged) in the name of the undersigned or, in the case of a book-entry
delivery of Outstanding Notes, please credit the account indicated above
maintained at the Book-Entry Transfer Facility. Similarly, unless otherwise
indicated under the box entitled "Special Delivery Instructions" above, please
send the Exchange Notes (and, if applicable, substitute certificates
representing Outstanding Notes for any Outstanding Notes not exchanged) to the
undersigned at the address shown above in the box entitled "Description of
Outstanding Notes Tendered Hereby."
IF OUTSTANDING NOTES ARE SURRENDERED BY HOLDER(S) THAT HAVE COMPLETED
EITHER THE BOX ENTITLED "SPECIAL ISSUANCE INSTRUCTIONS" OR THE BOX ENTITLED
"SPECIAL DELIVERY INSTRUCTIONS" IN THIS LETTER OF TRANSMITTAL, SIGNATURE(S) ON
THIS LETTER OF TRANSMITTAL MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION (SEE
INSTRUCTION 4).
6
<PAGE> 7
REGISTERED HOLDER(S) OF NOTES SIGN HERE
(In addition complete Substitute Form W-9 Below)
X
- --------------------------------------------------------------------------------
X
- --------------------------------------------------------------------------------
(Signature(s) of Registered Holder(s))
Must be signed by registered holder(s) exactly as name(s) appear(s) on the
Notes or on a security position listing as the owner of the Notes or by
person(s) authorized to become registered holder(s) by properly completed bond
powers transmitted herewith. If signature is by attorney-in-fact, trustee,
executor, administrator, guardian, officer of a corporation or other person
acting in a fiduciary capacity, please provide the following information (please
print or type):
Name and Capacity (full title):
- --------------------------------------------------------------------------------
Address (including zip):
- --------------------------------------------------------------------------------
Area Code and Telephone Number:
- --------------------------------------------------------------------------------
Dated:
- ---------------------
SIGNATURE GUARANTEE
(If required -- See Instruction 4)
Authorized Signature:
- --------------------------------------------------------------------------------
(Signature of Representative of Signature Guarantor)
Name and Title:
- --------------------------------------------------------------------------------
Name of Firm:
- --------------------------------------------------------------------------------
Area Code and Telephone Number:
- --------------------------------------------------------------------------------
(Please print or type)
Dated:
- ---------------------
7
<PAGE> 8
INSTRUCTIONS
FORMING PART OF THE TERMS AND
CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES.
All physically delivered Outstanding Notes or any confirmation of a
book-entry transfer to the Exchange Agent's account at a Book-Entry Transfer
Facility of Outstanding Notes tendered by book-entry transfer, as well as a
properly completed and duly executed copy of this Letter of Transmittal or
facsimile thereof, and any other documents required by this Letter of
Transmittal, must be received by the Exchange Agent at any of its addresses set
forth herein on or prior to the Expiration Date (as defined in the Prospectus).
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE OUTSTANDING NOTES AND
ANY OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER, AND
EXCEPT AS OTHERWISE PROVIDED BELOW, THE DELIVERY WILL BE DEEMED MADE ONLY WHEN
ACTUALLY RECEIVED BY THE EXCHANGE AGENT. IF SUCH DELIVERY IS BY MAIL, IT IS
SUGGESTED THAT REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED,
BE USED.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering Holders, by execution of this Letter of Transmittal (or
facsimile thereof), shall waive any right to receive notice of the acceptance of
the Outstanding Notes for exchange.
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH HEREIN, OR INSTRUCTIONS VIA
FACSIMILE OTHER THAN AS SET FORTH HEREIN, WILL NOT CONSTITUTE A VALID DELIVERY.
2. GUARANTEED DELIVERY PROCEDURES.
Holders who wish to tender their Outstanding Notes, but whose Outstanding
Notes are not immediately available and thus cannot deliver their Outstanding
Notes, the Letter of Transmittal or any other required documents to the Exchange
Agent (or comply with the procedures for book-entry transfer) prior to the
Expiration Date, may effect a tender if:
(a) the tender is made through a member firm of a registered national
securities exchange or of the National Association of Securities Dealers,
Inc., a commercial bank or trust company having an office or correspondent
in the United States or an "eligible guarantor institution" within the
meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible Institution");
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder, the registration
number(s) of such Outstanding Notes and the principal amount of Outstanding
Notes tendered, stating that the tender is being made thereby and
guaranteeing that, within five Nasdaq Stock Market trading days after the
Expiration Date, the Letter of Transmittal (or facsimile thereof), together
with the Outstanding Notes (or a confirmation of book-entry transfer of
such Outstanding Notes into the Exchange Agent's account at the Book-Entry
Transfer Facility) and any other documents required by the Letter of
Transmittal, will be deposited by the Eligible Institution with the
Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as all tendered Outstanding Notes in proper
form for transfer (or a confirmation of book-entry transfer of such
Outstanding Notes into the Exchange Agent's account at the Book-Entry
Transfer Facility) and all other documents required by the Letter of
Transmittal, are received by the Exchange Agent within five Nasdaq Stock
Market trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Outstanding Notes according to the
guaranteed delivery procedures set forth above. Any holder who wishes to tender
Outstanding Notes pursuant to the guaranteed delivery procedures described above
must ensure that the Exchange Agent receives the Notice of Guaranteed Delivery
relating to such Outstanding Notes prior to the Expiration Date. Failure to
complete the guaranteed delivery procedures outlined above will not, of itself,
affect the validity or effect a revocation of any Letter of Transmittal form
properly completed and executed by a Holder who attempted to use the guaranteed
delivery procedures.
8
<PAGE> 9
3. PARTIAL TENDERS (NOT APPLICABLE TO HOLDERS WHO TENDER BY BOOK-ENTRY
TRANSFER); WITHDRAWALS.
If less than the entire principal amount of Outstanding Notes evidenced by
a submitted certificate is tendered, the tendering holder should fill in the
principal amount tendered in the column entitled "Principal Amount Tendered" of
the box entitled "Description of Outstanding Notes Tendered Hereby." A newly
issued Outstanding Note for the principal amount of Outstanding Notes submitted
but not tendered will be sent to such holder as soon as practicable after the
Expiration Date. All Outstanding Notes delivered to the Exchange Agent will be
deemed to have been tendered in full unless otherwise indicated. Tenders of
Outstanding Notes will be accepted only in integral multiples of $1,000.
Outstanding Notes tendered pursuant to the Exchange Offer may be withdrawn
at any time prior to the Expiration Date, after which tenders of Outstanding
Notes are irrevocable. To be effective, a written or facsimile transmission
notice of withdrawal must be timely received by the Exchange Agent. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Outstanding Notes to be withdrawn (the "Depositor"), (ii) identify the
Outstanding Notes to be withdrawn (including the certificate number(s) and
principal amount of such Outstanding Notes, or, in the case of Outstanding Notes
transferred by book-entry transfer, the name and number of the account at the
Book-Entry Transfer Facility to be credited), (iii) be signed by the Holder in
the same manner as the original signature on this Letter of Transmittal
(including any required signature guarantees) or be accompanied by documents of
transfer sufficient to have the Trustee with respect to the Outstanding Notes
register the transfer of such Outstanding Notes into the name of the person
withdrawing the tender, (iv) specify the name in which any such Outstanding
Notes are to be registered, if different from that of the Depositor and (v) if
applicable because the Outstanding Notes have been tendered pursuant to
book-entry procedures, specify the name and number of the participant's account
at the Book-Entry Transfer Facility to be credited, if different from that of
the Depositor. All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Outstanding Notes
so withdrawn will be deemed not to have been validly tendered for purposes of
the Exchange Offer and no Exchange Notes will be issued with respect thereto
unless the Outstanding Notes so withdrawn are validly retendered. Any
Outstanding Notes that have been tendered but not accepted for exchange will be
returned to the Holder thereof without cost to such Holder as soon as
practicable after withdrawal, rejection of tender or termination of the Exchange
Offer.
4. SIGNATURE ON THIS LETTER OF TRANSMITTAL; WRITTEN INSTRUMENTS AND
ENDORSEMENTS; GUARANTEE OF SIGNATURES.
If this Letter of Transmittal (or facsimile hereof) is signed by the
registered holder(s) of the Outstanding Notes tendered hereby, the signature
must correspond with the name(s) as written on the face of the certificates
without alteration or enlargement or any change whatsoever. If this Letter of
Transmittal is signed by a participant in the Book-Entry Transfer Facility, the
signature must correspond with the name as it appears on the security position
listing as the Holder of the Outstanding Notes.
If any of the Outstanding Notes tendered hereby are owned of record by two
or more joint owners, all such owners must sign this Letter of Transmittal.
If a number of Outstanding Notes registered in different names are
tendered, it will be necessary to complete, sign and submit as many separate
copies of this Letter of Transmittal as there are different registrations of
Outstanding Notes.
Signatures on this Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution unless the
Outstanding Notes tendered hereby are tendered (i) by a registered holder who
has not completed the box entitled "Special Registration Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution.
If this Letter of Transmittal is signed by the registered holder or holders
of Outstanding Notes (which term, for the purposes described herein, shall
include a participant in the Book-Entry Transfer Facility whose name appears on
a security listing as the holder of the Outstanding Notes) listed and tendered
hereby, no endorsements of the tendered Outstanding Notes or separate written
instruments of transfer or exchange are required. In any other case, the
registered holder (or acting Holder) must either properly endorse the
Outstanding Notes or transmit properly completed bond powers with this Letter of
Transmittal (in either case, executed exactly as the name(s) of the registered
holder(s) appear(s) on the Outstanding Notes, and, with respect to a participant
in the Book-Entry Transfer Facility whose name appears on a security position
listing as the owner of Outstanding Notes, exactly as the name of the
participant appears on
9
<PAGE> 10
such security position listing), with the signature on the Outstanding Notes or
bond power guaranteed by an Eligible Institution (except where the Outstanding
Notes are tendered for the account of an Eligible Institution).
If this Letter of Transmittal, any certificates or separate written
instruments of transfer or exchange are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such persons should so
indicate when signing, and, unless waived by the Company, proper evidence
satisfactory to the Company of their authority so to act must be submitted.
5. SPECIAL REGISTRATION AND DELIVERY INSTRUCTIONS.
Tendering Holders should indicate, in the applicable box, the name and
address (or account at the Book-Entry Transfer Facility) in which the Exchange
Notes or substitute Outstanding Notes for principal amounts not tendered or not
accepted for exchange are to be issued (or deposited), if different from the
names and addresses or accounts of the person signing this Letter of
Transmittal. In the case of issuance in a different name, the employer
identification number or social security number of the person named must also be
indicated and the tendering Holder should complete the applicable box.
If no instructions are given, the Exchange Notes (and any Outstanding Notes
not tendered or not accepted) will be issued in the name of and sent to the
acting Holder of the Outstanding Notes or deposited at such Holder's account at
the Book-Entry Transfer Facility.
6. TRANSFER TAXES.
The Company shall pay all transfer taxes, if any, applicable to the
transfer and exchange of Outstanding Notes to it or its order pursuant to the
Exchange Offer. If a transfer tax is imposed for any other reason other than the
transfer and exchange of Outstanding Notes to the Company or its order pursuant
to the Exchange Offer, the amount of any such transfer taxes (whether imposed on
the registered Holder or any other person) will be payable by the tendering
Holder. If satisfactory evidence of payment of such taxes or exception therefrom
is not submitted herewith, the amount of such transfer taxes will be billed
directly to such tendering Holder.
Except as provided in this Instruction 6, it will not be necessary for
transfer stamps to be affixed to the Outstanding Notes listed in this Letter of
Transmittal.
7. WAIVER OF CONDITIONS.
The Company reserves the absolute right to waive, in whole or in part, any
of the conditions to the Exchange Offer set forth in the Prospectus.
8. MUTILATED, LOST, STOLEN OR DESTROYED NOTES.
Any Holder whose Outstanding Notes have been mutilated, lost, stolen or
destroyed should contact the Exchange Agent at the address indicated above for
further instructions.
9. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions relating to the procedure for tendering as well as requests for
additional copies of the Prospectus and this Letter of Transmittal may be
directed to the Exchange Agent at the address and telephone number(s) set forth
above. In addition, all questions relating to the Exchange Offer, as well as
requests for assistance or additional copies of the Prospectus and this Letter
of Transmittal, may be directed to the Company at 8150 North Central Expressway,
Suite M-2000, Dallas, Texas 75206, Attention: Stephen L. Cohen (telephone: (214)
692-4663).
10. VALIDITY AND FORM.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Outstanding Notes and withdrawal of tendered
Outstanding Notes will be determined by the Company in its sole discretion,
which determination will be final and binding. The Company reserves the absolute
right to reject any and all Outstanding Notes not properly tendered or any
Outstanding Notes the Company's acceptance of which would, in the opinion of
counsel for
10
<PAGE> 11
the Company, be unlawful. The Company also reserves the right to waive any
defects, irregularities or conditions of tender as to particular Outstanding
Notes. The Company's interpretation of the terms and conditions of the Exchange
Offer (including the instructions in this Letter of Transmittal) will be final
and binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Outstanding Notes must be cured within such time as
the Company shall determine. Although the Company intends to notify Holders of
defects or irregularities with respect to tenders of Outstanding Notes, neither
the Company, the Exchange Agent nor any other person shall incur any liability
for failure to give such notification. Tenders of Outstanding Notes will not be
deemed to have been made until such defects or irregularities have been cured or
waived. Any Outstanding Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering Holders
as soon as practicable following the Expiration Date.
IMPORTANT TAX INFORMATION
Under federal income tax law, a Holder tendering Outstanding Notes is
required to provide the Exchange Agent with such Holder's correct TIN on
Substitute Form W-9 below. If such Holder is an individual, the TIN is the
Holder's social security number. The Certificate of Awaiting Taxpayer
Identification Number should be completed if the tendering Holder has not been
issued a TIN and has applied for a number or intends to apply for a number in
the near future. If the Exchange Agent is not provided with the correct TIN, the
Holder may be subject to a $50 penalty imposed by the Internal Revenue Service.
In addition, payments that are made to such Holder with respect to tendered
Outstanding Notes may be subject to backup withholding.
Certain Holders (including, among others, all corporations and certain
foreign individuals and foreign entities) are not subject to these backup
withholding and reporting requirements. In order for such a Holder to qualify as
an exempt recipient, that holder must submit to the Exchange Agent a properly
completed Internal Revenue Service Form W-8, signed under penalties of perjury,
attesting to that Holder's exempt status. Such forms can be obtained from the
Exchange Agent.
If backup withholding applies, the Exchange Agent is required to withhold
31% of any amounts otherwise payable to the Holder. Backup withholding is not an
additional tax. Rather, the tax liability of persons subject to backup
withholding will be reduced by the amount of tax withheld. If withholding
results in an overpayment of taxes, a refund may be obtained from the Internal
Revenue Service.
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding on payments that are made to a Holder with
respect to Outstanding Notes tendered for exchange, the Holder is required to
notify the Exchange Agent of his or her correct TIN by completing the form
herein certifying that the TIN provided on Substitute Form W-9 is correct (or
that such Holder is awaiting a TIN) and that (i) such Holder has not been
notified by the Internal Revenue Service that he or she is subject to backup
withholding as a result of failure to report all interest or dividends or (ii)
the Internal Revenue Service has notified such Holder that he or she is no
longer subject to backup withholding.
WHAT NUMBER TO GIVE THE EXCHANGE AGENT
Each Holder is required to give the Exchange Agent the social security
number or employer identification number of the record Holder(s) of the
Outstanding Notes. If Outstanding Notes are in more than one name or are not in
the name of the actual Holder, consult the Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9 included herewith for
additional guidance on which number to report.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
If the tendering holder has not been issued a TIN and has applied for a
number or intends to apply for a number in the near future, write "Applied For"
in the space for the TIN on Substitute Form W-9, sign and date the form and the
Certificate of Awaiting Taxpayer Identification Number and return them to the
Exchange Agent. If such certificate is completed and the Exchange Agent is not
provided with the TIN within 60 days, the Exchange Agent will withhold 31% of
all payments made thereafter until a TIN is provided to the Exchange Agent.
11
<PAGE> 12
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A MANUALLY SIGNED FACSIMILE THEREOF
(TOGETHER WITH OUTSTANDING NOTES OR CONFIRMATION OF BOOK-ENTRY TRANSFER AND ALL
OTHER REQUIRED DOCUMENTS) OR A NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY
THE EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION DATE.
12
<PAGE> 13
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------
Name (if joint names, list first and circle the name of the
person or entity whose number you enter in Part 1 below. See
SUBSTITUTE instructions if your name has changed.)
FORM W-9 --------------------------------------------------------------
Address
--------------------------------------------------------------
City, State and Zip Code
--------------------------------------------------------------
List account number(s) here (optional)
--------------------------------------------------------------
Department of the Treasury PART 1 -- PLEASE PROVIDE YOUR TAXPAYER IDENTIFICATION NUMBER
Internal Revenue Service ("TIN") IN THE BOX AT RIGHT AND CERTIFY BY SIGNING AND DATING
BELOW
Social Security Number or TIN
--------------------------------------------------------------
PART 2 -- Check the box if you are NOT subject to backup
withholding under the provisions of section 3406 of the
Internal Revenue Code because (1) you have not been notified
that you are subject to backup withholding as a result of
PAYER'S REQUEST FOR failure to report all interest or dividends or (2) the
TAXPAYER IDENTIFICATION
NUMBER (TIN) Internal Revenue Service has notified you that you are no
longer subject to backup withholding. [ ]
--------------------------------------------------------------
CERTIFICATION INSTRUCTIONS -- YOU MUST CROSS OUT PART 2 ABOVE
IF YOU HAVE BEEN NOTIFIED BY THE INTERNAL REVENUE SERVICE
THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING BECAUSE OF
UNDER-REPORTING INTEREST OR DIVIDENDS ON YOUR TAX RETURN.
HOWEVER, IF AFTER BEING NOTIFIED BY THE INTERNAL REVENUE
SERVICE THAT YOU WERE SUBJECT TO BACKUP WITHHOLDING YOU
RECEIVED ANOTHER NOTIFICATION FROM THE INTERNAL REVENUE
SERVICE STATING THAT YOU ARE NO LONGER SUBJECT TO BACKUP
WITHHOLDING, DO NOT CROSS OUT PART 2. CERTIFICATION -- UNDER
THE PENALTIES OF PERJURY, I CERTIFY THAT THE INFORMATION
PROVIDED ON THIS FORM IS TRUE, CORRECT AND COMPLETE.
SIGNATURE --------------------------- Date------------
--------------------------------------------------------------
PART 3 --
Awaiting TIN [ ]
- -------------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE EXCHANGE OFFER. PLEASE
REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART
3 OF SUBSTITUTE FORM W-9:
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (a) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office, or (b)
I intend to mail or deliver an application in the near future. I understand that
if I do not provide a taxpayer identification number to the Exchange Agent
within 60 days, 31% of all reportable payments made to me thereafter will be
withheld until I provide a number to the Exchange Agent.
Signature
- -------------------------------------------------
Date
- ------------------------------------------------------
13
<PAGE> 14
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE
PAYER. -- Social Security numbers have nine digits separated by two hyphens:
i.e. 000-00-0000. Employer identification numbers have nine digits separated by
only one hyphen: i.e. 00-0000000. The table below will help determine the number
to give the payer.
- ---------------------------------------------------------
---------------------------------------------------------
<TABLE>
<CAPTION>
FOR THIS TYPE OF ACCOUNT: GIVE THE
SOCIAL
SECURITY
NUMBER OF --
- ---------------------------------------------------------
FOR THIS TYPE OF ACCOUNT: GIVE THE EMPLOYER
IDENTIFICATION
NUMBER OF --
- ---------------------------------------------------------
<C> <S> <C>
1. An individual's account. The individual
2. Two or more individuals The actual owner of
(joint account) the account or, if
combined funds, the
first individual on
the account(1)
3. Husband and wife (joint The actual owner of
account) the account or, if
joint funds, the first
individual on the
account(1)
4. Custodian account of a minor The minor(2)
(Uniform Gift to Minors Act)
5. Adult and minor (joint The adult or, if the
account) minor is the only
contributor, the
minor(1)
6. Account in the name of The ward, minor, or
guardian or committee for a incompetent person(3)
designated ward, minor, or
incompetent person
7. a The usual revocable The grantor- trustee(1)
savings trust account
(grantor is also trustee)
b So-called trust account The actual owner(1)
that is not a legal or
valid trust under State
law
8. Sole proprietorship account The owner(4)
9. A valid trust, estate, or The legal entity (Do
pension trust not furnish the
identifying number of
the personal
representative or
trustee unless the
legal entity itself is
not designated in the
account title.)(5)
10. Corporate account The corporation
11. Religious, charitable, or The organization
educational organization
account
12. Partnership account held in The partnership
the name of the business
13. Association, club, or other The organization
tax-exempt organization
14. A broker or registered The broker or nominee
nominee
15. Account with the Department The public entity
of Agriculture in the name
of a public entity (such as
a State or local government,
school district, or prison)
that receives agricultural
program payments
</TABLE>
- ---------------------------------------------------------
---------------------------------------------------------
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Circle the ward's, minor's or incompetent person's name and furnish such
person's social security number.
(4) Show the name of the owner.
(5) List first and circle the name of the legal trust, estate, or pension trust.
NOTE:If no name is circled when there is more than one name, the number will be
considered to be that of the first name listed.
<PAGE> 15
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
PAGE 2
OBTAINING A NUMBER
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Number Card, or Form
SS-4, Application for Employer Identification Number, at the local office of the
Social Security Administration or the Internal Revenue Service and apply for a
number.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
Payees specifically exempted from backup withholding on ALL payments include the
following:
- A corporation.
- A financial institution.
- An organization exempt from tax under section 501(a), or an individual
retirement plan, or a custodial account under section 403(b)(7).
- The United States or any agency or instrumentality thereof.
- A State, the District of Columbia, a possession of the United States, or any
subdivision or instrumentality thereof.
- A foreign government, a political subdivision of a foreign government, or any
agency or instrumentality thereof.
- An international organization or any agency, or instrumentality thereof.
- A registered dealer in securities or commodities registered in the U.S. or a
possession of the U.S.
- A real estate investment trust.
- A common trust fund operated by a bank under section 584(a)
- An exempt charitable remainder trust under section 664, or a non-exempt trust
described in section 4947.
- An entity registered at all times under the Investment Company Act of 1940.
- A foreign central bank of issue.
- A futures commission merchant registered with the Commodity Futures Trading
Commission.
- A middleman known in the investment community as a nominee or listed in the
most recent publication of the American Society of Corporate Secretaries,
Inc. Nominee List.
Payments of dividends and patronage dividends not generally subject to backup
withholding include the following:
- Payments to nonresident aliens subject to withholding under section 1441.
- Payments to partnerships not engaged in a trade or business in the U.S. and
which have at least one nonresident partner.
- Payments of patronage dividends where the amount received is not paid in
money.
- Payments made by certain foreign organizations.
Payments of interest not generally subject to backup withholding include the
following:
- Payments of interest on obligations issued by individuals.
Note: You may be subject to backup withholding if this interest is $600 or more
and is paid in the course of the payer's trade or business and you have not
provided your correct taxpayer identification number to the payer.
- Payments of tax-exempt interest (including exempt-interest dividends under
section 852).
- Payments described in section 6049(b)(5) to non-resident aliens.
- Payments on tax-free covenant bonds under section 1451.
- Payments made by certain foreign organizations.
- Mortgage interest paid to the payer.
Exempt payees described above should file Form W-9 to avoid possible erroneous
backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH YOUR TAXPAYER
IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, AND RETURN IT TO
THE PAYER. IF THE PAYMENTS ARE INTEREST, DIVIDENDS, OR PATRONAGE DIVIDENDS, ALSO
SIGN AND DATE THE FORM.
Certain payments other than interest, dividends, and patronage dividends, that
are not subject to information reporting are also not subject to backup
withholding. For details, see section 6041, 6041A(a), 6042, 6044, 6045, 6049,
6050A, and 6050N and their regulations.
PRIVACY ACT NOTICE. -- Section 6109 requires most recipients of dividend,
interest, or other payments to give taxpayer identification numbers to payers
who must report the payments to the IRS. IRS uses the numbers for identification
purposes and to help verify the accuracy of your return. Payers must be given
the numbers whether or not recipients are required to file tax returns. Payers
must generally withhold 31% of taxable interest, dividend, and certain other
payments to a payee who does not furnish a taxpayer identification number to a
payer. Certain penalties may also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER. -- If you
fail to furnish your taxpayer identification number to a payer, you are subject
to a penalty of $50 for each such failure unless your failure is due to
reasonable cause and not to willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. -- If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION. -- Falsifying certifications or
affirmations may subject you to criminal penalties including fines and/or
imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX
CONSULTANT OR THE INTERNAL REVENUE SERVICE
<PAGE> 16
FORM OF GUARANTEED DELIVERY
NOTICE OF GUARANTEED DELIVERY FOR
HEALTHCOR HOLDINGS, INC.
This form or one substantially equivalent hereto must be used to accept the
Exchange Offer of HealthCor Holdings, Inc., a Delaware corporation (the
"Company"), made pursuant to the Prospectus, dated February 10, 1998 (the
"Prospectus"), if certificates for Outstanding Notes of the Company are not
immediately available or if the procedure for book-entry transfer cannot be
completed on a timely basis or time will not permit all required documents to
reach the Company prior to 5:00 p.m., E.S.T., on the Expiration Date of the
Exchange Offer. Such form may be delivered or transmitted by facsimile
transmission, mail or hand delivery to Norwest Bank Minnesota, National
Association (the "Exchange Agent") as set forth below. Capitalized terms used
but not defined herein have the meanings given to them in the Prospectus.
Deliver To: Norwest Bank Minnesota, National Association, Exchange Agent
By Registered or Certified Mail:
Norwest Bank Minnesota, National Association
P.O. Box 1517
Minneapolis, Minnesota 55480-1515
Attention: Corporate Trust Operations
By Overnight Delivery:
Norwest Bank Minnesota, National Association
Norwest Center
6th and Marquette Avenue
Minneapolis, Minnesota 55479-0069
Attention: Corporate Trust Operations
By Hand Delivery:
Norwest Bank Minnesota, National Association
Northstar East 12th Floor
608 2nd Avenue
Minneapolis, Minnesota 55479-0113
Attention: Corporate Trust Operations
By Facsimile:
(612) 667-4927
Confirm by Telephone:
(612) 667-9764
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE, WILL
NOT CONSTITUTE A VALID DELIVERY.
<PAGE> 17
Ladies and Gentlemen:
Upon the terms and conditions set forth in the Prospectus and the
accompanying Letter of Transmittal, the undersigned hereby tenders to the
Company the principal amount of Outstanding Notes set forth below, pursuant to
the guaranteed delivery procedure described in "The Exchange Offer -- Guaranteed
Delivery Procedures" section of the Prospectus.
Principal Amount of Outstanding Notes Tendered:*
<TABLE>
<S> <C>
$ If the Outstanding Notes will be delivered by book- entry
- ------------------------------------------------------- transfer to the Depository Trust Company, provide
Certificate Nos. (if available): account number.
- --------------------------------------------------------
Total Principal Amount Represented by Outstanding Notes:
$ Account Number -------------------------------------
- -------------------------------------------------------
</TABLE>
- ---------------
* Must be in denominations of principal amount of $1,000 and any integral
multiple thereof.
ALL AUTHORITY HEREIN CONFERRED OR AGREED TO BE CONFERRED SHALL SURVIVE THE
DEATH OR INCAPACITY OF THE UNDERSIGNED AND EVERY OBLIGATION OF THE UNDERSIGNED
HEREUNDER SHALL BE BINDING UPON THE HEIRS, PERSONAL REPRESENTATIVES, SUCCESSORS
AND ASSIGNS OF THE UNDERSIGNED.
PLEASE SIGN HERE
<TABLE>
<S> <C>
X
- ------------------------------------------------------------ ------------------------------------
X
- ------------------------------------------------------------ ------------------------------------
Signature(s) of Owner(s) Date
or Authorized Signatory
</TABLE>
Area Code and Telephone Number:
- ------------------------------------------------------
Must be signed by the holder(s) of Outstanding Notes as their name(s)
appear(s) on certificates for Outstanding Notes or on a security position
listing, or by person(s) authorized to become registered holder(s) by
endorsement and documents transmitted with this Notice of Guaranteed Delivery.
If signature is by a trustee, executor, administrator, guardian,
attorney-in-fact, officer or other person acting in a fiduciary or
representative capacity, such person must set forth his or her full title below.
PLEASE PRINT NAME(S) AND ADDRESS(ES)
Name(s):
- --------------------------------------------------------------------------------
Capacity:
- --------------------------------------------------------------------------------
Address(es):
- --------------------------------------------------------------------------------
<PAGE> 18
GUARANTEE
The undersigned, a member of a registered national securities exchange, or
a member of the National Association of Securities Dealers, Inc., or a
commercial bank or trust company having an office or correspondent in the United
States, hereby guarantees that the certificates representing the principal
amount of Outstanding Notes tendered hereby in proper form for transfer, or
timely confirmation of the book-entry transfer of such Outstanding Notes into
the Exchange Agent's account at the Depository Trust Company pursuant to the
procedures set forth in the "The Exchange Offer -- Guaranteed Delivery
Procedures" section of the Prospectus, together with a properly completed and
duly executed Letter of Transmittal (or a manually signed facsimile thereof)
with any required signature guarantee and any other documents required by the
Letter of Transmittal, will be received by the Exchange Agent at the address set
forth above, no later than five Nasdaq Stock Market trading days after the
Expiration Date.
<TABLE>
<S> <C>
- -------------------------------------------------------- --------------------------------------------------------
Name of Firm Authorized Signature
- -------------------------------------------------------- --------------------------------------------------------
Address Title
Name: -------------------------------------------------
- --------------------------------------------------------
(Please Type or Print)
Area Code and Tel. No.: ------------------------------ Dated: -------------------------------------------------
</TABLE>
NOTE: DO NOT SEND CERTIFICATES FOR OUTSTANDING NOTES WITH THIS FORM.
CERTIFICATES FOR OUTSTANDING NOTES SHOULD ONLY BE SENT WITH YOUR LETTER OF
TRANSMITTAL.
