<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 8, 1996
REGISTRATION NO. 333-11667
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AMERICAN MEDSERVE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 5122 36-3925637
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification No.)
incorporation or organization)
</TABLE>
184 SHUMAN BLVD., SUITE 200
NAPERVILLE, ILLINOIS 60563
(630) 717-2904
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
--------------------------
TIMOTHY L. BURFIELD
PRESIDENT AND CHIEF EXECUTIVE OFFICER
184 SHUMAN BLVD., SUITE 200
NAPERVILLE, ILLINOIS 60563
(630) 717-2820
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C> <C>
Charles R. Wallace Glenn W. Reed, Esq. Kenneth J. Vaughan, Esq.
Vice President-Finance and Gardner, Carton & Douglas Chapman and Cutler
Chief Financial Officer 321 North Clark Street, 111 West Monroe Street
American Medserve Corporation Suite 3100 Chicago, Illinois 60603
184 Shuman Blvd., Suite 200 Chicago, Illinois 60610 (312) 845-3793
Naperville, Illinois 60563 (312) 245-8446
(630) 717-2904
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same
offering: / /
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
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 OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 8, 1996
PROSPECTUS
5,357,000 SHARES
AMERICAN MEDSERVE
[LOGO]
CORPORATION
COMMON STOCK
All the shares of Common Stock being offered hereby are being sold by
American Medserve Corporation (the "Company" or "AMC"). Prior to the offering
made hereby (the "Offering"), there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price will be between $13.00 and $15.00 per share. See "Underwriting" for
information relating to the determination of the initial public offering price.
Approximately $16.9 million of the net proceeds from the Offering will be used
to fund a one-time mandatory preferential distribution to the Company's
principal stockholder with respect to the Company's Class A Common Stock (which
stock will be converted into Common Stock contemporaneously with the Offering).
See "Use of Proceeds" and "Management -- Compensation Committee Interlocks and
Insider Participation." Upon completion of the Offering, based upon an assumed
initial public offering price of $14.00 per share, the Company's principal
stockholder will hold approximately 38.6% of the issued and outstanding shares
of Common Stock of the Company.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "AMCI."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON
STOCK OFFERED HEREBY.
---------------------
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 COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share................................ $ $ $
Total(3)................................. $ $ $
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $2,100,000 payable by the Company.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional 803,550 shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If all such shares are
purchased, the total Price to Public, Underwriting Discount and Proceeds to
Company will be $ , $ and $ , respectively.
The shares of Common Stock are offered by the several Underwriters when, as
and if delivered to and accepted by them and subject to their right to reject
orders in whole or in part. It is expected that delivery of the certificates for
the shares of Common Stock will be made on or about , 1996.
WILLIAM BLAIR & COMPANY
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
EQUITABLE SECURITIES
CORPORATION
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE>
[MAP]
7. MAP OF THE UNITED STATES OF AMERICA INDICATING THE LOCATIONS OF THE
COMPANY'S OPERATIONS.
The Company intends to furnish its stockholders with annual reports
containing audited consolidated financial statements and with quarterly reports
containing unaudited consolidated financial information for the first three
quarters of each fiscal year.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS.
UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I) HAS BEEN
ADJUSTED TO GIVE EFFECT TO THE MINORITY INTEREST CONVERSIONS AND THE GOOD
SAMARITAN CONSOLIDATION (EACH AS DEFINED HEREIN), (II) ASSUMES ISSUANCE OF
174,554 SHARES OF COMMON STOCK UPON CONVERSION OF THE ROYAL CARE NOTE, (III)
ASSUMES THE EFFECTIVENESS OF THE COMPANY'S AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION WHICH WILL, AMONG OTHER THINGS, EFFECT A RECLASSIFICATION OF EACH
SHARE OF THE COMPANY'S CLASS A COMMON STOCK AND CLASS B COMMON STOCK INTO 69.65
SHARES OF COMMON STOCK, (IV) ASSUMES ISSUANCE OF 565,625 SHARES OF COMMON STOCK
TO THE COMPANY'S PRINCIPAL STOCKHOLDER IN SATISFACTION OF AN UNPAID PREFERENCE
WITH RESPECT TO THE COMPANY'S CLASS A COMMON STOCK AND (V) ASSUMES NO EXERCISE
OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
THE COMPANY
American Medserve Corporation (the "Company" or "AMC") is a leading
independent provider of pharmacy services to long-term care institutions,
including skilled nursing facilities, assisted living facilities and other
long-term health care settings. The Company purchases, repackages and dispenses
pharmaceuticals to patients or residents in its client facilities and provides
such facilities with related consultant pharmacist and information services,
including formulary management (I.E., management of pharmaceuticals dispensed to
minimize cost and maximize therapeutic benefit), automated medical
record-keeping, drug therapy evaluation and assistance with regulatory
compliance. The Company also provides infusion therapy (I.E., intravenous
introduction of fluids containing medications and/or nutrients), parenteral and
enteral nutrition therapy (I.E., introduction, either intravenously or directly
into a patient's digestive system, of nutrient fluids or other fluids),
inhalation and respiratory therapy and wound care management services, as well
as medical supplies and devices. As of October 23, 1996, AMC provided pharmacy
services to approximately 41,800 residents at over 540 facilities located in
Colorado, Illinois, Louisiana, Minnesota, Nebraska, New York, Pennsylvania,
South Dakota and Virginia.
The Company was formed by Timothy L. Burfield (the Company's President and
Chief Executive Officer) and an investment fund affiliated with Golder, Thoma,
Cressey, Rauner, Inc. to participate in the consolidation of the long-term care
pharmacy industry. To meet this objective, the Company has pursued an
acquisition program designed to expand its presence in selected geographic
markets. Since commencing operations in August 1994, the Company has completed
18 acquisitions, including ten acquisitions in 1996. In April 1996, the Company
acquired a 40% equity interest in Good Samaritan Supply Services, Inc. ("Good
Samaritan Supply"). The Company's co-investor in Good Samaritan Supply is The
Evangelical Lutheran Good Samaritan Foundation (the "Foundation"), an affiliate
of The Evangelical Lutheran Good Samaritan Society (the "Society"). A 1995
industry survey ranked (by total licensed beds) the Society as the fifth
largest, and largest non-profit, owner-operator of nursing homes in the United
States. As of October 23, 1996, the Society operated 236 long-term care
facilities in 26 states, of which 20 facilities were served by the Company's
long-term care pharmacy operations. The Company believes that the Society's
facilities that are not currently served by the Company's long-term care
pharmacy operations represent a significant potential market for such
operations.
The Company believes that several factors support growth in the U.S. market
for pharmacy services in long-term care facilities, including the aging of the
U.S. population; the increasing acuity level of patients receiving care in
lower-cost non-hospital facilities; the emergence of alternative long-term care
settings, such as assisted living; and the continuing advances in drug research
and development. In addition, the long-term care pharmacy market is fragmented
and is in the process of consolidating. Prior to the 1970's, retail pharmacies
generally fulfilled the pharmacy needs of most long-term care facilities. Today,
long-term care institutions are more typically served by pharmacies that
specialize in serving the needs of the elderly, including "captive" pharmacy
companies owned by, or affiliated with, long-term care providers and independent
long-term care pharmacy companies such
3
<PAGE>
as the Company. The Company believes that larger providers possess the
advantages associated with size, such as enhanced purchasing power and the
ability to spread fixed costs over a larger revenue base, as well as the breadth
of services and capital necessary to compete in this increasingly competitive
and regulated business environment.
The Company seeks to benefit from these favorable industry trends and to
continue to expand its position as a leading independent provider of pharmacy
services to long-term care facilities through the implementation of its business
strategy, which emphasizes (i) continuing the acquisition of long-term care
pharmacy companies to serve as platforms for the Company's entry into new
markets as well as "add-on" pharmacies in AMC's existing markets; (ii) promoting
internal growth by expanding the breadth of the Company's services and by
increasing its marketing emphasis on newly-introduced products and services;
(iii) achieving greater efficiency through the consolidation and coordination of
purchasing, administrative and financial reporting functions; and (iv) forming
strategic alliances (such as the Company's alliance with the Foundation) with
long-term care facility operators and other health care providers to enable the
Company to expand its product and service offerings and to lower the cost of
care, thereby increasing the Company's appeal to managed care organizations and
other payors.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company.......... 5,357,000 shares
Common Stock to be Outstanding After the
Offering..................................... 11,656,804 shares(1)
Use of Proceeds.............................. To reduce indebtedness; to fund a one-time
mandatory preferential distribution to the
Company's principal stockholder; to fund a
payment to an affiliate of the Company's
principal stockholder; to make an additional
investment in Good Samaritan Supply; and for
other general corporate purposes, including
possible future acquisitions. See "Use of
Proceeds," "Company Background," "Management
-- Compensation Committee Interlocks and
Insider Participation" and "Certain
Transactions."
Proposed Nasdaq National Market Symbol....... AMCI
</TABLE>
- ------------------------
(1) Includes 565,625 Additional GTCR Shares and 174,554 shares issuable upon
conversion of the Royal Care Note. See "Company Background." Excludes
1,150,000 shares of Common Stock reserved for issuance under the Company's
1996 Stock Incentive Plan (including 160,000 shares subject to options to be
granted under the 1996 Stock Incentive Plan upon consummation of the
Offering) and 160,790 shares reserved for issuance under stock option plans
of the Company's subsidiaries (including 146,635 shares subject to options
granted under such stock option plans of the Company's subsidiaries, of
which options to purchase 48,186 shares of Common Stock were exercisable at
October 15, 1996). See "Management -- Employee Benefit Plans -- 1996 Stock
Incentive Plan" and "-- Subsidiary Option Plans." Also excludes shares of
Common Stock issuable pursuant to the Good Samaritan Shareholders Agreement.
See "Risk Factors -- Possible Dilution Resulting from Good Samaritan Option
and Put," "Company Background" and "Certain Transactions -- Good Samaritan
Relationship."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
PREDECESSOR (1) THE COMPANY (2)
-------------------------- ----------------------------------------------------------------------
YEAR ENDED DECEMBER
31,
PERIOD FROM PERIOD FROM ---------------------- SIX MONTHS ENDED JUNE 30,
JANUARY 1, AUGUST 3, PRO ---------------------------------
YEAR ENDED 1994 TO 1994 TO FORMA AS PRO FORMA
DECEMBER 31, AUGUST 2, DECEMBER ADJUSTED AS ADJUSTED
1993 1994 31, 1994 1995 1995 (3) 1995 1996 1996 (4)
------------- ----------- ----------- --------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................. $ 9,099 $ 6,917 $ 8,091 $ 44,049 $ 109,867 $ 16,702 $ 32,357 $ 59,754
Gross profit............. 2,275 1,954 2,100 12,585 30,044 4,797 9,098 15,514
Operating income......... 515 639 191 2,556 2,269 1,043 1,808 2,457
Interest expense......... 162 78 292 1,762 430 709 1,213 214
Income (loss) before
income taxes and
extraordinary item...... 349 561 (38) 1,074 2,413 399 674 2,404
Income (loss) before
extraordinary item...... 206 537 (17) 405 1,232 109 350 1,364
Pro forma income per
share before
extraordinary
item (5)................ $ 0.06 $ 0.11 $ 0.02 $ 0.05 $ 0.12
Pro forma weighted
average shares
outstanding (5)......... 6,578 11,696 6,578 6,578 11,696
SELECTED OPERATING DATA (AT PERIOD END):
Number of beds served.... 4,800 7,200 9,600 23,400 17,600 32,200
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30,
-----------------------------------
<S> <C> <C> <C>
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
1996 1996 (6) 1996 (7)
--------- ----------- -----------
BALANCE SHEET DATA:
Working capital (deficiency)................................................ $ 9,818 $ (9,869) $ 28,516
Total assets................................................................ 61,830 94,361 99,885
Long-term debt, excluding current portion................................... 28,167 41,042 4,111
Stockholders' equity........................................................ 22,836 8,110 83,426
</TABLE>
- ------------------------------
(1) Represents the combined results of operations of G.S.H.C., Inc. and the
Contract Services Division of Louis F. Gatti, Inc. (hereinafter referred to
as "Gatti LTC Services, Inc."), which were acquired by the Company on August
2, 1994. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Overview."
(2) The Company was formed in November 1993 by management and an investment fund
affiliated with Golder, Thoma, Cressey, Rauner, Inc. and commenced
operations with the acquisition of Gatti LTC Services, Inc., on August 2,
1994.
(3) Pro forma to give effect to the Completed Acquisitions, the Minority
Interest Conversions, the Good Samaritan Consolidation, the conversion of
the Royal Care Note (each as defined in "Company Background"), options
granted and shares issued to management in September 1996 and the
elimination of an annual $50,000 management fee payable to an affiliate of
the Company's principal stockholder, and as further adjusted to give effect
to the issuance of the Additional GTCR Shares and the offering of 5,357,000
shares of Common Stock made hereby and the use of a portion of the estimated
net proceeds therefrom to repay interest-bearing indebtedness in the amount
of $44.8 million, in each case as if such events had occurred on January 1,
1995. See "Company Background" and "Unaudited Pro Forma Consolidated
Financial Statements."
(4) Pro forma to give effect to the Completed Acquisitions that occurred after
December 31, 1995, the Minority Interest Conversions, the Good Samaritan
Consolidation, the conversion of the Royal Care Note, options granted and
shares issued to management in September 1996, the elimination of an annual
$50,000 management fee to an affiliate of the Company's principal
stockholder, and as further adjusted to give effect to the issuance of the
Additional GTCR Shares and the offering of 5,357,000 shares of Common Stock
made hereby and the use of a portion of the estimated net proceeds therefrom
to repay interest-bearing indebtedness in the amount of $44.8 million, in
each case as if such events had occurred on January 1, 1996. See "Company
Background" and "Unaudited Pro Forma Consolidated Financial Statements."
(5) In the case of historical periods, pro forma to give effect to the issuance
of the Additional GTCR Shares and to an additional 1,208,036 shares of
Common Stock assumed to have been issued at an assumed initial public
offering price of $14.00 per share, the proceeds of which will fund a
one-time mandatory preferential distribution (estimated to be approximately
$16.9 million) to the Company's principal stockholder with respect to the
Company's Class A Common Stock (which stock
5
<PAGE>
will be converted into Common Stock contemporaneously with the Offering).
See Note 3 of Notes to the Consolidated Financial Statements of the Company.
(6) Pro forma to give effect to the Completed Acquisitions that occurred after
June 30, 1996, the Minority Interest Conversions, the Good Samaritan
Consolidation, the issuance of shares to management in August and September
1996 and the recognition of the corresponding special compensation charges
(the "Special Compensation Charges") in the amount of $1.3 million and $1.1
million to be recognized in the quarter ended September 30, 1996 and the
quarter ending December 31, 1996, respectively, the conversion of the Royal
Care Note and the recording of a liability in connection with the one-time
mandatory preferential distribution to the Company's principal stockholder
with respect to the Company's Class A Common Stock (which stock will be
converted into Common Stock contemporaneously with the Offering), payable in
cash of $16.9 million and by issuance of the Additional GTCR Shares with an
assumed value of $7.9 million, in each case as if such events had occurred
on June 30, 1996. See "Company Background" and "Unaudited Pro Forma
Consolidated Financial Statements."
(7) Pro forma to give effect to the events described in Note (6) above, and as
further adjusted to give effect to the issuance of the Additional GTCR
Shares and the offering of 5,357,000 shares of Common Stock made hereby and
the use of a portion of the estimated net proceeds therefrom to repay
interest-bearing indebtedness in the amount of $44.8 million, to discharge
the liability related to the one-time mandatory preferential distribution to
the Company's principal stockholder with respect to the Company's Class A
Common Stock (which stock will be converted into Common Stock
contemporaneously with the Offering) and to pay to an affiliate of the
Company's principal stockholder $450,000 in discharge of accrued management
fees and to terminate a professional services agreement, in each case as if
such events had occurred on June 30, 1996. See "Company Background," "Use of
Proceeds" and "Unaudited Pro Forma Consolidated Financial Statements."
6
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS,
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS IN
EVALUATING AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY.
LIMITED OPERATING HISTORY
The Company commenced operations in August 1994 with its initial acquisition
of a long-term care pharmacy provider. Since its inception, the Company has
experienced substantial growth in revenues and operating income primarily
through the acquisition of long-term care pharmacy companies. Although certain
of these acquired businesses have been in operation for some time, the Company
has a limited consolidated operating history upon which prospective investors
may evaluate the Company's performance. In addition, the Company's limited
consolidated operating history may not serve as an accurate indicator of the
Company's future performance. There can be no assurance that the Company's
revenue and operating income growth will be sustained. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
IMPACT OF ACQUISITIONS AND MANAGEMENT OF GROWTH
In accordance with its strategy for growth, the Company is presently engaged
in an expansion program that incorporates an active acquisition program in the
long-term care pharmacy industry. The success of the Company's acquisition
program and of its underlying growth strategy will depend on, among other
things, the continued availability of suitable acquisition candidates. There can
be no assurance that suitable acquisition candidates will be available or that,
because of competition from other purchasers or for other reasons, the Company
will be able to complete any acquisitions on favorable terms, or at all, in the
future. See "Business -- Acquisition Program."
As a consequence of its acquisitions, the Company has grown significantly in
size and has broadened the geographic area in which it operates. Any
acquisition, however, involves inherent uncertainties, such as the effect on the
acquired business of integration into a larger organization and the availability
of management resources to oversee the operations of the acquired business. The
Company's ability to integrate the operations of acquired companies is essential
to its future success. There can be no assurance as to the Company's ability to
integrate new businesses nor as to its success in managing the significantly
larger operations resulting therefrom. The Company's rapid growth has presented
and will continue to present numerous operational challenges, such as the
assimilation of financial reporting systems and increased pressure on the
Company's senior management, and will increase the demands on the Company's
systems and internal controls. Even though an acquired business may have
experienced profitability and growth as an independent company prior to its
acquisition by the Company, there can be no assurance that such profitability
and growth will continue thereafter. In addition, there can be no assurance that
acquired businesses that do not have histories of profitability as independent
companies will achieve profitability after acquisition by the Company. Finally,
there can be no assurance that businesses acquired by the Company in the future
will achieve sufficient profitability and growth to justify the Company's
investment in such businesses.
In addition, the Company has recorded and may continue to record significant
amounts of goodwill in connection with its acquisitions. This goodwill is
amortized by the Company over a period of 40 years, which amortization has
resulted and will continue to result in periodic charges to earnings, which the
Company expects will increase in the future as it continues its acquisition
program. For the year ended December 31, 1995 and the six months ended June 30,
1996, the Company recorded amortization expense in the amount of $618,000 and
$275,000, respectively. In the event that the Company determines that the
carrying value of goodwill related to a specific acquisition is impaired, the
Company would be required to write down such carrying value which would result
in a charge to earnings. Any such charge could have a material adverse effect on
the Company's results of operations. In addition, the Company may issue shares
of Common Stock as a component of the purchase price in future acquisitions.
Such issuances, if and when they occur, would dilute the
7
<PAGE>
ownership interests of existing stockholders and could have a dilutive effect on
the Company's per share earnings. To date, the Company has issued an aggregate
of 1,002,755 shares of Common Stock (including shares issuable upon conversion
of the Royal Care Note) in partial consideration for its acquisitions.
CAPITAL REQUIREMENTS RELATING TO GROWTH STRATEGY
The Company's acquisition strategy will require significant capital
resources and, as a result, the Company may need to incur additional bank
indebtedness. To pursue its acquisition strategy, the Company also may need to
issue, in public or private transactions, equity or debt securities, the terms
of which will depend on market and other conditions. Capital is needed not only
for acquisitions, but also for the effective integration, operation and
expansion of acquired businesses. The Company believes that the net proceeds of
the Offering, together with cash generated from operations and funds available
under its bank credit facility and under Good Samaritan Supply's bank credit
facility will be adequate to support its foreseeable capital requirements,
although a large acquisition or a number of smaller acquisitions may require
funds in excess of such availability. After giving effect to the Offering and
the use of the net proceeds therefrom as described under "Use of Proceeds," $50
million will be available under the Company's bank credit facility and $12.3
million will be available to Good Samaritan Supply under Good Samaritan Supply's
bank credit facility. There can be no assurance that financing for future
acquisitions or for the integration, operation and expansion of existing or
acquired businesses can be obtained on terms acceptable to the Company, if at
all. If the Company is unable to obtain acceptable financing, it may be unable
to implement its growth strategy, which could have a material adverse effect on
the Company's results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
INDUSTRY IS HIGHLY COMPETITIVE
The business of providing pharmacy services to the long-term care industry
is highly competitive. The Company competes with numerous retail pharmacies,
local, regional and national long-term care pharmacies and captive pharmacy
companies owned by, or affiliated with, long-term care providers. In its program
of acquiring long-term care pharmacy providers, the Company competes with
several other companies that have similar acquisition strategies. Some of the
Company's competitors have significantly greater financial and other resources
than those of the Company. There can be no assurance that competitive pressures
will not have a material adverse effect on the Company's results of operations.
See "Business -- Competition."
The current trend in the long-term care industry is to consolidate long-term
care facilities. In addition, certain operators of long-term care facilities
have been acquiring their own companies to provide pharmacy products and
services, rather than obtaining such products and services from independent
providers like the Company. Both of these trends may adversely affect the
Company by decreasing the number of customers for which the Company can
effectively compete. In addition, an ownership change in any of the Company's
client facilities might result in the loss of such customer. While no single
customer of the Company (other than facilities operated by The Evangelical
Lutheran Good Samaritan Society (the "Society"), which in the aggregate
accounted for approximately 10%) accounted for more than 5% of the Company's
revenues for the six months ended June 30, 1996, on a pro forma basis, the loss
by the Company of a significant customer in a particular market might have a
material adverse effect on the Company's results of operations. See "Business --
Customers."
THIRD AND FOURTH QUARTER 1996 CHARGES
In September 1996 the Company issued an aggregate of 310,208 shares of
Common Stock to certain directors and officers, and in November 1996 the Company
accelerated the vesting of all such shares that were unvested. See "Management
- -- Compensation Committee Interlocks and Insider Participation -- Director Stock
Issuances" and "Certain Transactions -- Company Common Stock Issuances." In
connection with these transactions, in the quarter ended September 30, 1996 and
the quarter ending December 31, 1996, the Company will record additional
non-cash, non-recurring compensation expense (the "Special Compensation
Charges") in the amount of $1.3 million and $1.1
8
<PAGE>
million, respectively. In August 1996 in connection with the Minority Interest
Conversions, the Company issued an aggregate of 794,581 shares of Common Stock
to certain shareholders of its subsidiaries, and options to purchase shares of
common stock in certain subsidiaries were converted into options to purchase an
aggregate of 146,635 shares of Common Stock. See "Company Background." As part
of the Minority Interest Conversions, the Company has recorded additional
goodwill in the amount of $4.5 million, which goodwill the Company expects to
amortize ratably over a 40-year period. See Note 3 of Notes to the Company's
Consolidated Financial Statements. The Company will recognize no corresponding
tax benefits from any of these charges. In addition, in connection with the
issuance of the options to purchase an aggregate of 146,635 shares of Common
Stock, the Company will record additional non-cash compensation expense in the
amount of $86,000 in the quarter ended September 30, 1996 and an aggregate of
$176,000 to be recognized over the seven-year vesting period of such options.
In addition, the Company will record one-time, non-recurring charges in the
fiscal quarter ending December 31, 1996 in the amount of approximately $287,500
($173,000 net of tax) relating to the early termination in connection with the
Offering of the professional services agreement with an affiliate of its
principal stockholder and in the amount of approximately $245,000 ($135,000 net
of tax) relating to special bonuses paid to members of management in connection
with the Offering. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Possible Third and Fourth Quarter
Charges."
REGULATION AND REIMBURSEMENT
The Company's pharmacy business is subject to federal, state and local
regulations, and its pharmacies are required to be licensed in the states in
which they are located. The failure to obtain or renew any required regulatory
approvals or licenses could adversely affect the continued operation of the
Company's business. In addition, the long-term care facilities that contract for
the Company's services are also subject to federal, state and local regulations
and are required to be licensed in the states in which they are located. The
failure by these institutions to comply with such regulations or to obtain or
renew any required licenses could result in the loss of the Company's ability to
provide pharmacy services to their residents. The Company is also subject to
federal and state laws that prohibit certain direct and indirect payments
between health care providers that are intended, among other things, to induce
or encourage the referral of residents to, or the recommendation of, a
particular provider of items or services. Violation of these laws can result in
loss of licensure, civil and criminal penalties and exclusion from the Medicare
and Medicaid programs.
For the six months ended June 30, 1996 on a pro forma basis, approximately
42% of the Company's revenues were paid by Medicare and Medicaid and an
additional 26% were paid by long-term care facilities, a portion of which were,
in turn, reimbursed by Medicare. Medicare and Medicaid are highly regulated. The
failure of the Company and/or its client facilities to comply with applicable
reimbursement regulations could adversely affect the Company's business. In
addition, changes in such reimbursement programs or in regulations related
thereto, such as reductions in the allowable reimbursement levels, modifications
in the timing or processing of payments and other changes intended to limit or
decrease the growth of Medicare and Medicaid expenditures, could adversely
affect the Company's results of operations. See "Business -- Reimbursement and
Billing" and "-- Government Regulation."
UNCERTAINTY DUE TO POTENTIAL CHANGES IN NATIONAL AND STATE HEALTH CARE POLICIES
The Clinton administration and members of Congress have proposed reforms to
the system of health care delivery in the United States. The process by which
the administration or Congress will pursue proposals for national health care
reform and the precise nature of any such proposals are unclear at this time. In
addition, several states are considering various health care reforms, including
reforms through Medicaid managed care demonstration projects. The states of
Illinois, Louisiana, Minnesota and New York (from which four states
approximately 47% of the Company's revenues on a pro forma basis for the six
months ended June 30, 1996 were derived) have applied for, or received,
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approval from the U.S. Department of Health and Human Services ("HHS") for
waivers from certain Medicaid requirements, which are generally required for
such managed care projects. Although these demonstration projects generally
exempt institutional care, including long-term care facilities and long-term
care pharmacy services, no assurance can be given that these waiver projects
ultimately will not change the Medicaid reimbursement system for long-term care,
including pharmacy services in certain states, from fee-for-service to managed
care negotiated or capitated rates. It is not possible to predict what reforms
of the health care system will be adopted or the effect, if any, such reforms
may have on the Company's business and its results of operations. See "Business
- -- Reimbursement and Billing" and "-- Government Regulation."
DEPENDENCE ON KEY EMPLOYEES
The Company's operations are substantially dependent on the abilities of
Timothy L. Burfield, Michael B. Freedman, J. Jeffrey Gephart and Charles R.
Wallace, the executive officers of the Company. In December 1993, the Company
entered into a management and non-competition agreement with Mr. Burfield, which
the Company and Mr. Burfield contemplate amending and restating following
consummation of the Offering. In September 1996 the Company entered into
management and non-competition agreements with Messrs. Freedman, Gephart and
Wallace. See "Management -- Management Agreements." The Company's ability to
operate its acquired businesses is also substantially dependent on the
contribution of management of such businesses. While the Company has management
agreements with certain of these individuals, the loss of the services of one or
more of these persons could have a material adverse effect on the Company's
results of operations.
RISK OF PROFESSIONAL LIABILITY; AVAILABILITY OF INSURANCE
The Company's business exposes it to risks that are inherent in the
packaging and distribution of pharmaceuticals and the provision of other
services, such as consultant pharmacist services and formulary management
services. The Company maintains general/professional liability insurance in the
amount of $1 million per claim and $3 million aggregate per pharmacy location
and umbrella liability insurance in the amount of $10 million per occurrence and
$10 million aggregate. There can be no assurance that the coverage limits of
such insurance will be adequate to protect the Company against future claims. In
addition, there can be no assurance that the Company will be able to maintain
professional liability insurance in the future on acceptable terms or with
adequate coverage against potential liabilities. See "Business--Insurance."
CONTROL BY PRINCIPAL STOCKHOLDER
Upon completion of the Offering, Golder, Thoma, Cressey, Rauner Fund IV,
L.P. (the "GTCR Fund") will hold approximately 38.6% of the issued and
outstanding shares of Common Stock of the Company. Golder, Thoma, Cressey,
Rauner, Inc. ("GTCR") is the general partner of GTCR IV, L.P., which is the
general partner of the GTCR Fund. Accordingly, GTCR will be able to exercise
significant influence over matters requiring stockholder approval, including the
election of directors and the approval of significant corporate transactions.
Such concentration of ownership may have the effect of delaying or preventing a
change in control of the Company. Bryan C. Cressey, Chairman of the Board of the
Company, and Lee M. Mitchell, a director of the Company, are each principals of
GTCR. In addition, the Company and the GTCR Fund have entered into an agreement
effectively giving the GTCR Fund the right to nominate an additional GTCR Fund
representative for election to the Board of the Company. See "Principal
Stockholders," "Description of Capital Stock," "Management -- Compensation
Committee Interlocks and Insider Participation -- Stockholders Agreement of the
Company" and "-- Nominating Agreement."
PAYMENTS TO PRINCIPAL STOCKHOLDER AND ITS AFFILIATE
The Company will use approximately $16.9 million ($19.5 million if the
Underwriters' over-allotment option is exercised in full) of the net proceeds of
the Offering to make a one-time mandatory preferential distribution to the GTCR
Fund, the holder of the Company's Class A Common Stock (which stock will be
converted into Common Stock contemporaneously with the Offering), pursuant to
the terms of the Company's Amended and Restated Certificate of Incorporation. In
addition, the
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Company will pay GTCR IV, L.P. (the general partner of the GTCR Fund) $450,000
of the net proceeds of the Offering in payment of accrued management fees and in
exchange for the termination of a professional services agreement. See
"Management -- Compensation Committee Interlocks and Insider Participation."
POSSIBLE DILUTION RESULTING FROM GOOD SAMARITAN OPTION AND PUT
In connection with the Company's acquisition in April 1996 of a 40% equity
interest in Good Samaritan Supply, the Company granted the Foundation (which
currently holds 60% of the stock in Good Samaritan Supply and will, after the
Good Samaritan Consolidation, hold 49.9% of such stock) an option, exercisable
after the Offering, to convert the Foundation's shares of stock in Good
Samaritan Supply (limited, prior to April 30, 1999, to 10% of the then issued
and outstanding shares of Good Samaritan Supply common stock) into shares of
Common Stock (the "Initial Public Offering Option") and a right (the "Good
Samaritan Put"), exercisable after April 30, 1999, to put the Foundation's
shares of stock in Good Samaritan Supply to the Company in exchange for, at the
Company's option, cash and/or Common Stock. The formula for determining the
number of shares of Common Stock issuable upon exercise of the Initial Public
Offering Option or the Good Samaritan Put is based upon several factors,
including (a) the total consolidated market capitalization of the Company
(which, in turn, depends upon the market price of the Company's Common Stock),
(b) the book value of Good Samaritan Supply, (c) the Company's percentage
ownership of Good Samaritan Supply, and (d) Good Samaritan Supply's relative
contribution to the Company's consolidated net income over a trailing
twelve-month period, with each entity's net income being adjusted for
extraordinary, unusual or non-recurring gains or losses, including the effects
of acquisitions, divestitures, discontinued operations, etc. While this formula
is intended to approximate the fair value of the shares of Good Samaritan Supply
common stock being converted or exchanged, there can be no assurance that the
value of the shares of Company Common Stock issuable upon exercise of the
Initial Public Offering Option or the Good Samaritan Put will in fact
approximate the fair value of such shares of Good Samaritan Supply common stock.
Based upon management's current estimate of the relative future performance of
the Company and Good Samaritan Supply, the number of shares of Common Stock
issuable to the Foundation upon exercise of the Initial Public Offering Option
or the Good Samaritan Put would be substantially less than 10% of the then
issued and outstanding shares of the Company's Common Stock. It is possible,
however, that, under certain extraordinary circumstances (i.e., the Company's
recognizing a consolidated net loss (without regard to Good Samaritan Supply),
Good Samaritan Supply's performing extraordinarily better than projected and the
Company's market capitalization approaching zero) the Company would be obligated
to issue a number of shares which, after giving effect to such issuance, would
be in excess of 99% of the issued and outstanding shares of Common Stock upon
exercise of the Initial Public Offering Option or the Good Samaritan Put (but,
in the case of the Good Samaritan Put, only if the Company elected to exchange
Common Stock rather than cash for the Foundation's shares of stock in Good
Samaritan Supply). The Company believes that the probability of occurrence of
such circumstances is extremely remote. In the event the number of shares of
Common Stock issuable upon exercise of the Initial Public Offering Option or the
Good Samaritan Put equals or exceeds 20% of the then issued and outstanding
shares of Common Stock, the rules of the National Association of Securities
Dealers, Inc. would require shareholder approval of such issuance. See "Certain
Transactions -- Good Samaritan Relationship."
INCREASINGLY SIGNIFICANT ROLE OF MANAGED CARE
As managed care organizations assume an increasingly significant role in the
health care industry, the Company's future success may, in part, be dependent on
obtaining and retaining managed care contracts. Managed care organizations are
typically insurance companies, which offer pre-paid, capitated health plans, as
opposed to "fee-for-service" plans. Competition for managed care contracts is
intense and, in most cases, will require the Company to compete based on breadth
of services offered, pricing, ability to track and report patient outcomes and
cost data and provision of value-added
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consultant pharmacist services, among other factors. In addition, reimbursement
rates under managed care contracts typically are lower than those paid by other
private, third-party payors. Approximately 9.4% of the Company's total revenues
for the six months ended June 30, 1996 on a pro forma basis were derived from
the sale of products and services sold pursuant to participation agreements with
insurance companies, including managed care organizations. Approximately 4.6% of
the Company's revenues derived from its core business of providing
pharmaceutical dispensing services to residents of long-term care facilities for
the six months ended June 30, 1996 on a pro forma basis was pursuant to
contracts with managed care organizations. There can be no assurance that the
Company will be able to effectively compete for such managed care contracts or
that the managed care contracts it obtains will be on terms as favorable to the
Company as those of its current contracts.
SIGNIFICANT OPERATING LOSSES AT RECENTLY ACQUIRED SUBSIDIARY
In August 1996 the Company completed the acquisition of Royal Care of
America, Inc. ("Royal Care"), a provider of long-term care pharmacy services to
approximately 7,700 residents in 155 facilities in upstate New York. In its most
recent fiscal years ended December 31, 1995 and 1994, Royal Care incurred losses
from operations in the amount of $1.6 million and $1.3 million, respectively.
The Company believes that, prior to its acquisition by the Company, Royal Care
had begun to take steps to reduce such operating losses. Nonetheless, there can
be no assurance that Royal Care will achieve profitability at a level sufficient
to justify the Company's investment in such business. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Overview."
ABSENCE OF PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for any securities of
the Company, including the Common Stock. Although the Common Stock has been
approved for quotation on the Nasdaq National Market, there can be no assurance
that an active trading market will develop or that the market price of the
Common Stock will not decline below the initial public offering price. The
initial public offering price of the Common Stock will be determined by
negotiations between the Company and the Representatives of the Underwriters.
See "Underwriting." The stock market has from time to time experienced extreme
price and volume fluctuations which in some circumstances have been unrelated to
the operating performance of particular companies. The market price for shares
of the Common Stock may be highly volatile depending on various factors,
including, but not limited to, the state of the national economy, stock market
conditions, industry research reports, actions by governmental agencies,
litigation involving the Company, earnings and other announcements by the
Company or its competitors and general conditions in the long-term care pharmacy
business.
POTENTIAL EFFECT OF ANTI-TAKEOVER PROVISIONS AND CERTAIN PROVISIONS OF DELAWARE
LAW
Certain provisions of Delaware law and the Company's Amended and Restated
Certificate of Incorporation and Amended and Restated By-Laws could have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of the Company.
The Company's Amended and Restated By-Laws provide for the Board of Directors to
be divided into three classes of directors serving staggered three-year terms.
Such classification of the Board of Directors lengthens the time required to
change the composition of a majority of directors and could discourage a proxy
contest or other takeover bid for the Company. The Company's Amended and
Restated Certificate of Incorporation allows the Company to issue preferred
stock with rights senior to those of the Common Stock without any further vote
or action by the stockholders. The issuance of preferred stock could decrease
the amount of earnings and assets available for distribution to the holders of
Common Stock or could adversely affect the rights and powers, including voting
rights, of the holders of the Common Stock. The issuance of preferred stock
could also have the effect of making an unsolicited acquisition of the Company
more difficult, and consequently cause a decrease in the market price of the
Common Stock. In addition, the Company is subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law, which
prohibit the Company from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
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business combination is approved in a prescribed manner. The application of
Section 203 also could have the effect of delaying or preventing a change in
control of the Company. See "Description of Capital Stock -- Preferred Stock"
and "-- Certain Limited Liability, Indemnification and Anti-takeover
Provisions."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of Common Stock offered hereby (at an assumed initial public
offering price of $14.00 per share) will experience immediate dilution of $11.66
per share in the pro forma net tangible book value of the Common Stock. See
"Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market after the
Offering, or the perception that such sales could occur, may adversely affect
prevailing market prices of the Common Stock and could impair the future ability
of the Company to raise capital through an offering of its equity securities.
The Company, its officers and directors, and other stockholders, holding in the
aggregate all of the Company's currently outstanding shares of Common Stock,
have agreed not to offer, sell, contract to sell or otherwise dispose of any
shares of Common Stock for a period of 180 days after the date of this
Prospectus without the prior written consent of William Blair & Company, L.L.C.
(except, in the case of the Company, for the issuance of the Additional GTCR
Shares and shares issuable upon exercise of currently outstanding options, upon
conversion of the Royal Care Note, pursuant to the Good Samaritan Shareholders
Agreement and in connection with possible future acquisitions). Upon expiration
of a 180-day lock-up period, 2,567,282 shares of Common Stock will be eligible
for sale pursuant to Rule 144. See "Shares Eligible for Future Sale" and
"Underwriting."
NO CURRENT INTENTION TO PAY DIVIDENDS
Other than the one-time mandatory preferential distribution to the Company's
principal stockholder to be paid with respect to the Company's Class A Common
Stock (which stock will be converted into Common Stock contemporaneously with
the Offering) described under the caption "Company Background," the Company has
not declared or paid any cash dividends on, or made any other distribution with
respect to, its Common Stock since its formation and does not currently intend
to declare or pay any cash dividends on its Common Stock, but intends to retain
future earnings for reinvestment in its business. Any future determination by
the Company to pay cash dividends on its Common Stock will be at the discretion
of the Board of Directors of the Company and will be dependent upon the
Company's results of operations, financial condition, contractual restrictions
and other factors deemed relevant by the Board of Directors. See "Dividend
Policy."
HOLDING COMPANY STRUCTURE
The operations of the Company are conducted primarily through the Company's
operating subsidiaries. See "Company Background." As a holding company, the
Company relies primarily on such subsidiaries for dividends and other permitted
payments to meet its obligations for corporate expenses. The payment of
dividends by the Company's subsidiaries will depend, in part, on the available
surplus and future earnings of the subsidiaries.
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COMPANY BACKGROUND
American Medserve Corporation (the "Company" or "AMC"), a Delaware
corporation, was formed in November 1993 by Timothy L. Burfield (the Company's
President and Chief Executive Officer) and Golder, Thoma, Cressey, Rauner Fund
IV, L.P. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview." Unless the context indicates otherwise, all
references herein to the "Company" or "AMC" shall mean the Company and its
subsidiaries, including AMC Regional Holdings, Inc., a direct, wholly-owned
subsidiary of the Company. AMC Regional Holding, Inc. was formed to function as
a financing and acquisition company for the Company's acquisitions and is the
direct or indirect parent of all of the Company's operating subsidiaries, other
than Good Samaritan Supply.
Commencing with its acquisition of Gatti LTC Services, Inc. in August 1994,
the Company has completed a total of 18 acquisitions. Historically, as part of
the Company's acquisition strategy of identifying and motivating strong
management teams, management of the acquired companies has generally retained
minority equity interests in their respective companies. In August 1996, the
Company exercised its right to convert such minority interests into Common Stock
of the Company, and options to purchase shares of such acquired companies were
converted into options to purchase shares of Common Stock (the "Minority
Interest Conversions"). Following the Minority Interest Conversions, the
acquired companies became wholly-owned subsidiaries of the Company, and members
of management of such companies became the holders in the aggregate of
approximately 16.6% (approximately 8.0% after giving effect to the Offering) of
the fully-diluted common equity of the Company (assuming exercise of all
outstanding stock options held by management of such companies).
In April 1996, the Company acquired a 40% equity interest in Good Samaritan
Supply, principally a provider of pharmaceutical products and services and
medical supplies to the long-term care market. Upon consummation of the
Offering, this interest in Good Samaritan Supply will increase to 50.1% upon
exercise by the Company of an option to acquire from Good Samaritan Supply an
additional equity interest for an exercise price of $2.0 million. After giving
effect to such exercise (the "Good Samaritan Consolidation"), Good Samaritan
Supply will be a consolidated operating subsidiary of the Company for financial
reporting purposes. At any time after April 30, 2001, the Company has the right
to acquire up to a 90% equity interest in Good Samaritan Supply. See "Business
- -- Good Samaritan Alliance" and "Certain Transactions -- Good Samaritan
Relationship."
In addition to the Company's acquisition in August 1994 of Gatti LTC
Services, Inc. (based in Indiana, Pennsylvania) and Williamson Drug Company,
Inc. (based in Harrisonburg, Virginia), during the period January 1, 1995 to
date, the Company has completed the acquisition of 13 long-term care pharmacy
providers: Nihan & Martin, Inc., based in Rockford, Illinois; Dixon Pharmacy,
Inc., based in Dixon, Illinois; Johnson Pharmacy and Medical Supply, Inc., based
in South Hills, Pennsylvania; Sterling Healthcare Services, Inc., based in
Shreveport, Louisiana; Pharmed, Inc., based in Alexandria, Louisiana; Pharmed of
Baton Rouge, Inc., based in Baton Rouge, Louisiana; Extended Care Associates,
Inc., based in Lynchburg, Virginia; PRN, Inc., based in Portsmouth, Virginia;
Crawford Drug, based in Freeport, Illinois; Woodbine Pharmacy, Inc., based in
Manassas, Virginia; Royal Care of America, Inc., based in Malta, New York;
Okie's Pharmacy, based in Newfane, New York; and Critical Care Pharmacy, based
in Clearfield, Pennsylvania. In addition, during that period, the Company has
completed the acquisition of two prescription medical supply services providers:
Gatti Medical Supply, Inc., based in Indiana, Pennsylvania; and Specialized
Patient Care Services, Inc., based in Mobile, Alabama. These 15 acquisitions
completed during the period January 1, 1995 to date are referred to herein as
the "Completed Acquisitions." See "Unaudited Pro Forma Consolidated Financial
Statements" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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Set forth below as of October 15, 1996 is an organizational chart showing
the Company and each of its subsidiaries:
[CHART]
In accordance with the terms of the Company's Class A Common Stock, upon the
occurrence of the Offering and from the net proceeds thereof, the GTCR Fund, as
the sole holder of the Company's Class A Common Stock, will receive a
preferential cash distribution in the amount of approximately $16.9 million
(approximately $19.5 million if the Underwriters' over-allotment option is
exercised in full). In addition, upon the occurrence of future public offerings
the holder of Class A Common Stock is entitled to additional preferential
distributions until the holder's entire investment in Class A Common Stock plus
a specified yield thereon is paid in full. See "Management -- Compensation
Committee Interlocks and Insider Participation -- Agreement with GTCR Fund
Regarding Class A Common Stock." In consideration of the GTCR Fund's full
release and discharge of any and all future preferences with respect to Class A
Common Stock, the Company has agreed to issue to the GTCR Fund additional shares
of Common Stock (the "Additional GTCR Shares"), representing the amount of the
expected remaining unpaid preference with respect to the Class A Common Stock
(expected to be approximately $7.9 million at November 15, 1996) divided by the
initial public offering price of shares of Common Stock. Based upon an assumed
initial public offering price of $14.00 per share, the Company will issue to the
GTCR Fund 565,625 Additional GTCR Shares (378,833 Additional GTCR Shares if the
Underwriters' over-allotment option is exercised in full). In connection with
the Offering, the Company will adopt an Amended and Restated Certificate of
Incorporation, pursuant to which all shares of Class A Common Stock will be
converted into shares of Common Stock.
In August 1996 the Company acquired Royal Care of America, Inc., a provider
of long-term care pharmacy services to approximately 7,700 residents in 155
facilities in upstate New York (8,800 residents in 164 facilities as of October
23, 1996). As part of the consideration for such purchase, the Company issued to
the seller an 8.75% convertible subordinated note in the principal amount of
$2.0 million (the "Royal Care Note"). The Royal Care Note is convertible by the
holder, during the 30-day period beginning 30 days following the Offering, into
a number of shares of Common Stock equal to $2.0 million plus accrued interest
thereon, divided by 85% of the initial public offering price per share. Based
upon an assumed initial public offering price of $14.00 per share, the Royal
Care Note would be convertible into 174,554 shares of Common Stock.
The principal executive offices of the Company are located at 184 Shuman
Blvd., Suite 200, Naperville, Illinois 60563, and its telephone number is (630)
717-2904.
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USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be
approximately $67.6 million ($78.1 million if the Underwriters' over-allotment
option is exercised in full), assuming an initial public offering price of
$14.00 per share and after deducting the estimated underwriting discount and
offering expenses payable by the Company.
Approximately $16.9 million of the net proceeds to the Company from the
Offering (approximately $19.5 million if the Underwriters' over-allotment option
is exercised in full) will be used to make a one-time mandatory preferential
distribution to the GTCR Fund, the holder of the Company's Class A Common Stock
(which stock will be converted into Common Stock contemporaneously with the
Offering), pursuant to the terms thereof as set forth in the Company's Amended
and Restated Certificate of Incorporation (see "Management -- Compensation
Committee Interlocks and Insider Participation -- Agreement with GTCR Fund
Regarding Class A Common Stock"). The balance of the net proceeds of the
Offering will be used (i) to make a payment of $450,000 to GTCR IV, L.P., the
general partner of the GTCR Fund, $162,500 of which is in payment of accrued
management fees and $287,500 of which is in exchange for the termination of a
professional services agreement (see "Management -- Compensation Committee
Interlocks and Insider Participation -- Professional Services Agreement"); (ii)
to repay in full $5.0 million of indebtedness outstanding under a bridge loan,
plus accrued interest thereon of approximately $100,000 (the "Bridge Loan");
(iii) to make a prepayment of $900,000 on the revolving credit facility
outstanding under the Credit Agreement dated as of March 15, 1996, among AMC
Regional Holdings, Inc. and certain commercial lending institutions (the "Credit
Agreement"); (iv) to make a prepayment of $11.9 million on the acquisition loan
facility outstanding under the Credit Agreement; (v) to make a payment of $25.0
million on the term loan facility outstanding under the Credit Agreement; (vi)
to make an additional investment of $2.0 million in Good Samaritan Supply in
connection with the Good Samaritan Consolidation, which $2.0 million will be
utilized by Good Samaritan Supply to reduce outstanding indebtedness (see
"Company Background"); and (vii) for other general corporate purposes, including
possible future acquisitions. Although an integral part of the Company's
business strategy is growth through acquisitions, and the Company is currently
in discussions with acquisition candidates, no acquisition has become the
subject of any definitive agreement, letter of intent or agreement in principle.
Pending application of the net proceeds as described above, the Company intends
to invest the net proceeds in short-term investment grade securities.
The Credit Agreement provides for interest to be paid on amounts outstanding
at varying rates, depending on the applicable facility under the Credit
Agreement and whether certain financial ratio tests are met. On June 30, 1996,
the annual interest rate on the revolving credit facility was 10.0%, and the
annual interest rate on the acquisition loan facility and the term loan facility
was 8.5%. The Credit Agreement also provides for a 0.50% annual commitment fee
on the unused portion of the revolving credit and acquisition loan facilities
($18.0 million at June 30, 1996). The revolving credit facility terminates on
March 15, 2002. Indebtedness outstanding under the revolving credit facility was
incurred to provide funds for working capital needs of the Company's
subsidiaries, to repay loans and for other general corporate purposes. The
acquisition loan facility converts to a term loan on March 15, 1998 and is
thereafter payable in sixteen consecutive quarterly installments commencing June
30, 1998 and continuing through March 31, 2002. Indebtedness outstanding under
the acquisition loan facility was incurred to finance certain acquisitions and
to pay transaction costs associated with such acquisitions and with the Credit
Agreement and related documents. The term loan facility matures on March 31,
2002. Indebtedness outstanding under the term loan facility was incurred to
refinance indebtedness that had been incurred (i) in connection with
acquisitions made prior to March 1996, (ii) to pay expenses associated with
refinancing the Credit Agreement and (iii) for general corporate purposes.
The Bridge Loan is due on January 2, 1997 and bears interest per annum at
the lender's prime rate (8.25% at October 23, 1996). Indebtedness under the
Bridge Loan was incurred to provide
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additional financing to fund, in part, acquisitions that occurred in August
1996. Repayment of the Bridge Loan is guaranteed by the GTCR Fund. See
"Management -- Compensation Committee Interlocks and Insider Participation --
Bridge Loan Guaranty."
The Company believes that the net proceeds of the Offering, together with
cash generated from operations and funds available under the Credit Agreement,
as well as funds available to Good Samaritan Supply under Good Samaritan
Supply's bank credit facility, will be adequate to support the foreseeable
capital requirements of the Company and its subsidiaries through 1998, although
a large acquisition or a number of smaller acquisitions may require funds in
excess of such availability.
DIVIDEND POLICY
Other than the one-time mandatory preferential distribution to the Company's
principal stockholder with respect to the Company's Class A Common Stock (which
stock will be converted into Common Stock contemporaneously with the Offering)
described under the caption "Company Background," the Company has not declared
or paid any cash dividends on, or made any other distribution with respect to,
its Common Stock since its formation and does not currently intend to declare or
pay any cash dividends on its Common Stock, but intends to retain future
earnings for reinvestment in its business. Any future determination by the
Company to pay cash dividends on its Common Stock will be at the discretion of
the Board of Directors of the Company and will be dependent upon the Company's
results of operations, financial condition, contractual restrictions and other
factors deemed relevant by the Board of Directors. Under the terms of the Credit
Agreement, AMC Regional Holdings, Inc. may not pay dividends to the Company
prior to June 30, 1997 in an aggregate amount in excess of $700,000.
Consequently, the Company's ability to pay dividends is restricted.
17
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and total capitalization
of the Company at June 30, 1996 on (i) a historical basis; (ii) a pro forma
basis to give effect to the Completed Acquisitions that occurred after June 30,
1996, the Minority Interest Conversions, the Good Samaritan Consolidation, the
recognition of the Special Compensation Charges, the recording of a liability in
connection with the one-time mandatory preferential distribution with respect to
the Company's Class A Common Stock (which stock will be converted into Common
Stock contemporaneously with the Offering) and the conversion of the Royal Care
Note; and (iii) a pro forma basis as further adjusted to give effect to the
issuance of the Additional GTCR Shares and the Offering at an assumed initial
public offering price of $14.00 per share, and the application of a portion of
the estimated net proceeds therefrom to repay interest-bearing indebtedness in
the amount $44.8 million, to fund the cash payment of the one-time mandatory
preferential distribution in the amount of $16.9 million to the Company's
principal stockholder with respect to the Company's Class A Common Stock and to
fund a $450,000 payment to an affiliate of the Company's principal stockholder
in discharge of accrued management fees and to terminate a professional services
agreement. See "Use of Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Short-term debt, including current portion of long-term debt................. $ 4,017 $ 8,568 $ 668
--------- ----------- -----------
--------- ----------- -----------
Long-term debt, less current portion (1)..................................... $ 28,167 $ 41,042 $ 4,111
Minority interests........................................................... 2,743 2,481 2,481
Stockholders' equity:
Preferred Stock, $0.01 par value; 1,000,000 shares authorized;
no shares outstanding..................................................... -- -- --
Common Stock, $0.01 par value;
30,000,000 shares authorized; 4,421,216 shares outstanding, actual;
5,734,179 shares outstanding, pro forma; 11,656,804 shares outstanding,
pro forma as adjusted (2)(3).............................................. 44 75 117
Additional paid-in capital................................................... 22,491 10,205 85,732
Retained earnings............................................................ 301 (2,170) (2,423)
--------- ----------- -----------
Total stockholders' equity............................................... 22,836 8,110 83,426
--------- ----------- -----------
Total capitalization................................................... $ 53,746 $ 51,633 $ 90,018
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
- ------------------------
(1) See Note 6 of Notes to the Consolidated Financial Statements of the Company
for information regarding the Company's long-term indebtedness.
(2) See Note 9 of Notes to the Consolidated Financial Statements of the Company
for information regarding the Company's Common Stock.
(3) Excludes 1,150,000 shares of Common Stock reserved for issuance under the
Company's 1996 Stock Incentive Plan (including 160,000 shares subject to
options to be granted under the 1996 Stock Incentive Plan upon consummation
of the Offering) and 160,790 shares reserved for issuance under stock option
plans of the Company's subsidiaries (including 146,635 shares subject to
options granted under such stock option plans of the Company's subsidiaries,
of which options to purchase 48,186 shares of Common Stock were exercisable
at October 15, 1996). See "Management -- Employee Benefit Plans -- 1996
Stock Incentive Plan" and "-- Subsidiary Option Plans." Also excludes shares
of Common Stock issuable pursuant to the Good Samaritan Shareholders
Agreement. See "Risk Factors -- Possible Dilution Resulting from Good
Samaritan Option and Put," "Company Background" and "Certain Transactions --
Good Samaritan Relationship."
18
<PAGE>
DILUTION
As of June 30, 1996, the Company had a pro forma net tangible book value
(deficit) of $(48.1) million, or $(7.63) per share. Pro forma net tangible book
value per share of Common Stock represents the pro forma amount of total
tangible assets of the Company reduced by the pro forma amount of its total
liabilities and divided by the number of shares of Common Stock outstanding, in
each case giving effect to (i) the Minority Interest Conversions; (ii) the Good
Samaritan Consolidation; (iii) the Completed Acquisitions; (iv) the recognition
of the Special Compensation Charges; (v) the recording of a liability in the
amount of $24.8 million in connection with the one-time mandatory preferential
distribution with respect to the Company's Class A Common Stock; (vi) the
issuance of the Additional GTCR Shares; and (vii) the conversion of the Royal
Care Note. After giving effect to (i) the sale of 5,357,000 shares of Common
Stock offered by the Company hereby at an assumed initial public offering price
of $14.00 per share; and (ii) the application of the estimated net proceeds of
the Offering as described under "Use of Proceeds," the adjusted pro forma net
tangible book value of the Company as of June 30, 1996 would have been $27.3
million, or $2.34 per share. This represents an immediate increase in pro forma
net tangible book value of $9.97 per share to the existing stockholders and an
immediate dilution of $11.66 per share to new investors. The following table
illustrates this dilution per share:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $ 14.00
Pro forma net tangible book value (deficit) per share before the
Offering........................................................ $ (7.63)
Increase per share attributable to new investors................. 9.97
---------
Adjusted pro forma net tangible book value per share after the
Offering.......................................................... 2.34
---------
Dilution per share to new investors................................ $ 11.66
---------
---------
</TABLE>
The following table summarizes, after giving effect to the Offering at an
assumed initial public offering price of $14.00 per share, (i) the number of
shares of Common Stock purchased by existing stockholders from the Company and
the total consideration and average price per share paid to the Company for such
shares; (ii) the number of shares of Common Stock purchased by new investors in
the Offering and the total consideration and the price per share paid by them
for such shares; and (iii) the percentage of shares purchased from the Company
by existing stockholders and the new investors and the percentages of the
consideration paid to the Company for such shares by existing stockholders and
new investors.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------------- ------------------------------ PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------------- ----------- ----------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders..................... 6,299,804(1) 54.0% $ 15,872,890(2) 17.5% $ 2.52
New investors............................. 5,357,000 46.0 74,998,000 82.5 14.00
---------------- ----- ----------------- -----
Total................................. 11,656,804 100.0% $ 90,870,890 100.0%
---------------- ----- ----------------- -----
---------------- ----- ----------------- -----
</TABLE>
- ------------------------
(1) Includes 565,625 Additional GTCR Shares and 174,554 shares of Common Stock
issuable upon conversion of the Royal Care Note. See "Company Background."
Excludes 1,150,000 shares of Common Stock reserved for issuance under the
Company's 1996 Stock Incentive Plan (including 160,000 shares subject to
options to be granted under the 1996 Stock Incentive Plan upon consummation
of the Offering) and 160,790 shares reserved for issuance under the stock
option plans of the Company's subsidiaries (including 146,635 shares subject
to options granted under such stock option plans of the Company's
subsidiaries, of which options to purchase 48,186 shares of Common Stock
were exercisable at October 15, 1996). See "Management -- Employee Benefit
Plans -- 1996 Stock Incentive Plan" and "-- Subsidiary Option Plans." Also
excludes shares of Common Stock issuable pursuant to the Good Samaritan
Shareholders Agreement. See "Certain Transactions -- Good Samaritan
Relationship."
(2) Reflects the distribution to the GTCR Fund of approximately $16.9 million to
fund a mandatory preferential distribution with respect to the Company's
Class A Common Stock (see "Company Background") and includes $7.2 million
representing, in the aggregate, the value of the 794,581 shares of the
Company's Common Stock exchanged in the Minority Interest Conversions.
19
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Consolidated Financial Statements of the
Company present the Unaudited Pro Forma Consolidated Statements of Operations
for the year ended December 31, 1995 and the six months ended June 30, 1996, and
the Unaudited Pro Forma Consolidated Balance Sheet at June 30, 1996. The
Unaudited Pro Forma Consolidated Statement of Operations for the year ended
December 31, 1995 gives pro forma effect to the Completed Acquisitions, which
include the Company's acquisitions of (i) Nihan & Martin, Inc. ("N&M")
(completed in March 1995); (ii) Dixon Pharmacy, Inc. ("Dixon") (completed in
April 1995); (iii) Extended Care Associates, Inc. ("ECA") (completed in April
1995); (iv) Johnson's Pharmacy and Medical Supply, Inc. ("Johnson's") (completed
in April 1995); (v) Sterling Healthcare Services, Inc. ("SHS") (completed in
August 1995); (vi) Pharmed, Inc. ("Pharmed") (completed in May 1996); (vii)
Royal Care of America, Inc. ("Royal Care") (completed in August 1996); and
(viii) eight other less significant businesses, in each case as if such
transactions had occurred on January 1, 1995. The Unaudited Pro Forma
Consolidated Statement of Operations for the six months ended June 30, 1996
gives pro forma effect to the Completed Acquisitions that occurred after
December 31, 1995 as if such transactions had occurred on January 1, 1996. The
Unaudited Pro Forma Consolidated Statements of Operations for the year ended
December 31, 1995 and the six months ended June 30, 1996 also give pro forma
effect to: (i) the Minority Interest Conversions; (ii) the Good Samaritan
Consolidation; (iii) the conversion of the Royal Care Note; and (iv) the
elimination of a management fee payable to an affiliate of the Company's
principal stockholder, in each case as if such transactions had occurred on the
first day of the period presented. The Pro Forma Consolidated Balance Sheet at
June 30, 1996 gives pro forma effect to (i) the Completed Acquisitions that
occurred after June 30, 1996; (ii) the Minority Interest Conversions; (iii) the
Good Samaritan Consolidation; (iv) the recognition of the Special Compensation
Charges; (v) the recording of a liability in the amount of $24.8 million in
connection with the one-time mandatory preferential distribution to the
Company's principal stockholder with respect to the Company's Class A Common
Stock; and (vi) the conversion of the Royal Care Note, in each case as if such
transactions had occurred at June 30, 1996. The Pro Forma As Adjusted
Consolidated Financial Statements give additional effect to the issuance of the
Additional GTCR Shares and the offering of 5,357,000 shares of Common Stock made
hereby at an assumed initial public offering price of $14.00 per share and the
use of a portion of the net proceeds therefrom to repay interest-bearing
indebtedness in the amount of $44.8 million, to fund a one-time mandatory
preferential distribution (estimated to be approximately $16.9 million) to the
Company's principal stockholder with respect to the Company's Class A Common
Stock (which stock will be converted into Common Stock contemporaneously with
the Offering) and to fund a $450,000 payment to an affiliate of the Company's
principal stockholder to discharge accrued management fees and to terminate a
professional services agreement, in each case as if such events had occurred on
the first day of the period presented, for purposes of statement of operations
data, and as if such events had occurred on June 30, 1996, for purposes of
balance sheet data.
The unaudited pro forma consolidated financial statements presented herein
are based on the assumptions and adjustments described in the accompanying
notes. The Unaudited Pro Forma Consolidated Statements of Operations do not
purport to represent what the Company's results of operations would have been if
the events described above had occurred as of the dates indicated or what such
results will be for any future periods. The Unaudited Pro Forma Consolidated
Financial Statements are based upon assumptions and adjustments that the Company
believes are reasonable. The Unaudited Pro Forma Financial Statements and the
accompanying notes should be read in conjunction with the historical financial
statements of the Company, Gatti LTC Services, Inc. ("GSI"), Williamson Drug
Company, Inc. ("WDC"), N&M, Dixon, ECA, Johnson's, SHS, Pharmed, Royal Care and
Good Samaritan Supply, including the notes thereto, which are included elsewhere
in this Prospectus.
20
<PAGE>
The respective contributions to pro forma and historical revenues of the
Company's existing subsidiaries at January 1, 1995, the Completed Acquisitions
and Good Samaritan Supply for the year ended December 31, 1995 and for the six
months ended June 30, 1996 are as follows:
<TABLE>
<CAPTION>
CONTRIBUTION TO CONTRIBUTION TO
PRO FORMA REVENUES HISTORICAL REVENUES
------------------------- -------------------------
YEAR ENDED SIX MONTHS YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE DECEMBER 31, ENDED JUNE
ACQUISITIONS DATE ACQUIRED 1995 30, 1996 1995 30, 1996
- ------------------------------------- ------------------- ------------ ----------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
EXISTING SUBSIDIARIES (at January 1,
1995):
GSI................................ August 2, 1994 $ 16,855 $ 10,205 $ 16,855 $ 10,205
WDC................................ August 11, 1994 5,155 3,093 5,155 3,093
COMPLETED ACQUISITIONS:
N&M................................ March 9, 1995 12,341 6,496 10,147 6,496
ECA................................ April 14, 1995 2,378 1,415 1,687 1,415
Johnson's.......................... April 17, 1995 2,159 1,111 1,574 1,111
Dixon.............................. April 17, 1995 6,948 3,732 4,823 3,732
SHS................................ August 3, 1995 8,018 4,702 3,515 4,702
Pharmed............................ May 8, 1996 3,921 2,305 -- 680
Royal Care......................... August 5, 1996 15,815 7,588 -- --
Other Completed Acquisitions....... 10,984 5,265 293 923
GOOD SAMARITAN SUPPLY................ 25,293 13,842 -- --
------------ ----------- ------------ -----------
TOTAL............................ $ 109,867 $ 59,754 $ 44,049 $ 32,357
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
</TABLE>
21
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMPLETED GOOD SAMARITAN PRO FORMA
AMC ACQUISITIONS (A) CONSOLIDATION (B) ADJUSTMENTS PRO FORMA
--------- --------------- ----------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Revenues...................................... $ 44,049 $ 40,525 $ 25,293 $ -- $ 109,867
Cost of revenues.............................. 31,464 28,261 20,098 -- 79,823
--------- --------------- -------- ------------- -----------
Gross profit................................ 12,585 12,264 5,195 -- 30,044
Selling, general and administrative
expenses..................................... 10,029 12,729 5,332 (315)(c) 27,775
--------- --------------- -------- ------------- -----------
Operating income (loss)..................... 2,556 (465) (137) 315 2,269
Interest expense.............................. 1,762 637 474 1,115(d) 3,988
Other (income) expense........................ (312) (77) (17) -- (406)
Minority interests............................ 32 -- (157) (30)(e) (155)
--------- --------------- -------- ------------- -----------
Income (loss) before income taxes........... 1,074 (1,025) (437) (770) (1,158)
Income tax provision (benefit)................ 669 88 (280) (719)(f) (242)
--------- --------------- -------- ------------- -----------
Net income (loss)........................... $ 405 $ (1,113) $ (157) $ (51) $ (916)
--------- --------------- -------- ------------- -----------
--------- --------------- -------- ------------- -----------
Pro forma net income per share................ $ 0.06
---------
---------
Pro forma shares used in computation.......... 6,578(j)
<CAPTION>
OFFERING PRO
FORMA PRO FORMA AS
ADJUSTMENTS ADJUSTED
------------- ------------
<S> <C> <C>
Revenues...................................... $ -- $ 109,867
Cost of revenues.............................. -- 79,823
------------- ------------
Gross profit................................ -- 30,044
Selling, general and administrative
expenses..................................... -- 27,775
------------- ------------
Operating income (loss)..................... -- 2,269
Interest expense.............................. (3,558)(g) 430
Other (income) expense........................ -- (406)
Minority interests............................ (13)(h) (168)
------------- ------------
Income (loss) before income taxes........... 3,571 2,413
Income tax provision (benefit)................ 1,423(i) 1,181
------------- ------------
Net income (loss)........................... $ 2,148 $ 1,232
------------- ------------
------------- ------------
Pro forma net income per share................ $ 0.11
------------
------------
Pro forma shares used in computation.......... 11,696(k)
</TABLE>
- ------------------------------
(a) The statement of operations data for the Completed Acquisitions for the year
ended December 31, 1995 represent the results of operations of such
companies from January 1, 1995 to the earlier of their respective dates of
acquisition or December 31, 1995. Each of the Completed Acquisitions has
been accounted for as a purchase. Accordingly, the results of operations of
each such acquired company are included in the Company's results of
operations from the date of acquisition. See the financial statements of the
significant Completed Acquisitions appearing elsewhere in this Prospectus.
(b) The statement of operations data for the Good Samaritan Consolidation for
the year ended December 31, 1995 represent the results of operations of Good
Samaritan Supply for the year ended December 31, 1995, including the pro
forma results of operations giving effect to acquisitions by Good Samaritan
Supply completed in June 1996 and October 1996, as if the Company owned
50.1% of the outstanding common stock of Good Samaritan Supply on January 1,
1995 and had consolidated the results of operations of Good Samaritan Supply
for the entire year. See the financial statements of Good Samaritan Supply
appearing elsewhere in this Prospectus.
(c) The adjustment to selling, general and administrative expenses consists of
(1) an increase in amortization of excess of cost over net assets acquired
of the Completed Acquisitions over a 40-year period, as if such companies
were acquired on January 1, 1995 ($270,000), (2) reductions to historical
amounts related to compensation, employee benefits and other owner/operator
expenses for certain Completed Acquisitions that will not be incurred by the
Company after the acquisitions were completed ($648,000), (3) the
elimination of a management fee to an affiliate of the Company's principal
stockholder ($50,000) and (4) an increase in amortization of goodwill
initially recorded in connection with the Minority Interest Conversions
($113,000).
(d) The adjustment to interest expense reflects (1) additional interest expense
that would have been incurred had the consideration in the form of debt
related to the Company's acquisitions been incurred on January 1, 1995
($1,248,000), including the Bridge Loan, and (2) a reduction in interest
expense for Good Samaritan Supply had the Company's initial investment in
Good Samaritan Supply occurred on January 1, 1995 and had the proceeds from
such investment been used by Good Samaritan Supply to reduce its outstanding
debt ($133,000). The interest expense related to additional long-term debt
incurred by the Company in connection with the acquisitions is based on an
average interest rate of 9.00%, which approximates the borrowing rate in
effect for the respective periods.
(e) The adjustment to minority interests reflects (1) a reduction in minority
interests related to the Minority Interest Conversions relating to the
existing companies at January 1, 1995 and the Completed Acquisitions, as if
such conversions had occurred on January 1, 1995 ($32,000), and (2)
additional minority interests related to pro forma adjustments (c) and (d)
and (f) ($2,000).
(f) Certain of the companies included in the Completed Acquisitions were treated
as S corporations for income tax purposes and, accordingly, did not record
any federal or state income taxes. In addition, the historical results of
operations for Royal Care, included as a Completed Acquisition, did not
include an income tax provision because the company was in a net operating
loss carryforward position. The adjustment to income tax provision reflects
(1) an income tax provision as if the S corporations had been subject to
federal and state income taxes at an estimated effective tax rate of 40%
($416,000), (2) an income tax benefit, using an estimated effective tax rate
of 40%, on pro forma adjustments (c) and (d) above ($275,000), and (3) an
adjustment to reflect an income tax benefit for the operating loss of Royal
Care, at an estimated effective tax rate of 40% ($860,000).
22
<PAGE>
(g) The adjustment to interest expense reflects the retirement of certain
long-term debt of the Company by applying a portion of the estimated net
proceeds of the Offering as more fully described in "Use of Proceeds," as if
such transaction had occurred on January 1, 1995.
(h) The adjustment to minority interests reflects additional minority interests
related to the pro forma adjustment to interest expense for Good Samaritan
Supply included in pro forma adjustment (g) above.
(i) The adjustment to income tax provision reflects an estimated effective tax
rate of 40% on pro forma adjustment (g) above.
(j) Pro forma to give effect to the issuance of the Additional GTCR Shares and
to an additional 1,208,036 shares of Common Stock assumed to have been
issued at an assumed initial public offering price of $14.00 per share, the
proceeds of which will fund a one-time mandatory preferential distribution
(estimated to be approximately $16.9 million) to the Company's principal
stockholder with respect to the Company's Class A Common Stock (which stock
will be converted into Common Stock contemporaneously with the Offering).
See Note 3 of Notes to the Consolidated Financial Statements of the Company.
(k) Shares used in the computation of pro forma net income per share, as
adjusted, give effect to (1) the issuance of 794,581 shares of Common Stock
in connection with the Minority Interest Conversions, (2) the issuance of
174,554 shares of Common Stock in connection with the conversion of the
Royal Care Note, (3) the issuance and sale of the 5,357,000 shares of Common
Stock offered by the Company hereby, (4) the issuance of 565,625 Additional
GTCR Shares and (5) the issuance of 33,620 shares of Common Stock issued in
connection with a Completed Acquisition. Common Stock sold to management and
directors and stock options issued within the twelve-month period preceding
the proposed filing date of the Company's public offering are included as if
they were outstanding for the period presented. The dilutive effect (107,895
shares) of all such Common Stock sold to management and directors and
options issued within the twelve-month period was calculated using the
treasury stock method and an assumed initial public offering price of $14.00
per share.
23
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMPLETED GOOD SAMARITAN PRO FORMA
AMC ACQUISITIONS (A) CONSOLIDATION (B) ADJUSTMENTS PRO FORMA
------------ --------------- ----------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Revenues................................... $ 32,357 $ 13,555 $ 13,842 $ -- $ 59,754
Cost of revenues........................... 23,259 9,096 11,885 -- 44,240
------------ --------------- -------- ------------- -----------
Gross profit............................. 9,098 4,459 1,957 -- 15,514
Selling, general and administrative
expenses.................................. 7,290 4,238 1,714 (185)(c) 13,057
------------ --------------- -------- ------------- -----------
Operating income......................... 1,808 221 243 185 2,457
Interest expense........................... 1,213 329 238 280(d) 2,060
Other (income) expense..................... (75) (84) (13) -- (172)
Minority interests......................... (4) -- 30 (11)(e) 15
------------ --------------- -------- ------------- -----------
Income (loss) before income taxes and
extraordinary item...................... 674 (24) (12) (84) 554
Income tax provision (benefit)............. 324 6 (42) 13(f) 301
------------ --------------- -------- ------------- -----------
Income (loss) before extraordinary
item.................................... $ 350 $ (30) $ 30 $ (97) $ 253
------------ --------------- -------- ------------- -----------
------------ --------------- -------- ------------- -----------
Pro forma income per share before
extraordinary item........................ $ 0.05
------------
------------
Pro forma shares used in computation....... 6,578(j)
<CAPTION>
OFFERING PRO
FORMA PRO FORMA AS
ADJUSTMENTS ADJUSTED
------------- ------------
<S> <C> <C>
Revenues................................... $ -- $ 59,754
Cost of revenues........................... -- 44,240
------------- ------------
Gross profit............................. -- 15,514
Selling, general and administrative
expenses.................................. -- 13,057
------------- ------------
Operating income......................... -- 2,457
Interest expense........................... (1,846)(g) 214
Other (income) expense..................... (172)
Minority interests......................... (4)(h) 11
------------- ------------
Income (loss) before income taxes and
extraordinary item...................... 1,850 2,404
Income tax provision (benefit)............. 739(i) 1,040
------------- ------------
Income (loss) before extraordinary
item.................................... $ 1,111 $ 1,364
------------- ------------
------------- ------------
Pro forma income per share before
extraordinary item........................ $ 0.12
------------
------------
Pro forma shares used in computation....... 11,696(k)
</TABLE>
- ------------------------------
(a) The statement of operations data for the Completed Acquisitions occurring
after December 31, 1995 for the six months ended June 30, 1996 represent the
results of operations for such companies from January 1, 1996 to the earlier
of their respective dates of acquisition or June 30, 1996. Each of the
Completed Acquisitions has been accounted for as a purchase. Accordingly,
the results of operations of each such acquired company are included in the
Company's results of operations from the date of acquisition. See the
financial statements of the significant Completed Acquisitions appearing
elsewhere in this Prospectus.
(b) The statement of operations data for the Good Samaritan Consolidation for
the six months ended June 30, 1996 represent the results of operations of
Good Samaritan Supply for the six months ended June 30, 1996, including the
pro forma results of operations giving effect to acquisitions by Good
Samaritan Supply in June 1996 and October 1996, as if the Company owned
50.1% of the outstanding common stock of Good Samaritan Supply on January 1,
1996 and had consolidated the results of operations of Good Samaritan Supply
for the six months ended June 30, 1996. See the financial statements of Good
Samaritan Supply appearing elsewhere in this Prospectus.
(c) The adjustment to selling, general and administrative expenses consists of
(1) an increase in amortization of excess of cost over net assets acquired
of the Completed Acquisitions over a 40-year period, as if such companies
were acquired on January 1, 1996 ($20,000), (2) reductions to historical
amounts related to compensation, employee benefits and other owner/operator
expenses for certain Completed Acquisitions that will not be incurred by the
Company after the acquisitions were completed ($237,000), (3) the
elimination of a management fee to an affiliate of the Company's principal
stockholder ($25,000) and (4) an increase in amortization of goodwill
initially recorded in connection with the Minority Interest Conversions
($57,000).
(d) The adjustment to interest expense reflects (1) additional interest expense
that would have been incurred had the consideration in the form of debt
related to the Company's acquisitions been incurred on January 1, 1996
($337,000), including the Bridge Loan, and (2) a reduction in interest
expense for Good Samaritan Supply had the Company's initial investment in
Good Samaritan Supply occurred on January 1, 1995 and had the proceeds from
such investment been used by Good Samaritan Supply to reduce its outstanding
debt ($57,000). The interest expense related to additional long-term debt
incurred by the Company in connection with the acquisitions is based on an
average interest rate of 9.00%, which approximates the borrowing rate in
effect for the respective periods.
(e) The adjustment to minority interest reflects (1) additional minority
interest related to the Minority Interest Conversions relating to the
existing companies at January 1, 1995 and the Completed Acquisitions, as if
such conversions had occurred on January 1, 1996 ($4,000) and (2) a
reduction in minority interests related to pro forma adjustments (c) and (d)
and (f) ($16,000).
(f) Certain of the companies included in the Completed Acquisitions were treated
as S corporations for income tax purposes and, accordingly, did not record
any federal or state income taxes. In addition, the historical results of
operations for Royal Care, included as a Completed Acquisition, did not
include an income tax provision because the company was in a net operating
loss carryforward position. The adjustment to income tax provision reflects
(1) an income tax provision as if the S corporations had
24
<PAGE>
been subject to federal and state income taxes at an estimated effective tax
rate of 40% ($178,000), (2) an income tax benefit using an estimated
effective tax rate of 40% on pro forma adjustments (c) and(d) above
($15,000), and (3) an adjustment to reflect an income tax benefit for the
operating loss of Royal Care, at an estimated effective tax rate of 40%
($150,000).
(g) The adjustment to interest expense reflects the retirement of certain
long-term debt of the Company by applying a portion of the estimated net
proceeds of the Offering as more fully described in "Use of Proceeds" as if
such transaction had occurred on January 1, 1996.
(h) The adjustment to minority interest reflects additional minority interests
related to the pro forma adjustment to interest expense for Good Samaritan
Supply included in pro forma adjustment (g) above.
(i) The adjustment to income tax provision reflects an estimated effective tax
rate of 40% on pro forma adjustment (g) above.
(j) Pro forma to give effect to the issuance of the Additional GTCR Shares and
to an additional 1,208,036 shares of Common Stock assumed to have been
issued at an assumed initial public offering price of $14.00 per share, the
proceeds of which will fund a one-time mandatory preferential distribution
(estimated to be approximately $16.9 million) to the Company's principal
stockholder with respect to the Company's Class A Common Stock (which stock
will be converted into Common Stock contemporaneously with the Offering).
See Note 3 of Notes to the Consolidated Financial Statements of the Company.
(k) Shares used in the computation of pro forma net income per share, as
adjusted, give effect to (1) the issuance of 794,581 shares of Common Stock
in connection with the Minority Interest Conversions, (2) the issuance of
174,554 shares of Common Stock in connection with the conversion of the
Royal Care Note, (3) the issuance and sale of the 5,357,000 shares of Common
Stock offered by the Company hereby, (4) the issuance of 565,625 Additional
GTCR Shares and (5) the issuance of 33,620 shares of Common Stock in
connection with a Completed Acquisition. Common Stock sold to management and
directors and stock options issued within the twelve-month period preceding
the proposed filing date of the Company's public offering are included as if
they were outstanding for the period presented. The dilutive effect (107,895
shares) of all such Common Stock sold to management and directors and
options issued within the twelve-month period was calculated using the
treasury stock method and an assumed initial public offering price of $14.00
per share.
25
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
CONSOLIDATED
CONSOLIDA- PRO FORMA AMC PRO FORMA
ACTUAL GOOD TION BEFORE PRO FORMA AMC BEFORE
SAMARITAN ADJUST- COMPLETED COMPLETED ADJUST- OFFERING
AMC SUPPLY MENTS (A) ACQUISITIONS ACQUISITIONS MENTS (B) ADJUSTMENTS
--------- ----------- ----------- ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and equivalents......... $ 500 $ 686 $ -- $ 1,186 $ 1,398 $ 44 $ 2,628
Accounts receivable.......... 11,632 3,950 (31) 15,551 5,363 -- 20,914
Inventories.................. 4,615 698 -- 5,313 1,255 -- 6,568
Income taxes receivable...... 571 425 -- 996 -- -- 996
Other current assets......... 475 301 -- 776 25 -- 801
--------- ----------- ----------- ------------- ------------ ----------- ------------
Total current assets....... 17,793 6,060 (31) 23,822 8,041 44 31,907
--------- ----------- ----------- ------------- ------------ ----------- ------------
Fixed assets, net.............. 3,027 1,253 -- 4,280 877 -- 5,157
Goodwill and organization
costs, net.................... 34,398 5,521 3,444 43,363 7,961 4,848 56,172
Other long-term assets......... 6,612 463 (6,000) 1,075 50 -- 1,125
--------- ----------- ----------- ------------- ------------ ----------- ------------
Total assets............... $ 61,830 $ 13,297 $ (2,587) $ 72,540 $ 16,929 $ 4,892 $ 94,361
--------- ----------- ----------- ------------- ------------ ----------- ------------
--------- ----------- ----------- ------------- ------------ ----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............. $ 2,432 $ 2,883 $ (31) $ 5,284 $ 860 $ -- $ 6,144
Preferential distribution
payable..................... -- -- -- -- -- 24,832 24,832
Current portion of long-term
debt........................ 4,017 192 -- 4,209 4,359 -- 8,568
Accrued expenses............. 1,526 88 -- 1,614 618 -- 2,232
--------- ----------- ----------- ------------- ------------ ----------- ------------
Total current liabilities.. 7,975 3,163 (31) 11,107 5,837 24,832 41,776
Long-term liabilities:
Long-term debt............... 28,167 5,054 -- 33,221 9,907 (2,086) 41,042
Deferred income taxes........ 109 43 -- 152 -- -- 152
Other long-term liabilities.. -- -- -- -- 800 -- 800
Minority interests............. 2,743 -- 2,481 5,224 -- (2,743) 2,481
Stockholders' equity:
Common stock and paid-
in-capital.................. 22,535 5,300 (5,300) 22,535 385 (12,640) 10,280
Retained earnings
(deficit)................... 301 (263) 263 301 -- (2,471) (2,170)
--------- ----------- ----------- ------------- ------------ ----------- ------------
Total stockholders'
equity.................... 22,836 5,037 (5,037) 22,836 385 (15,111) 8,110
--------- ----------- ----------- ------------- ------------ ----------- ------------
Total liabilities and
stockholders' equity...... $ 61,830 $ 13,297 $ (2,587) $ 72,540 $ 16,929 $ 4,892 $ 94,361
--------- ----------- ----------- ------------- ------------ ----------- ------------
--------- ----------- ----------- ------------- ------------ ----------- ------------
<CAPTION>
OFFERING
PRO FORMA
ADJUST- PRO FORMA AS
MENTS (C) ADJUSTED
----------- ------------
<S> <C> <C>
Current assets:
Cash and equivalents......... $ 5,356 $ 7,984
Accounts receivable.......... -- 20,914
Inventories.................. -- 6,568
Income taxes receivable...... 168 1,164
Other current assets......... -- 801
----------- ------------
Total current assets....... 5,524 37,431
----------- ------------
Fixed assets, net.............. -- 5,157
Goodwill and organization
costs, net.................... -- 56,172
Other long-term assets......... -- 1,125
----------- ------------
Total assets............... $ 5,524 $ 99,885
----------- ------------
----------- ------------
Current liabilities:
Accounts payable............. $ -- $ 6,144
Preferential distribution
payable..................... (24,832) --
Current portion of long-term
debt........................ (7,900) 668
Accrued expenses............. (129) 2,103
----------- ------------
Total current liabilities.. (32,861) 8,915
Long-term liabilities:
Long-term debt............... (36,931) 4,111
Deferred income taxes........ -- 152
Other long-term liabilities.. -- 800
Minority interests............. -- 2,481
Stockholders' equity:
Common stock and paid-
in-capital.................. 75,569 85,849
Retained earnings
(deficit)................... (253) (2,423)
----------- ------------
Total stockholders'
equity.................... 75,316 83,426
----------- ------------
Total liabilities and
stockholders' equity...... $ 5,524 $ 99,885
----------- ------------
----------- ------------
</TABLE>
(SEE NOTES ON FOLLOWING PAGE)
26
<PAGE>
- ------------------------------
(a) Reflects the consolidation of Good Samaritan Supply as a result of an
additional investment of $2.0 million from the proceeds of the Offering
(which will increase AMC's ownership to 50.1% of the outstanding common
stock of Good Samaritan Supply) and to record as goodwill the excess of the
total purchase price over the fair value of Good Samaritan Supply's net
assets, reverse the Company's 40% equity investment in Good Samaritan
Supply, record the minority interest amount and eliminate intercompany
balances.
(b) Reflects (i) the issuance of 794,581 shares of Common Stock with a value of
$7.2 million as consideration for the minority interests in all of the
Company's subsidiaries, except Good Samaritan Supply, resulting in an
increase to goodwill of $4.5 million and a decrease to minority interests of
$2.7 million, (ii) the issuance of options as part of the Minority Interest
Conversions, resulting in a decrease to retained earnings of $86,000, (iii)
the issuance of 310,208 shares of Common Stock to management and directors
at a purchase price of $1.41 per share for cash of $44,000 and notes
receivable of $394,000, with the notes receivable being netted against
common stock and paid-in-capital, (iv) the conversion of the $2.1 million
Royal Care Note (including accrued interest) into 174,554 shares of Common
Stock at $11.90 per share (85% of the assumed initial public offering
price), resulting in an increase in common stock and paid-in-capital of $2.4
million and additional goodwill of $358,000, (v) the recording of a
liability in connection with the preferential distribution payable to the
Company's principal stockholder with respect to the Company's Class A Common
Stock of $24.8 million, with a corresponding reduction of retained earnings
and paid-in-capital, and (vi) the recognition of the Special Compensation
Charges resulting in a decrease to retained earnings of $2.4 million.
(c) Reflects the issuance of the 565,625 Additional GTCR Shares (See "Company
Background") and the issuance of 5,357,000 shares of Common Stock offered by
the Company hereby at an assumed initial public offering price of $14.00 per
share and the application of the net proceeds therefrom. The Additional GTCR
Shares were accounted for as additional common stock and paid-in-capital of
$7.9 million, with a corresponding reduction in retained earnings and common
stock and additional paid-in-capital for the preferential distribution on
the Class A Common Stock.
The increase to stockholders' equity is comprised of the net proceeds from
the Offering of $67,650,000 and the issuance of the 565,625 Additional GTCR
Shares, which have a value of $7.9 million based on the assumed public
offering price of $14.00 per share, reduced by the effect of the GTCR
termination fee of $321,000 and the interest on the Bridge Loan of $100,000,
less a tax benefit of $168,000 calculated using an effective tax rate of
40%.
The application of the net proceeds from the Offering are estimated to be as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Net proceeds from the Offering...................................................................... $ 67,650
Mandatory preferential distribution to the Company's principal stockholder.......................... (16,913)
Payment to affiliate of Company's principal stockholder of accrued management fees $(129) and to
terminate a professional services agreement ($321)................................................. (450)
Additional 10.1% investment in Good Samaritan Supply (which will be used to repay a portion of the
long-term debt of Good Samaritan Supply)........................................................... (2,000)
Repayment of Bridge Loan (including accrued interest of $100)....................................... (5,100)
Repayment of a portion of long-term debt, including current portion................................. (37,831)
---------
Net increase in cash and equivalents................................................................ $ 5,356
---------
---------
</TABLE>
27
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OPERATING DATA
The selected consolidated financial data of the Company for the year ended
December 31, 1993 and the period from January 1, 1994 to August 2, 1994, have
been derived from the audited financial statements of Gatti LTC Services, Inc.
(the combined results of operations of G.S.H.C., Inc. and the Contract Services
Division of Louis F. Gatti, Inc.) presented elsewhere in this Prospectus. The
selected consolidated financial data of the Company for the year ended June 30,
1995 and the six months ended December 31, 1995 have been derived from the
Company's audited financial statements presented elsewhere in this Prospectus.
The selected financial data for the periods ended December 31, 1991 and 1992
have been derived from financial statements of the Company's Predecessor not
included herein.
<TABLE>
<CAPTION>
PREDECESSOR (1)
-------------------------------------------- THE COMPANY (2)
PERIOD FROM -------------------------
JANUARY 1, SIX MONTHS
YEARS ENDED DECEMBER 31, 1994 TO YEAR ENDED ENDED
------------------------------- AUGUST 2, JUNE 30, DECEMBER 31,
1991 1992 1993 1994 1995 1995
--------- --------- --------- ----------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................. $ 4,211 $ 6,515 $ 9,099 $ 6,917 $ 24,793 $ 27,347
Cost of revenues......................... 3,021 4,700 6,824 4,963 17,896 19,559
--------- --------- --------- ----------- ----------- ------------
Gross profit........................... 1,190 1,815 2,275 1,954 6,897 7,788
Selling, general and administrative
expenses................................ 886 1,301 1,760 1,315 5,663 6,275
--------- --------- --------- ----------- ----------- ------------
Operating income....................... 304 514 515 639 1,234 1,513
Interest expense......................... 135 135 162 78 1,001 1,053
Other (income) expense................... -- -- 4 -- (171) (210)
Minority interests....................... -- -- -- -- 43 (5)
--------- --------- --------- ----------- ----------- ------------
Income before income taxes............. 169 379 349 561 361 675
Income tax provision..................... 21 97 143 24 269 379
--------- --------- --------- ----------- ----------- ------------
Net income............................. $ 148 $ 282 $ 206 $ 537 $ 92 $ 296
--------- --------- --------- ----------- ----------- ------------
--------- --------- --------- ----------- ----------- ------------
Pro forma net income per
share (3)............................... $ 0.01 $ 0.04
----------- ------------
----------- ------------
Pro forma weighted average shares
outstanding (3)......................... 6,209 6,578
</TABLE>
- ------------------------
(1) Represents results of operations of Gatti LTC Services, Inc., which was
acquired by the Company on August 2, 1994. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview."
(2) The Company was formed in November 1993 by management and an investment fund
affiliated with Golder, Thoma, Cressey, Rauner, Inc. and commenced
operations with the acquisition of Gatti LTC Services, Inc. on August 2,
1994.
(3) Pro forma to give effect to the issuance of the Additional GTCR Shares and
to an additional 1,208,036 shares of Common Stock assumed to have been
issued at an assumed initial public offering price of $14.00 per share, the
proceeds of which will fund a one-time mandatory preferential distribution
(estimated to be approximately $16.9 million) to the Company's principal
stockholder with respect to the Company's Class A Common Stock (which stock
will be converted into Common Stock contemporaneously with the Offering).
See Note 3 of Notes to the Consolidated Financial Statements of the Company.
28
<PAGE>
The selected consolidated financial data presented below at December 31,
1991, 1992, 1993, 1994 and 1995 and for each of the years then ended have been
derived from the financial data presented in the preceding table. The financial
data have been reformatted in order to facilitate a better analytical review and
to correspond to future reporting periods. The selected consolidated financial
data at, and for the six months ended, June 30, 1995 and 1996 have been derived
from unaudited consolidated financial statements, which include all adjustments,
consisting of normal recurring adjustments, which management considers necessary
for a fair presentation of the financial position and results of operations for
these periods. The data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Consolidated Financial Statements of the Company and related Notes thereto, and
other financial information included elsewhere herein. The data for the periods
presented are not necessarily comparable because of acquisitions made throughout
these periods. The results for the six months ended June 30, 1996 are not
necessarily indicative of the results to be expected for the full year.
<TABLE>
<CAPTION>
PREDECESSOR
-------------------------------------------- THE COMPANY
--------------------------------------------------
PERIOD FROM PERIOD FROM YEARS ENDED DECEMBER 31,
YEARS ENDED DECEMBER 31, JANUARY 1, AUGUST 3, -----------------------------------
1994 TO 1994 TO PRO FORMA
------------------------------- AUGUST 2, DECEMBER 31, AS ADJUSTED
1991 1992 1993 1994 1994 1994 (1) 1995 1995 (2)
--------- --------- --------- ----------- ------------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
STATEMENT OF OPERATIONS
DATA:
Revenues................. $ 4,211 $ 6,515 $ 9,099 $ 6,917 $ 8,091 $ 15,008 $ 44,049 $ 109,867
Cost of revenues......... 3,021 4,700 6,824 4,963 5,991 10,954 31,464 79,823
--------- --------- --------- ----------- ------------- ----------- --------- -----------
Gross profit........... 1,190 1,815 2,275 1,954 2,100 4,054 12,585 30,044
Selling, general and
administrative
expenses................ 886 1,301 1,760 1,315 1,909 3,224 10,029 27,775
--------- --------- --------- ----------- ------------- ----------- --------- -----------
Operating income....... 304 514 515 639 191 830 2,556 2,269
Interest expense......... 135 135 162 78 292 370 1,762 430
Other (income) expense... -- -- 4 -- (69) (69) (312) (406)
Minority interests....... -- -- -- -- 6 6 32 (168)
--------- --------- --------- ----------- ------------- ----------- --------- -----------
Income before income
taxes and
extraordinary item.... 169 379 349 561 (38) 523 1,074 2,413
Income tax provision..... 21 97 143 24 (21) 3 669 1,181
--------- --------- --------- ----------- ------------- ----------- --------- -----------
Income before
extraordinary item.... $ 148 $ 282 $ 206 $ 537 $ (17) $ 520 $ 405 $ 1,232
--------- --------- --------- ----------- ------------- ----------- --------- -----------
--------- --------- --------- ----------- ------------- ----------- --------- -----------
Pro forma income per
share before
extraordinary item
(4)..................... $ 0.06 $ 0.11
Pro forma weighted
average shares
outstanding (4)......... 6,578 11,696
SELECTED OPERATING DATA (AT
PERIOD END):
Number of beds served.... 2,900 3,900 7,000 9,600 9,600 23,400
BALANCE SHEET DATA (AT
PERIOD END):
Working capital.......... $ (338) $ (149) $ 221 $ 216 $ 3,517 $ 3,517 $ 9,540
Total assets............. 2,094 3,369 3,955 5,240 16,965 16,965 44,997
Long-term debt, excluding
current portion......... 468 435 530 264 8,039 8,039 23,505
Stockholders' equity..... 179 462 668 1,205 5,596 5,596 14,573
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------
PRO FORMA
AS ADJUSTED
1995 1996 1996 (3)
--------- --------- -----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................. $ 16,702 $ 32,357 $ 59,754
Cost of revenues......... 11,905 23,259 44,240
--------- --------- -----------
Gross profit........... 4,797 9,098 15,514
Selling, general and
administrative
expenses................ 3,754 7,290 13,057
--------- --------- -----------
Operating income....... 1,043 1,808 2,457
Interest expense......... 709 1,213 214
Other (income) expense... (102) (75) (172)
Minority interests....... 37 (4) 11
--------- --------- -----------
Income before income
taxes and
extraordinary item.... 399 674 2,404
Income tax provision..... 290 324 1,040
--------- --------- -----------
Income before
extraordinary item.... $ 109 $ 350 $ 1,364
--------- --------- -----------
--------- --------- -----------
Pro forma income per
share before
extraordinary item
(4)..................... $ 0.02 $ 0.05 $ 0.12
Pro forma weighted
average shares
outstanding (4)......... 6,578 6,578 11,696
SELECTED OPERATING DATA (AT
PERIOD END):
Number of beds served.... 17,600 32,200
BALANCE SHEET DATA (AT
PERIOD END):
Working capital.......... $ 4,824 $ 9,818 $ 28,516
Total assets............. 37,511 61,830 99,885
Long-term debt, excluding
current portion......... 15,707 28,167 4,111
Stockholders' equity..... 12,527 22,836 83,426
</TABLE>
- ------------------------------
(1) Statement of operations data for the year ended December 31, 1994 include
the results of operations of Gatti LTC Services, Inc., which was acquired by
the Company on August 2, 1994, for the period January 1, 1994 to August 2,
1994, and the results of the Company for the period August 3, 1994 to
December 31, 1994. The results of the operations of the Company for the
period August 3, 1994 to December 31,
29
<PAGE>
1994 reflect the effects of the application of purchase accounting, which
consist of $80,000 of amortization of excess of cost over net assets
acquired of Gatti LTC Services, Inc., $230,000 of interest expense related
to the debt incurred to acquire Gatti LTC Services, Inc. and $92,000 of
income tax benefit related to such interest expense.
(2) Pro forma as adjusted income statement data for the year ended December 31,
1995 give effect to the Completed Acquisitions, the Minority Interest
Conversions, the Good Samaritan Consolidation, the conversion of the Royal
Care Note, the issuance of shares to management in September 1996 and the
elimination of an annual $50,000 management fee to an affiliate of the
Company's principal stockholder, and are further adjusted to give effect to
the issuance of the Additional GTCR Shares and the offering of 5,357,000
shares of Common Stock made hereby and the use of a portion of the estimated
net proceeds therefrom to repay interest-bearing indebtedness in the amount
of $44.8 million, in each case as if such events had occurred on January 1,
1995. See "Company Background" and "Unaudited Pro Forma Consolidated
Financial Statements."
(3) Pro forma as adjusted income statement data for the six months ended June
30, 1996 give effect to the Completed Acquisitions that occurred after
December 31, 1995, the Minority Interest Conversions, the Good Samaritan
Consolidation, the conversion of the Royal Care Note, the issuance of shares
to management in September 1996 and the elimination of an annual $50,000
management fee to an affiliate of the Company's principal stockholder, and
are further adjusted to give effect to the issuance of the Additional GTCR
Shares and the offering of 5,357,000 shares of Common Stock made hereby and
the use of a portion of the estimated net proceeds therefrom to repay
interest-bearing indebtedness in the amount of $44.8 million, in each case
as if such events had occurred on January 1, 1996. Pro forma as adjusted
balance sheet data give pro forma effect to the Completed Acquisitions that
occurred after June 30, 1996, the Minority Interest Conversions, the Good
Samaritan Consolidation, shares issued to management in September 1996, the
recognition of the Special Compensation Charges and the conversion of the
Royal Care Note, and are further adjusted to give effect to the issuance of
the Additional GTCR Shares and the offering of 5,357,000 shares of Common
Stock made hereby and the use of a portion of the estimated net proceeds
therefrom to repay interest-bearing indebtedness in the amount of $44.8
million, to fund a one-time mandatory preferential distribution (estimated
to be approximately $16.9 million) to the Company's principal stockholder
with respect to the Company's Class A Common Stock (which stock will be
converted into Common Stock contemporaneously with the Offering) and to fund
a $450,000 payment to an affiliate of the Company's principal stockholder to
discharge accrued management fees and to terminate a professional services
agreement, in each case as if such events occurred on June 30, 1996. See
"Company Background," "Use of Proceeds" and "Unaudited Pro Forma
Consolidated Financial Statements."
(4) In the case of historical periods, pro forma to give effect to the issuance
of the Additional GTCR Shares and to an additional 1,208,036 shares of
Common Stock assumed to have been issued at an assumed initial public
offering price of $14.00 per share, the proceeds of which will fund a
one-time mandatory preferential distribution (estimated to be approximately
$16.9 million) to the Company's principal stockholder with respect to the
Company's Class A Common Stock (which stock will be converted into Common
Stock contemporaneously with the Offering). See Note 3 of Notes to the
Consolidated Financial Statements of the Company.
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Consolidated Financial Information and Operating Data and the Consolidated
Financial Statements of the Company and Notes thereto included elsewhere in this
Prospectus.
OVERVIEW
The Company commenced operations in August 1994 with its initial acquisition
of a long-term care pharmacy provider. Since its inception, the Company has
experienced substantial growth in revenues and operating profits primarily
through the acquisition of 16 long-term care pharmacy companies and two
prescription medical supply services companies. As of October 23, 1996, the
Company served approximately 41,800 residents at over 540 facilities in nine
states. For the six months ended June 30, 1996 on a pro forma basis,
approximately 69% of the Company's revenues were derived from pharmacy and
consultant pharmacist services, 16% of revenues were derived from enteral and
intravenous infusion therapy services and prescription medical supplies, 12%
were derived from sales of non-prescription medical supplies and wholesale
pharmaceuticals and 3% were derived from sales of other product and services.
The Company's services (other than consultant pharmacist services) primarily
consist of the dispensing of pharmaceuticals and pharmaceutical products. See
"Business -- Services." The Company does not bill for such services separately
from the sale of products. Accordingly, for financial reporting purposes the
Company presents on a combined basis revenues and costs of revenues from the
sale of products and services. For the six months ended June 30, 1996 on a pro
forma basis, less than 1% of the Company's revenues were derived from consultant
pharmacist services.
The Company's total revenues have increased from $15.0 million for the year
ended December 31, 1994 to $44.0 million for the year ended December 31, 1995
and from $16.7 million for the six months ended June 30, 1995 to $32.4 million
for the six months ended June 30, 1996. This growth has been primarily achieved
through acquisitions ($24.9 million of the increase for the twelve-month periods
and $11.9 million of the increase for the six-month periods), as well as through
internal growth ($4.1 million of the increase for the twelve-month periods and
$3.8 million of the increase for the six-month periods). The Company defines
"internal growth" to consist of increased market penetration in existing
markets, fold-in acquisitions in established areas that are assimilated into
existing operations, start-up facilities in new areas in states where the
Company was already established, and sales of new products and services to
existing customers.
In 1994, the Company completed the acquisitions of Gatti LTC Services, Inc.,
based in Indiana, Pennsylvania (August 1994) (the Company's predecessor
company), and Williamson Drug Company, Inc. ("WDC"), based in Harrisonburg,
Virginia (August 1994). In 1995, the Company completed the acquisitions of Nihan
& Martin, Inc. ("N&M"), based in Rockford, Illinois (March 1995); Dixon
Pharmacy, Inc. ("Dixon"), based in Dixon, Illinois (April 1995); Extended Care
Associates, Inc. ("ECA"), based in Lynchburg, Virginia (April 1995); Sterling
Healthcare Services, Inc. ("SHS"), based in Shreveport, Louisiana (August 1995),
as well as two other less significant acquisitions. In 1996, the Company
completed the acquisitions of Pharmed, Inc. ("Pharmed"), based in Alexandria,
Louisiana (May 1996); Royal Care of America, Inc. ("Royal Care"), based in
Malta, New York (August 1996), as well as seven other less significant
acquisitions. The recently-completed acquisition of Royal Care adds
approximately 7,700 residents served in 155 facilities in upper New York State
(excluding the New York City metropolitan area). Royal Care experienced
significant operating losses in 1994 (approximately $1.3 million) and 1995
(approximately $1.6 million) and from September 1994 through June 1995 underwent
a substantial restructuring and reorganization, whereby Royal Care hired a new
chief executive officer and replaced a majority of its total staff. The Company
believes that Royal Care has successfully emerged from its reorganization and
will provide a profitable platform company for the New York State marketplace.
31
<PAGE>
The purchase agreements relating to the Company's acquisitions of WDC, ECA
and Specialized Patient Care Services, Inc. entitle the sellers to receive
additional contingent cash consideration based primarily upon future earnings of
such companies. The Company currently estimates that the maximum amount of such
future contingent payments will not exceed $3.5 million through June 30, 2000.
See Note 2 of Notes to Consolidated Financial Statements of the Company. The
Company anticipates that such future contingent payments will be funded from
cash flow to be generated from the Company's operations.
The Company operates in an environment impacted by cost containment efforts
as well as the consolidation of the long-term care industry. The Company has
pursued an acquisition program designed to expand its presence in selected
geographic markets. Several of the Company's acquisitions include businesses in
geographic markets with a mix of products, services and profitability that
differs in certain respects from the Company's existing operations. While the
product and service mix and profitability of the Company's acquired businesses
have varied from state to state, the Company expects that its results of
operations will continue to be affected by the timing of acquisitions as well as
the Medicaid and Medicare reimbursement rates in a given state. For the six
months ended June 30, 1996 on a pro forma basis, 42% of the Company's pharmacy
revenues were paid by Medicare and Medicaid, 26% were paid by long-term care
facilities, (a portion of which were, in turn, reimbursed by Medicare), 21% were
paid in cash or charged to individuals and 11% were charged to third-party
insurance plans or other commercial accounts.
In April 1996, the Company acquired a 40% equity interest in Good Samaritan
Supply, principally a provider of pharmaceutical products and services and
medical supplies to the long-term care market. For the year ended December 31,
1995 and the six months ended June 30, 1996, Good Samaritan Supply's revenues
were $18.9 million and $10.7 million, respectively. Compared to AMC's base
business, Good Samaritan Supply's mix of products and services includes a larger
percentage of revenues derived from the sale of lower gross margin medical
supplies. For the six months ended June 30, 1996, approximately 31% of Good
Samaritan Supply's revenues were derived from the sale of pharmaceutical
products and services and 69% were derived from the sale of medical supplies. As
of October 23, 1996, Good Samaritan Supply's medical supply business served 207
of the Society's 236 long-term care facilities, and its pharmaceutical products
and services business served approximately 2,400 patients in 20 of such
facilities. Good Samaritan Supply has a corporate staff with operational,
marketing and human resources capabilities, which the Company expects to be able
to synergistically employ in its other operations. Upon consummation of the
Offering, the Company will increase its equity interest in Good Samaritan Supply
to 50.1% and Good Samaritan Supply will become a consolidated operating
subsidiary of the Company for financial reporting purposes. As a result of the
consolidation of Good Samaritan Supply, the Company expects its overall gross
and operating margins to be slightly lower on a comparative basis, primarily due
to Good Samaritan Supply's larger concentration of lower margin medical supply
revenues.
In March 1996, the Company refinanced its senior credit facility in order to
increase the availability of capital for acquisitions and operating needs from
an aggregate of $33.0 million under its previous credit facility to an aggregate
of $50.0 million under its new Credit Agreement. The Company also has the option
to cause the agent-lenders under the Credit Agreement to seek additional lenders
to increase borrowing availability under its Credit Agreement to $75.0 million.
In August 1996, the Company received a $5.0 million bridge loan (the "Bridge
Loan") from a commercial lending institution. The Bridge Loan matures on January
2, 1997, and repayment of the Bridge Loan is guaranteed by the GTCR Fund.
Proceeds of the Bridge Loan were used to partially fund acquisitions that
occurred in August and October 1996 and for general corporate purposes. See "--
Liquidity and Capital Resources" and "Management -- Compensation Committee
Interlocks Insider Participation -- Bridge Loan Guaranty."
THIRD AND FOURTH QUARTER 1996 CHARGES
In September 1996 the Company issued an aggregate of 310,208 shares of
Common Stock to certain directors and officers, and in November 1996 the Company
accelerated the vesting of all such
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<PAGE>
shares that were unvested. See "Management -- Compensation Committee Interlocks
and Insider Participation -- Director Stock Issuances" and "Certain Transactions
- -- Company Common Stock Issuances." In connection with these transactions, in
the quarter ended September 30, 1996 and the quarter ending December 31, 1996,
the Company will record additional non-cash, non-recurring compensation expense
in the amount of $1.3 million and $1.1 million, respectively. In August 1996 in
connection with the Minority Interest Conversions, the Company issued an
aggregate of 794,581 shares of Common Stock to certain shareholders of its
subsidiaries, and options to purchase shares of common stock in certain
subsidiaries were converted into options to purchase an aggregate of 146,635
shares of Common Stock. See "Company Background." As part of the Minority
Interest Conversions, the Company has recorded additional goodwill in the amount
of $4.5 million, which goodwill the Company expects to amortize ratably over a
40-year period. See Note 3 of Notes to the Company's Consolidated Financial
Statements. The Company will recognize no corresponding tax benefits from any of
these charges. In addition, in connection with the issuance of the options to
purchase an aggregate of 146,635 shares of Common Stock, the Company will record
additional non-cash compensation expense in the amount of $86,000 in the quarter
ended September 30, 1996 and an aggregate of $176,000 to be recognized over the
seven-year vesting period of such options.
In addition, the Company will record one-time, non-recurring charges in the
fiscal quarter ending December 31, 1996 in the amount of approximately $287,500
($173,000 net of tax) relating to the early termination in connection with the
Offering of the professional services agreement with an affiliate of its
principal stockholder and in the amount of approximately $245,000 ($135,000 net
of tax) relating to special bonuses paid to members of management in connection
with the Offering, including bonuses of $120,000, $58,000, $37,000 and $15,000
paid to Timothy L. Burfield (President and Chief Executive Officer), Charles R.
Wallace (Vice President--Finance, Chief Financial Officer and Treasurer),
Michael B. Freedman (Vice President--Business Development) and J. Jeffrey
Gephart (Vice President--National Sales), respectively.
RECENT QUARTERLY RESULTS
For the third quarter ended September 30, 1996, the Company's revenues were
$22.1 million, representing an increase of $9.2 million, or 71%, over revenues
of $12.9 million for the corresponding period of 1995. The Company had an
operating loss for the 1996 period of $(396,000), compared to operating income
in the amount of $743,000 for the corresponding 1995 period. The Company
incurred a net loss of $(1.3) million for the quarter ended September 30, 1996,
compared to net income of $129,000 for the corresponding 1995 period. The
results for the quarter ended September 30, 1996 reflect a nonrecurring,
non-cash compensation charge in the amount of $1.3 million (with no income tax
benefit) associated with the issuance in September 1996 of an aggregate of
310,208 shares of Common Stock to management and directors. Earnings (loss) per
share was $(0.01) (on a pro forma basis, excluding the nonrecurring compensation
charge) and $0.02 for the three months ended September 30, 1996 and 1995,
respectively. The Company completed the acquisition of Royal Care of America,
Inc. on August 5, 1996, as well as one other less significant acquisition in the
three months ended September 30, 1996. The third quarter 1996 results include
the post-acquisition results of operations of these acquired businesses. The
foregoing financial information has been derived from the unaudited financial
statements of the Company, which, in the opinion of management, include all
adjustments (consisting only of normal recurring accruals) necessary to present
fairly the financial information set forth therein. The results of operations
for the quarter ended September 30, 1996 are not necessarily indicative of the
results that may be expected for the full year.
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1995 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1994
(PREDECESSOR COMPANY PRIOR TO AUGUST 3, 1994)
The results of operations for the six months ended December 31, 1994 include
the results of operations of the Company from August 3, 1994 through December
31, 1994 and the results of
33
<PAGE>
operations of the Company's predecessor company, Gatti LTC Services, Inc.
("GSI") as well as limited start-up expenses of the Company, in each case for
the period July 1, 1994 through August 2, 1994 (the date of GSI's acquisition by
the Company).
Revenues for the six months ended December 31, 1995 increased to $27.3
million from $9.3 million for the six months ended December 31, 1994. Of this
$18.0 million increase, $17.3 million was attributable to revenues related to
the acquisitions of WDC in August 1994 and N&M, Dixon, ECA, SHS, and two other
less significant acquisitions in 1995.
Gross profit for the six months ended December 31, 1995 was $7.8 million
compared to $2.4 million for the six months ended December 31, 1994, which
represents an increase of $5.4 million. Gross profit as a percentage of revenues
increased to 28.5% for the six months ended December 31, 1995 from 26.2% for the
six months ended December 31, 1994. The increase in gross profit as a percentage
of revenues was primarily the result of acquisitions of companies with higher
gross margins and more favorable reimbursement rates in the states in which such
companies operate. This effect was partially offset by the acquisition of
certain retail pharmacy operations that typically operate at lower gross
margins.
Selling, general and administrative expenses for the six months ended
December 31, 1995 were $6.3 million compared to $2.2 million for the six months
ended December 31, 1994, representing an increase of $4.1 million. Selling,
general and administrative expenses as a percentage of revenues decreased to
22.9% for the six months ended December 31, 1995 from 23.7% for the six months
ended December 31, 1994. The decrease in total selling, general and
administrative expenses as a percentage of revenues was primarily related to
operating leverage generated by the acquisitions, which resulted in a larger
revenue base over which to spread corporate expenses. In addition, certain of
the acquired businesses had a lower ratio of selling, general and administrative
expenses to revenues than that of GSI.
Operating income for the six months ended December 31, 1995 was $1.5 million
compared to $0.2 million for the six months ended December 31, 1994. The
increase in operating income reflects the effect of increased revenues, achieved
both through acquisitions and internal growth, as well as the improvement in the
Company's gross profit margin and the selling, general and administrative
expense to revenues ratio discussed above. Operating income as a percentage of
revenues increased to 5.5% for the six months ended December 31, 1995 from 2.5%
for the six months ended December 31, 1994.
Interest expense of $1.1 million for the six months ended December 31, 1995
increased by $0.8 million over interest expense for the six months ended
December 31, 1994, primarily as a result of higher debt levels related to the
acquisitions made in the 1995 period.
YEAR ENDED JUNE 30, 1995 COMPARED TO YEAR ENDED JUNE 30, 1994 (PREDECESSOR
COMPANY)
The results of operations for the year ended June 30, 1995 include the
operating results of the Company from August 3, 1994 through June 30, 1995 as
well as limited start-up expenses of the Company for the period July 1, 1994
through August 2, 1994. The year ended June 30, 1994 results represent the
results of operations of the Company's predecessor company, GSI.
Revenues for the year ended June 30, 1995 increased to $24.8 million from
$10.6 million for the year ended June 30, 1994. Of this $14.2 million increase,
$9.7 million was attributable to revenues related to the acquisitions of WDC in
August 1994 and the acquisitions of N&M, Dixon, ECA, SHS, and two other less
significant acquisitions made in the period ended June 30, 1995.
Gross profit for the year ended June 30, 1995 was $6.9 million compared to
$2.9 million for the year ended June 30, 1994, which represents an increase of
$4.2 million. Gross profit as a percentage of revenues increased to 27.8% for
the year ended June 30, 1995 from 27.0% for the year ended June 30, 1994. The
increase in gross profit as a percentage of revenues was primarily the result of
acquisitions of companies with higher gross margins and more favorable
reimbursement rates in the states in which such companies operate. This effect
was partially offset by the acquisition of certain retail pharmacy operations
that typically operate at lower gross margins.
34
<PAGE>
Selling, general and administrative expenses for the year ended June 30,
1995 were $5.7 million compared to $2.0 million for the year ended June 30,
1994, representing an increase of $3.8 million. Selling, general and
administrative expenses as a percentage of revenues increased to 22.8% for the
year ended June 30, 1995 from 18.6% for the year ended June 30, 1994. The
increase in total selling, general and administrative expenses as a percentage
of revenues was primarily the result of increased amortization of goodwill
($187,000) associated with the acquired companies, as well as increased costs
associated with the establishment of the Company's corporate office.
Operating income for the year ended June 30, 1995 was $1.2 million compared
to $0.9 million for the year ended June 30, 1994. The increase in operating
income reflects the effect of increased revenues, achieved both through
acquisitions and internal growth, as well as the improvement in the Company's
gross profit margin, partially offset by increases in selling, general and
administrative expenses. Operating income as a percentage of revenues decreased
to 5.0% for the year ended June 30, 1995 from 8.4% for the year ended June 30,
1994 as a result of the increase in selling, general and administrative expense
as a percentage of revenues discussed above, partially offset by the improved
gross profit percentage discussed above.
Interest expense of $1.0 million for the year ended June 30, 1995 increased
by $0.8 million over interest expense for the year ended June 30, 1994,
primarily as a result of higher debt levels related to the acquisitions made
during the year ended June 30, 1995.
PERIOD FROM JANUARY 1, 1994 TO AUGUST 2, 1994 (PREDECESSOR COMPANY) COMPARED TO
PERIOD FROM
JANUARY 1, 1993 TO AUGUST 2, 1993 (PREDECESSOR COMPANY)
The results of operations for both of the periods represent the results of
operations of the Company's predecessor company, GSI.
Revenues for the period from January 1, 1994 to August 2, 1994 increased to
$6.9 million from $5.0 million for the period from January 1, 1993 to August 2,
1993. The increase of $1.9 million was the result of growth in the number of
customers served by GSI.
Gross profit for the period from January 1, 1994 to August 2, 1994 was $2.0
million compared to $1.2 million for the period from January 1, 1993 to August
2, 1993, which represents an increase of $0.8 million. Gross profit as a
percentage of revenues increased to 28.2% for the period from January 1, 1994 to
August 2, 1994 from 24.6% for the period from January 1, 1993 to August 2, 1993.
The increase in gross profit as a percentage of revenues was primarily the
result of a change in wholesale purchasing arrangements in late 1993 resulting
in more favorable procurement costs, as well as an improvement in GSI's business
conditions in 1994.
Selling, general and administrative expenses for the period from January 1,
1994 to August 2, 1994 were $1.3 million compared to $0.9 million for the period
from January 1, 1993 to August 2, 1993, representing an increase of $0.4
million. Selling, general and administrative expenses as a percentage of
revenues increased to 19.0% for the period from January 1, 1994 to August 2,
1994 from 18.8% for the period from January 1, 1993 to August 2, 1993. The
increase in total selling, general and administrative expenses as a percentage
of revenues was primarily related to additional operating expenses incurred by
GSI related to GSI's sale to the Company.
Operating income for the period from January 1, 1994 to August 2, 1994 was
$0.6 million compared to $0.3 million for the period from January 1, 1993 to
August 2, 1993. The increase in operating income reflected the effect of
increased revenues, achieved through internal growth, as well as the improvement
in GSI's gross profit margin, partially offset by an increase in selling,
general and administrative expenses. Operating income as a percentage of
revenues increased to 9.2% for the period from January 1, 1994 to August 2, 1994
from 5.8% for the period from January 1, 1993 to August 2, 1993, as a result of
the improvement in the gross margin percentage discussed above and the reduction
in selling, general and administrative expenses as a percentage of revenues
discussed above.
Interest expense was $0.1 million for both periods. GSI maintained a
consistent level of borrowing during the periods.
35
<PAGE>
As the Company and its predecessor, GSI, which was acquired on August 2,
1994, have had various fiscal year-ends during the past three years the Company
has reformatted the selected consolidated financial data of the Company and its
predecessor to years ended December 31 in order to facilitate a better
analytical review and to correspond to future reporting periods. See "Selected
Consolidated Financial Information and Operating Data."
The following table sets forth for the periods indicated certain information
derived from the Company's reformatted results of operations expressed as a
percentage of revenues for such periods:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
-----------------------------------------------------
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues............................................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues..................................................... 75.0 73.0 71.4 71.3 71.9
--------- --------- --------- --------- ---------
Gross profit....................................................... 25.0 27.0 28.6 28.7 28.1
Selling, general and administrative expenses......................... 19.3 21.5 22.8 22.5 22.5
--------- --------- --------- --------- ---------
Operating income................................................... 5.7 5.5 5.8 6.2 5.6
Interest expense..................................................... 1.8 2.5 4.0 4.2 3.7
Other (income) expense............................................... -- (0.5) (0.7) (0.6) (0.2)
Minority interests................................................... -- -- 0.1 0.2 --
--------- --------- --------- --------- ---------
Income before income taxes and extraordinary item.................. 3.8 3.5 2.4 2.4 2.1
Income tax provision................................................. 1.5 -- 1.5 1.7 1.0
--------- --------- --------- --------- ---------
Income before extraordinary item................................... 2.3 3.5 0.9 0.7 1.1
Extraordinary item................................................... -- -- -- -- (1.4)
--------- --------- --------- --------- ---------
Net income (loss).................................................. 2.3% 3.5% 0.9% 0.7% (0.3)%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Revenues for the six months ended June 30, 1996 increased to $32.4 million
from $16.7 million for the comparable 1995 period. Of this $15.7 million
increase, $11.9 million was due to acquisitions, and $3.8 million was due to
internal growth.
Gross profit for the six months ended June 30, 1996 was $9.1 million
compared to $4.8 million for the comparable 1995 period, an increase of $4.3
million. Gross profit as a percentage of revenues decreased to 28.1% for the six
months ended June 30, 1996 from 28.7% for the comparable 1995 period. The
decrease in gross profit as a percentage of revenues was primarily the result of
Medicaid reimbursement adjustments in the latter half of 1995, which resulted in
lower reimbursement rates for certain products, and certain pharmaceutical cost
increases. The effect of these factors was partially offset by the acquisition
of certain companies with higher margin products.
Selling, general and administrative expenses for the six months ended June
30, 1996 were $7.3 million compared to $3.8 million for the comparable 1995
period, an increase of $3.5 million. Selling, general and administrative
expenses as a percentage of revenues were 22.5% for both the six months ended
June 30, 1996 and the six months ended June 30, 1995. The increase in total
selling, general and administrative expenses in absolute dollars was primarily
the result of increased amortization of goodwill ($165,000) and increased
ongoing legal and accounting fees ($125,000) associated with the acquired
companies, as well as the expansion of the corporate office staff in the latter
half of 1995 to support the Company's growth.
Operating income for the six months ended June 30, 1996 was $1.8 million
compared to $1.0 million for the comparable 1995 period. The increase in
operating income reflects the effects of increased revenues, achieved both
through acquisitions and internal growth. Operating income as a percentage of
revenues decreased to 5.6% for the six months ended June 30, 1996 from 6.2% for
the comparable 1995 period, due to the decrease in gross profit as a percentage
of revenues discussed above.
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<PAGE>
Interest expense of $1.2 million for the six months ended June 30, 1996
increased by $0.5 million over interest expense for the six months ended June
30, 1995, primarily as a result of higher debt levels related to acquisitions.
In March 1996 the Company recorded an extraordinary item in the amount of
$0.4 million (net of an income tax benefit of $0.4 million) reflecting the
write-off of deferred financing charges in connection with the refinancing of
the Company's credit facility.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
(PREDECESSOR COMPANY
PRIOR TO AUGUST 3, 1994)
The results of operations for the year ended December 31, 1994 include the
results of operations of the Company's predecessor company, Gatti LTC Services,
Inc. ("GSI"), through August 2, 1994, its acquisition date by the Company, and
the results of the Company from August 3, 1994 through December 31, 1994.
Revenues for the year ended December 31, 1995 increased to $44.0 million
from $15.0 million for the year ended December 31, 1994. Of this $29.0 million
increase, $24.9 million was attributable to the acquisitions of WDC in August
1994 and N&M, Dixon, ECA, SHS and two other less significant acquisitions in
1995, and $4.1 million was attributable to internal growth.
Gross profit for the year ended December 31, 1995 was $12.6 million compared
to $4.1 million for the year ended December 31, 1994, which represents an
increase of $8.5 million. Gross profit as a percentage of revenues increased to
28.6% for the year ended December 31, 1995 from 27.0% for the year ended
December 31, 1994. The increase in gross profit as a percentage of revenues was
primarily the result of acquisitions of companies with higher gross margins and
more favorable reimbursement rates in the states in which such acquired
companies operate. This effect was partially offset by the acquisition of
certain retail pharmacy operations that typically operate at a lower gross
margin.
Selling, general and administrative expenses for the year ended December 31,
1995 were $10.0 million compared to $3.2 million for the year ended December 31,
1994, representing an increase of $6.8 million. Selling, general and
administrative expenses as a percentage of revenues increased to 22.8% for the
year ended December 31, 1995 from 21.5% for the year ended December 31, 1994.
The increase in total selling, general and administrative expenses is primarily
the result of increased amortization of goodwill and increased ongoing
professional fees associated with the acquired companies and expenses associated
with the formation of the Company, including the hiring of management personnel
and the establishment of the corporate office.
Operating income for the year ended December 31, 1995 was $2.6 million
compared to $0.8 million for the year ended December 31, 1994. The increase in
operating income reflects the effect of increased revenues, achieved both
through acquisitions and internal growth, as well as the improvement in the
Company's gross profit margin. Operating income as a percentage of revenues
increased to 5.8% for the year ended December 31, 1995 from 5.5% for the year
ended December 31, 1994.
Interest expense of $1.8 million for the year ended December 31, 1995
increased by $1.4 million over interest expense for the year ended December 31,
1994, primarily as a result of higher debt levels related to acquisitions.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
(PREDECESSOR COMPANY
PRIOR TO AUGUST 3, 1994)
Revenues for the year ended December 31, 1994 increased to $15.0 million
from $9.1 million for the year ended December 31, 1993. Of this $5.9 million
increase, $1.7 million was due to the acquisition of WDC in August 1994 and $4.2
million was due to internal growth.
Gross profit for the year ended December 31, 1994 was $4.1 million compared
to $2.3 million for the year ended December 31, 1993, which represents an
increase of $1.8 million. Gross profit as a percentage of revenues increased to
27.0% for the year ended December 31, 1994 from 25.0% for the
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<PAGE>
year ended December 31, 1993. The increase in gross profit as a percentage of
revenues was primarily the result of a change in wholesale purchasing in late
1993 resulting in more favorable procurement costs, as well as an overall
improvement in the Company's business conditions in 1994.
Selling, general and administrative expenses for the year ended December 31,
1994 were $3.2 million compared to $1.8 million for the year ended December 31,
1993, representing an increase of $1.4 million. Selling, general and
administrative expenses as a percentage of revenues increased to 21.5% for the
year ended December 31, 1994 from 19.3% for the year ended December 31, 1993.
The increase in total selling, general and administrative expenses is primarily
the result of the acquisition of WDC, including the resulting increased
amortization expense.
Operating income for the year ended December 31, 1994 was $0.8 million
compared to $0.5 million for the year ended December 31, 1993. The increase in
operating income in absolute dollars reflects the effect of increased revenues,
achieved both through the acquisition of WDC and internal growth. Operating
income as a percentage of revenues decreased to 5.5% for the year ended December
31, 1994 from 5.7% for the year ended December 31, 1993.
Interest expense of $0.4 million for the year ended December 31, 1994
increased by $0.2 million over interest expense for the year ended December 31,
1993, primarily as a result of higher debt levels related to the acquisition of
WDC.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal cash requirements to date have been to fund
acquisitions, to provide working capital to support internal revenue growth and
for capital expenditures. The Company's principal sources of cash have been
capital provided by its principal stockholder ($22.5 million through October 15,
1996), proceeds of borrowings under its Credit Agreement and the Bridge Loan and
cash generated from operations. The Company plans to use approximately $16.9
million of the net proceeds from the Offering to make a mandatory distribution
to its principal stockholder. The Company plans to use other net proceeds from
the Offering to (i) make a $450,000 payment to GTCR IV, L.P. in payment of
accrued management fees under a professional services agreement and in exchange
for the termination of such agreement; (ii) make an additional investment in
Good Samaritan Supply ($2.0 million), which will be used to repay a portion of
Good Samaritan Supply's long-term debt; (iii) repay the Bridge Loan ($5.0
million), plus accrued interest thereon (approximately $100,000); and (iv) repay
a portion of long-term debt, including the current portion (approximately $37.8
million), resulting in excess cash generated from the Offering of approximately
$5.4 million.
Net cash provided (used) by operating activities was $0.2 million, ($0.5)
million and $0.2 million for the years ended December 31, 1993, 1994 and 1995,
respectively, and $0.5 million and ($0.9) million for the six months ended June
30, 1995 and 1996, respectively. The net use of cash for the six months ended
June 30, 1996 was primarily attributable to an increase in accounts receivable
related to internal sales growth and slower payments at certain of the Company's
operating subsidiaries.
Net cash used in investing activities was $0.1 million, $12.4 million and
$22.8 million for the years ended December 31, 1993, 1994 and 1995,
respectively, and $16.8 million and $14.3 million for the six months ended June
30, 1995 and 1996, respectively. The majority of these expenditures were related
to the acquisitions completed in the respective periods, including the
acquisition of the predecessor company, along with capital expenditures. Capital
expenditures were $0.2 million, $0.3 million and $0.7 million for the years
ended December 31, 1993, 1994 and 1995, respectively, and $0.3 million and $0.8
million for the six months ended June 30, 1995 and 1996, respectively. The
capital expenditures for the six months ended June 30, 1996 increased as a
result of leasehold improvements at one location, and increases in equipment
leased to customers and medication carts used in locations served.
The Company's Credit Agreement provides for maximum borrowings in the
aggregate of $50.0 million, consisting of a $10.0 million revolving line of
credit, a $15.0 million revolving acquisition loan facility and a $25.0 million
term loan. At the Company's option, the maximum borrowings
38
<PAGE>
under the Credit Agreement can be increased by $25.0 million to $75.0 million,
consisting of a $4.0 million maximum increase to the revolving line of credit
and a $21.0 million maximum increase to the revolving acquisition loan facility.
Borrowings under the revolving line of credit are limited to specified
percentages of eligible inventories and accounts receivable. At June 30, 1996
the Company had $4.6 million available under the revolving line of credit. At
June 30, 1996, total borrowings outstanding under the Credit Agreement were
$32.0 million. The revolving line of credit terminates on March 15, 2002, the
revolving acquisition loan facility converts to a term loan on March 15, 1998
and thereafter matures on March 31, 2002 and the term loan matures on March 31,
2002. The Credit Agreement provides for interest to be paid on amounts
outstanding at varying rates, depending on the applicable facility under the
Credit Agreement and whether certain financial ratio tests are met. At June 30,
1996, the annual interest rate on the revolving line of credit was 10.0%, the
annual interest rate on the acquisition loan facility was 8.5% and the annual
interest rate on the term loan facility was 8.5%. The Credit Agreement also
provides for a 0.5% annual commitment fee on the unused portion of the revolving
line of credit and acquisition loan facility ($18.0 million at June 30, 1996).
Obligations under the Credit Agreement are secured by a lien on substantially
all of the assets of AMC Regional Holdings, Inc. and its subsidiaries, as well
as by a pledge by the Company of all of the issued and outstanding common stock
of AMC Regional Holdings, Inc. See Note 6 of Notes to the Consolidated Financial
Statements of the Company included elsewhere in this Prospectus.
On June 21, 1996, Good Samaritan Supply entered into a credit agreement
providing for maximum borrowings in the aggregate of $15.0 million, consisting
of a $5.0 million revolving line of credit, a $5.0 million revolving acquisition
loan facility and a $5.0 million term loan (the "Good Samaritan Supply Credit
Agreement"). At June 30, 1996, total borrowings under the Good Samaritan Supply
Credit Agreement were $5.0 million. The revolving line of credit terminates on
June 21, 2001. The revolving acquisition loan facility converts to a term loan
on the earlier of (i) June 21, 1998 and (ii) the date on which (x) Good
Samaritan Supply has obtained term loans in an aggregate principal amount of
$5.0 million and (y) the aggregate principal amount outstanding under the
revolving acquisition loan facility is $5.0 million, and thereafter matures on
June 21, 2001. The term loan matures on June 21, 2001. See Note 6 of Notes to
the Financial Statements of Good Samaritan Supply included elsewhere in this
Prospectus.
The Company's acquisition strategy will require significant capital
resources and, as a result, the Company may need to incur additional
indebtedness. To pursue its acquisition strategy, the Company also may need to
issue, in public and private transactions, equity or debt securities, the terms
of which will depend on market and other conditions. Capital is needed not only
for acquisitions, but also for the effective integration, operation and
expansion of existing businesses. The Company believes that the net proceeds of
the Offering, together with cash generated from operations and funds available
under the Credit Agreement, as well as funds available to Good Samaritan Supply
under the Good Samaritan Supply Credit Agreement, will be adequate to support
the foreseeable capital requirements of the Company and its subsidiaries through
1998, although a large acquisition or a number of smaller acquisitions may
require funds in excess of such availability.
PRO FORMA RESULTS OF OPERATIONS COMPARED TO HISTORICAL RESULTS OF OPERATIONS
PRO FORMA SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO HISTORICAL SIX MONTHS
ENDED JUNE 30, 1996. Pro forma revenues for the six months ended June 30, 1996
were $59.8 million, compared to historical revenues during such period of $32.4
million. Six months ended June 30, 1996 pro forma revenues reflect the full
period pro forma effects of (a) the Company's Completed Acquisitions made during
1996 to date, including the acquisitions of Pharmed (which contributed $2.3
million to pro forma revenues, of which $680,000 was included in the Company's
historical results), Royal Care (which contributed $7.6 million to pro forma
revenues, none of which was included in the Company's historical results) and
seven other less significant acquisitions (which contributed in the aggregate
$5.3 million to pro forma revenues, of which $923,000 was included in the
Company's historical results) and (b) the Good Samaritan Consolidation (which
contributed $13.8 million to pro forma revenues, none of which was included in
the Company's historical results). Pro forma gross profit for
39
<PAGE>
the six months ended June 30, 1996 was $15.5 million, compared to historical
gross profit during the period of $9.1 million, and pro forma operating income
for the period was $2.5 million, compared to historical operating income of $1.8
million.
PRO FORMA YEAR ENDED DECEMBER 31, 1995 COMPARED TO HISTORICAL YEAR ENDED
DECEMBER 31, 1995. Pro forma revenues for the year ended December 31, 1995 were
$109.9 million, compared to historical revenues during such period of $44.0
million. Year ended December 31, 1995 pro forma revenues reflect the full period
pro forma effects of (a) the Company's Completed Acquisitions made during 1995,
including the acquisitions of N&M (which contributed $12.3 million to 1995 pro
forma revenues, of which $10.1 million was included in the Company's historical
results), ECA (which contributed $2.4 million to 1995 pro forma revenues, of
which $1.7 million was included in the Company's historical results), Johnson's
(which contributed $2.2 million to 1995 pro forma revenues, of which $1.6
million was included in the Company's historical results), Dixon (which
contributed $7.0 million to 1995 pro forma revenues, of which $4.8 million was
included in historical results) and SHS (which contributed $8.0 million to 1995
pro forma revenues, of which $3.5 million was included in the Company's
historical results); (b) the Company's Completed Acquisitions made during 1996
to date (including Pharmed (which contributed $3.9 million to 1995 pro forma
revenues, none of which was included in the Company's historical results), Royal
Care (which contributed $15.8 million to 1995 pro forma revenue, none of which
was included in the Company's historical results) and seven other less
significant acquisitions (which contributed in the aggregate $11.0 million to
pro forma revenues, none of which was included in the Company's historical
results); and (c) the Good Samaritan Consolidation (which contributed $25.3
million to pro forma revenues, none of which was included in the Company's
historical results). Pro forma gross profit for the year ended December 31, 1995
was $30.0 million, compared to historical gross profit during the period of
$12.6 million, and pro forma operating income for the period was $2.3 million,
compared to historical operating income of $2.6 million. Pro forma operating
income for the year ended December 31, 1995 reflects the full period pro forma
effects of a $1.6 million operating loss at Royal Care (which was acquired by
the Company in August 1996).
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BUSINESS
GENERAL
American Medserve Corporation ("AMC" or the "Company") is a leading
independent provider of pharmacy services to long-term care institutions,
including skilled nursing facilities, assisted living facilities and other
long-term health care settings. The Company purchases, repackages and dispenses
in patient-ready packaging pharmaceuticals to patients or residents in its
client facilities and provides such facilities with related consultant
pharmacist and information services, including formulary management, automated
medical record-keeping, drug therapy evaluation and assistance with regulatory
compliance. To complement its core pharmacy services, the Company also provides
infusion therapy, specialized nutrition therapy, inhalation and respiratory
therapy and wound care management services, as well as medical supplies and
devices. As of October 23, 1996, AMC provided pharmacy services to approximately
41,800 residents at over 540 facilities located in Colorado, Illinois,
Louisiana, Minnesota, Nebraska, New York, Pennsylvania, South Dakota and
Virginia.
The Company was formed by Timothy L. Burfield (the Company's President and
Chief Executive Officer) and an investment fund affiliated with Golder, Thoma,
Cressey, Rauner, Inc. to participate in the consolidation of the long-term care
pharmacy industry. To meet this objective, the Company has pursued an
acquisition program designed to expand its presence in selected geographic
markets. Since commencing operations in August 1994, the Company has completed
18 acquisitions, including ten acquisitions in 1996. In April 1996, the Company
acquired a 40% equity interest in Good Samaritan Supply. The Company's
co-investor in Good Samaritan Supply is The Evangelical Lutheran Good Samaritan
Foundation, an affiliate of The Evangelical Lutheran Good Samaritan Society (the
"Society"). A 1995 industry survey ranked (by total licensed beds) the Society
as the fifth largest, and largest non-profit, owner-operator of nursing homes in
the United States. As of October 23, 1996, the Society operated 236 long-term
care facilities in 26 states, of which 20 facilities were served by the
Company's long-term care pharmacy operations. The Company believes that the
Society's facilities that are not currently served by the Company's long-term
care pharmacy operations represent a significant potential market for such
operations. See "-- Good Samaritan Alliance."
MARKET OVERVIEW
LONG-TERM CARE INDUSTRY. The long-term care industry encompasses a variety
of types of health care services that are provided primarily to the frail
elderly in varying settings. Those who require 24-hour skilled medical
supervision and are in need of specialized support, rehabilitative, nutritional,
respiratory and other skilled treatments are typically cared for in a nursing
facility, sometimes referred to as a skilled nursing facility. Assisted living
facilities, which are an emerging segment of the long-term care industry, serve
the rapidly growing elderly population who may require assistance with personal
care (such as dressing and bathing), support services (such as housekeeping and
laundry) and intermittent healthcare services (such as assistance with taking
medications and health monitoring). Residents in assisted living facilities
typically do not require continuous medical or skilled nursing care, but choose
not to live at home. Accordingly, assisted living facility residents generally
have lower acuity levels than patients in skilled nursing facilities.
LONG-TERM CARE PHARMACY MARKET. Long-term care pharmacies purchase,
repackage and dispense pharmaceuticals to patients and residents in long-term
care facilities such as skilled nursing facilities, assisted living facilities
and other long-term health care settings. Unlike hospitals, most long-term care
facilities do not have on-site pharmacies but depend instead on outside sources
to provide the necessary products and services. Providers of pharmacy services
to long-term care facilities typically receive a substantial portion of their
payments through reimbursement from Medicare and Medicaid programs, with the
balance of payments being received from individual facility residents (private
pay), non-government insurers and long-term care facilities. In response to a
changing regulatory environment and other factors, including the increasing
acuity levels of residents, the sophistication and breadth of services required
by long-term care facilities have increased dramatically in recent years. Today,
in addition to providing pharmaceuticals, long-term care pharmacies
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provide consultant pharmacist services, which include monitoring the control,
distribution and administration of pharmaceuticals within the long-term care
facility and assisting facilities in complying with applicable regulations, as
well as therapeutic monitoring and drug utilization review services. The Company
believes that a long-term care facility patient is often under prescription for
more than four different medications at a time, and, consequently, high quality,
cost-efficient systems for dispensing and monitoring patient drug regimens are
critical. Providing these services places the long-term care pharmacy in a
central role of influencing the effectiveness and cost of care.
The Company believes that the U.S. market for pharmacy services (including
consulting services and related supplies) in long-term care facilities is
growing due primarily to four factors:
AGING POPULATION. The number of long-term care facility residents is
rising as a result of the aging of the U.S. population. According to the
U.S. Bureau of the Census, the number of persons over age 75 increased by
approximately 31% from 1980 to 1990. In 1990, 6.1% of the population ages 75
to 84 and 24.5% of the population ages 85 or older received care in
long-term care facilities. According to the U.S. Bureau of the Census, the
segment of the population over age 85, which comprises the largest
percentage of residents at long-term care facilities, is the fastest growing
segment of the population and is expected to increase by approximately 43%
from 1990 to 2000.
INCREASING ACUITY OF PATIENTS. The Company believes that the second
factor creating growth in the long-term care pharmacy market is the
increasing acuity level of long-term care facility residents as a result of
payors' efforts to have care delivered in the lowest cost setting. This has
encouraged shorter lengths of stay in acute care hospitals in favor of less
costly long-term care facilities.
EMERGENCE OF ALTERNATIVE LONG-TERM CARE SETTINGS. As the number of
patients being "pushed down" from acute care hospitals to skilled nursing
facilities increases, the demand for residential options such as assisted
living facilities is also expected to increase. Many states have put in
place moratoriums or other restrictions on the growth of skilled nursing
beds. However, alternative care settings, such as assisted living
facilities, are not generally impacted by such restrictions and have been
characterized by significant growth. While the typical assisted living
resident is less medically needy than a skilled nursing or subacute
resident, the assisted living resident generally requires similar long-term
care pharmacy services.
ADVANCES IN DRUG RESEARCH AND DEVELOPMENT. The Company believes that
the long-term care pharmacy market is also growing as a result of advances
in drug research and development, which have resulted in the availability
and use of new drug therapy regimens. More complicated and aggressive drug
therapies, such as intravenously-administered antibiotics, are now
frequently administered in long-term care settings.
TRENDS AFFECTING THE CONSOLIDATION OF THE LONG-TERM CARE PHARMACY
MARKET. The Company believes that there are significant consolidation
opportunities in the long-term care pharmacy market. Prior to the 1970's, the
pharmacy needs of most long-term care facilities were generally fulfilled by
retail pharmacies. Since then, the pharmacy and related consultant and
information needs of long-term care facilities have grown substantially as
regulatory requirements and the reimbursement environment have become more
complex. The Company believes that long-term care pharmacy companies, both
independent and captive (those owned by, or affiliated with, long-term care
providers), have been, and continue to be, better positioned to meet these
changing market demands. As a result, over the past 25 years the proportion of
the long-term care pharmacy market served by retail pharmacies has steadily
declined to approximately 40%, and long-term care pharmacies have become the
more prevalent providers of pharmacy services to this market.
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The long-term care pharmacy market remains highly fragmented. The Company
believes that a growing number of smaller pharmacies are being acquired by
larger, long-term care pharmacies and that there are several factors driving the
consolidation, including the following:
SCALE ADVANTAGES. Larger pharmacies are able to (i) realize advantages
associated with size, including purchasing power, service breadth, more
sophisticated sales and marketing programs and formulary management
capabilities, (ii) achieve efficiencies in administrative functions and
(iii) access the capital resources necessary to support growth.
ABILITY TO SERVE MULTI-SITE CUSTOMERS IN A CHANGING MARKET. The
long-term care market is undergoing change as health care reform proposals
are considered, cost-containment initiatives are implemented, managed care
organizations and other payors seek regional coverage and consolidation
takes place. As a result of their ability to capitalize upon the
opportunities created by these changes, as well as their ability to serve
long-term care customers with several physical locations, larger pharmacies
possess a significant competitive advantage over their smaller counterparts.
The Company believes that there are also significant opportunities for
full-service, long-term care pharmacies with a comprehensive range of
services and regional coverage to provide a spectrum of health care products
and services to managed care organizations and other payors.
REGULATORY EXPERTISE AND SYSTEMS CAPABILITIES. Long-term care
facilities are demanding more sophisticated and specialized services from
pharmacy providers due, in part, to the implementation in 1990 of the
Omnibus Budget Reconciliation Act of 1987 ("OBRA"). The OBRA regulations,
which were designed to upgrade and standardize care in nursing facilities,
mandated strict new standards relating to planning, monitoring and reporting
on the progress of patient care to include, among other things, prescription
drug therapy. As a result, long-term care administrators increasingly seek
experienced pharmacists and specialized providers with computerized
information and documentation systems designed to monitor patient care and
control costs incurred by the facilities and payors.
BUSINESS STRATEGY
The Company seeks to capitalize on the favorable industry trends described
above and continue to expand its position as a leading independent provider of
pharmacy services to long-term care facilities. The Company believes it has
significant opportunities to achieve this objective through the implementation
of its business strategy, the principal components of which include the
following:
ACQUISITIONS. The Company seeks to continue its acquisition program to
capitalize on consolidation opportunities in the long-term care pharmacy
market. Since commencing operations in August 1994 with its initial
acquisition of a long-term care pharmacy provider, the Company has completed
18 acquisitions, including ten acquisitions in 1996. The Company's
acquisition program focuses on acquisition candidates that have experienced
and highly competent local management teams and demonstrated capacities for
growth. The key principle of the Company's acquisition program is the
retention of senior local management at its acquired businesses. The Company
believes that the experienced local management teams in its acquired
businesses have a valuable understanding of their respective markets and
businesses and have strong customer relationships upon which the Company may
capitalize. Seeking to align the interests of management with those of the
Company, the Company encourages management of the acquired companies to
maintain an equity interest in the Company. Upon completion of the Offering,
management of the Company's operating subsidiaries will hold, in the
aggregate, approximately 8.0% of the fully-diluted common equity of the
Company (assuming exercise of all outstanding stock options held by
management of the operating subsidiaries).
The Company utilizes a three-tiered acquisition program focused on
acquiring businesses in targeted states, or markets within states, that are
characterized by substantial growth opportunities and an acceptable
reimbursement climate (I.E., states in which the Medicaid and other
insurance reimbursement rates allow a pharmacy to achieve a pre-tax profit
margin of at least 8-10%). The Company seeks to enter targeted states with
"platform" acquisitions of long-term
43
<PAGE>
care pharmacy providers with strong or leading market positions. The Company
then looks to expand its presence in established, contiguous, regions within
a targeted state by making "add-on" acquisitions as well as acquiring
"fold-in" businesses that can be easily assimilated into the Company's
existing operations. See "-- Acquisition Program."
INTERNAL GROWTH. The Company focuses on promoting internal growth by
expanding the breadth of the Company's services and by increasing its
marketing emphasis on newly-introduced products and services. The Company
believes that the rising acuity levels within the patient population of
long-term care facilities will continue to create increased demand for
pharmacy products and services by residents of such facilities. To
complement its core pharmacy services, the Company provides an array of
health care services, such as infusion therapy (I.E., intravenous
introduction of fluids containing medications and/or nutrients), specialized
nutritional therapy (I.E., introduction, either intravenously or directly
into a patient's digestive system, of nutrient fluids or other fluids),
inhalation and respiratory therapy and wound care management services, as
well as prescription medical supplies and devices. The Company also employs
formulary management techniques (I.E., techniques to manage the dispensing
of pharmaceuticals to minimize cost and maximize therapeutic benefits)
designed to assist physicians in making the best clinical choice of drug
therapy for patients at the lowest cost. In addition, the Company also seeks
to generate internal growth by establishing start-up pharmacy operations in
strategic geographic areas where there are no suitable acquisition
candidates.
ENHANCED OPERATING LEVERAGE. The Company seeks to achieve operating
leverage through, among other things, the consolidation and coordination of
purchasing, administrative and financial reporting functions. In June 1996,
the Company entered into agreements with Managed Health Care Associates,
Inc. ("MHA"), a pharmaceutical group purchasing organization, and with
McKesson Health Systems ("McKesson"), one of the largest wholesale
pharmaceutical distributors in the United States, to consolidate its drug
purchasing activities. The Company intends to capitalize on the economies of
scale in drug purchasing afforded by the MHA and McKesson agreements and to
apply such cost saving opportunities to future acquisitions. In addition,
the Company will benefit from access to drug utilization information,
inventory control and contract compliance software offered through the
Company's agreements with McKesson and MHA. The Company also believes that
significant cost saving opportunities exist in the consolidation of
operating functions such as payroll, audit and insurance. The Company also
intends to continue to develop and upgrade its centralized financial
reporting systems. The Company believes that enhancement of its financial
reporting systems will better enable it to analyze operating data on a
site-by-site, as well as system-wide, basis, enabling it to improve its
budgeting capabilities and more keenly focus its future operating
strategies.
STRATEGIC ALLIANCES. The Company believes significant growth
opportunities exist through the formation of strategic alliances with
long-term care facility operators and other health care industry
participants. The Company believes such alliances, which may take the form
of joint ownership, shared services agreements, co-marketing arrangements,
joint development agreements and/or other collaborative business
arrangements, afford it the opportunity to expand its product and service
offerings and to lower the cost of care, thereby broadening the Company's
appeal to managed care payors. As part of this strategy, in April 1996 the
Company acquired a 40% interest in Good Samaritan Supply. The Company's
co-investor in Good Samaritan Supply is The Evangelical Lutheran Good
Samaritan Foundation, an affiliate of The Evangelical Lutheran Good
Samaritan Society. See "-- Good Samaritan Alliance."
ACQUISITION PROGRAM
The Company has become a leading independent provider of pharmacy services
to long-term care institutions through an acquisition program designed to
capitalize on the consolidation opportunities in the long-term care pharmacy
market. Since commencing operations in August 1994 with its initial acquisition
of a long-term care pharmacy provider, the Company has completed 18
acquisitions, including ten acquisitions in 1996. The Company believes that
through the successful integration of
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acquired businesses it can continue to grow through geographic expansion and by
providing a broader array of pharmacy products and ancillary services to its
client facilities in a cost-effective manner. In addition, successful
acquisitions can result in efficiencies in marketing, information systems and
administrative functions, and can significantly increase purchasing leverage,
all of which can improve the operational results of acquired businesses while
increasing the Company's growth rate.
The Company's acquisition program identifies states (or markets within
states) characterized by substantial growth opportunities and an acceptable
reimbursement climate. Within markets that are so identified, the Company
targets acquisition candidates with highly competent management and a
demonstrated capacity for growth. The Company believes that a large part of its
success to date in integrating acquired businesses is due to its acquisition
model, which encourages local management to continue to retain primary operating
responsibility for the profitability and growth of the acquired business.
Seeking to align the interests of local management with those of the Company,
the Company encourages management of its acquired businesses to maintain an
equity interest in the Company. Upon consummation of the Offering, management of
the Company's operating subsidiaries will hold, in the aggregate, approximately
8.0% of the fully-diluted common equity of the Company (assuming exercise of all
outstanding stock options held by management of the operating subsidiaries).
This aspect of the Company's acquisition program, along with the benefits of
being affiliated with a larger organization, has enhanced the Company's ability
to consummate and integrate new acquisitions. In addition, the retention of
local management enables the Company to capitalize on management's keen
understanding of their respective markets, as well as their strong customer
relationships.
The Company employs a three-tiered acquisition program for long-term care
pharmacy providers, which focuses on businesses that can be characterized as
"platform," "add-on" and "fold-in" acquisition candidates.
PLATFORM ACQUISITIONS: The Company seeks to enter selected states with
"platform" acquisitions of long-term care pharmacy providers with strong market
positions. In analyzing platform acquisition candidates, the Company focuses on
acquiring businesses that have developed strong customer relationships and that
have experienced and highly competent management, effective operating systems
and a broad array of services. Platform acquisitions benefit from the Company's
operational and financial strengths and the Company benefits from the platform
acquisition's regional presence and active involvement in the local community.
In addition, these platform acquisitions typically have the infrastructure in
place to allow the Company to build regional concentration through the
acquisition of smaller long-term care pharmacy businesses in established or new
regions.
ADD-ON ACQUISITIONS: The second tier of the Company's acquisition program
involves the acquisition of "add-on" long-term care pharmacy companies that
expand the Company's presence in a particular state, thereby enabling the
Company to achieve the critical mass required to service clients, including
multi-facility clients, in a cost-effective manner throughout the selected
state. In making such add-on acquisitions, the Company assesses the services
required by the specific state's customer base and then seeks to acquire leading
providers of such services within that state. As with platform acquisitions, the
Company seeks businesses with strong management teams and demonstrated
capacities for growth.
FOLD-IN ACQUISITIONS: In order to increase its market share and realize
economies of scale, the Company seeks to acquire smaller "fold-in" businesses
that can be easily assimilated into the Company's existing operations, including
acquisitions of the long-term care pharmacy businesses of retail pharmacies.
Such fold-in businesses are intended to enable the Company to benefit from the
operating leverage of its existing businesses by acquiring additional market
share and revenues while eliminating or reducing certain general, administrative
and operating costs previously associated with such revenues.
For the six months ended June 30, 1996 on a pro forma basis, approximately
83% of the Company's revenues were from platform acquisitions, 16% were from
add-on acquisitions and 1% were from fold-in acquisitions.
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The following table summarizes by service area each of the Company's
completed acquisitions of long-term care pharmacies to date:
<TABLE>
<CAPTION>
YEAR ACQUIRED
COMPANY
GEOGRAPHIC TYPE OF COMMENCED
SERVICE AREA WHEN ACQUIRED NAME OF ACQUISITION ACQUISITION OPERATIONS
- ---------------- -------------- -------------------------------------------------- ----------- -------------
<S> <C> <C> <C> <C>
Pennsylvania August 1994 Gatti LTC Services, Inc. Platform 1934
April 1995 Johnson's Pharmacy and Medical Supply, Inc. Add-on 1959
October 1996 Critical Care Pharmacy Add-on 1980
Virginia August 1994 Williamson Drug Company, Inc. Platform 1955
April 1995 Extended Care Associates, Inc. Add-on 1992
April 1996 PRN, Inc. Add-on 1993
June 1996 Woodbine Pharmacy, Inc. Fold-in 1990
Illinois March 1995 Nihan & Martin, Inc. Platform 1925
April 1995 Dixon Pharmacy, Inc. Add-on 1971
March 1996 Crawford Drug Fold-in 1865
Louisiana August 1995 Sterling Healthcare Services, Inc. Platform 1989
May 1996 Pharmed, Inc. Add-on 1964
May 1996 Pharmed of Baton Rouge, Inc. Add-on 1989
Colorado, April 1996 Good Samaritan Supply Services, Inc. Platform 1992
Minnesota,
Nebraska and
South Dakota
New York August 1996 Royal Care of America, Inc. Platform 1972
October 1996 Okie's Pharmacy Fold-in 1976
</TABLE>
In addition to pursuing rapid growth through acquisitions of long-term care
pharmacies, the Company has expanded, and expects to continue to expand, the
range of products and services that it offers through the acquisition of
businesses that provide ancillary services complementary to the Company's core
pharmacy services and products. In June 1995 the Company acquired Gatti Medical
Supply, Inc., based in Indiana, Pennsylvania and in August 1996 the Company
acquired Specialized Patient Care Services, Inc., based in Mobile, Alabama, each
of which provides prescription medical supply services to long-term care
patients.
As consideration for future acquisitions, the Company intends to use various
combinations of Common Stock, cash and debt securities. The Company also intends
to continue to be competitive and to acquire operations that are priced
appropriately and meet strategic objectives. The Company typically values
candidates based on number of beds served, business mix, quality of management
and the target's suitability as a platform, add-on or fold-in acquisition.
GOOD SAMARITAN ALLIANCE
In April 1996 the Company acquired a 40% equity interest in Good Samaritan
Supply (which interest will increase to 50.1%, upon exercise by the Company of
an option to acquire an additional equity interest from Good Samaritan Supply
upon consummation of the Offering), in which its co-investor is The Evangelical
Lutheran Good Samaritan Foundation. See "Company Background." The Evangelical
Lutheran Good Samaritan Foundation is an affiliate of The Evangelical Lutheran
Good Samaritan Society (the "Society"). A 1995 industry survey ranked (by total
licensed beds) the Society as the fifth largest, and largest non-profit,
owner-operator of nursing homes in the United States, operating 236 long-term
care facilities in 26 states as of October 23, 1996. At October 23, 1996, the
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Society served over 27,000 beds, consisting of approximately 9,500 assisted
living facility beds and approximately 17,500 skilled nursing facility beds. Of
these over 27,000 beds, the Company's long-term care pharmacy operations served
approximately 2,400 beds at October 23, 1996.
Good Samaritan Supply was formed by The Evangelical Lutheran Good Samaritan
Foundation in 1992 to provide pharmaceutical products and services and medical
supplies primarily to facilities affiliated with the Society and, secondarily,
to the long-term market generally. Good Samaritan Supply acquired Capitol Drug
Company, Inc., its initial long-term care pharmacy, in June 1994 to serve the
Minneapolis metropolitan market; Professional Pharmacy Services, Inc. in
February 1996 located in Loveland, Colorado; Unidose LTC Pharmacy, Inc. in June
1996, serving Nebraska from its locations in Omaha and Lincoln; and Unomed, Inc.
in October 1996, based in Sioux Falls, South Dakota. For the year ended December
31, 1995 and the six months ended June 30, 1996, Good Samaritan Supply's
revenues were $18.9 million and $10.7 million, respectively. For the six months
ended June 30, 1996, approximately 31% of Good Samaritan Supply's revenues were
derived from the sale of pharmaceutical products and services and 69% were
derived from the sale of medical supplies.
The Company's investment in Good Samaritan Supply expands the Company's
product and service offerings and provides the Company with an opportunity to
expand its long-term care pharmacy services in the twelve states in which the
Society's operations are currently concentrated. In addition, under the terms of
the Company's agreement with Good Samaritan Supply, the Company will assist Good
Samaritan Supply in the marketing of Good Samaritan Supply's home medical
equipment and supplies to the customers of the Company's current and future
long-term care pharmacies. See "Certain Transactions -- Good Samaritan
Relationship."
SERVICES
The Company purchases, repackages and dispenses in patient-ready packaging
pharmaceuticals to patients or residents in its client facilities and provides
such facilities with related consultant pharmacist and information services,
including formulary management, automated medical record-keeping, drug therapy
evaluation and regulatory assistance. To complement its core pharmacy services,
the Company provides an array of health care services, such as infusion therapy,
specialized nutritional therapy, inhalation and respiratory therapy and wound
care management services, as well as prescription medical supplies and devices.
For the six months ended June 30, 1996 on a pro forma basis, approximately 69%
of the Company's revenues were derived from pharmacy and consultant pharmacist
services, 16% of revenues were derived from enteral and intravenous infusion
therapy services and other prescription medical supplies, 12% were derived from
sales of non-prescription medical supplies and wholesale pharmaceuticals and 3%
were derived from sales of other products and services.
PHARMACY SERVICES. The Company's core business is providing pharmaceutical
dispensing services to residents of long-term care facilities. The Company
purchases, repackages and dispenses in patient-ready packaging prescription
pharmaceuticals in accordance with physician orders and delivers such
prescriptions at least daily to long-term care facilities for administration to
residents by the nursing staffs of these facilities. The Company provides 24
hour coverage 365 days per year from 32 sites in eight states. In addition, the
Company, through its operating subsidiaries in Illinois and Pennsylvania, offers
retail pharmacy services.
Upon receipt of a doctor's order, the information is entered into one of the
Company's management information systems, which automatically reviews the order
for patient-specific allergies and potentially adverse interactions with other
medications the patient is receiving. Following this analysis, a report on each
order is produced for review by a Company pharmacist, who performs a prospective
drug utilization analysis of the order and, if appropriate, substitutes generic
drugs approved for equivalence by the U.S. Food and Drug Administration ("FDA").
In addition, subject to the prescribing physician's approval, the pharmacist may
make generic or therapeutic substitutions based on the Company's formulary
guidelines.
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The Company provides pharmaceuticals to its clients through a patient-ready
unit dose distribution system. The Company divides the pharmaceuticals received
in bulk form from its suppliers into patient-ready unit dose packages. The
patient-ready, unit dose format is designed to reduce errors, encourage
compliance by patients, increase convenience for nursing staffs, improve control
over the distribution of pharmaceuticals and save nursing administration time
relative to the bulk systems traditionally used by retail pharmacies.
As an additional service, the Company furnishes its clients with information
captured by its computerized medical records and documentation system. This
system captures patient care information which is used to create monthly
management and quality assurance reports. The Company believes that this system
of information management, combined with the unit dose delivery system, improves
the efficiency and controls in nursing administration and reduces the likelihood
of drug-related adverse consequences.
CONSULTANT PHARMACIST SERVICES. Federal and state regulations mandate that
long-term care facilities improve the quality of patient care by offering
consultant pharmacist services to monitor and report on prescription drug
therapy. The OBRA legislation implemented in 1990 seeks to further upgrade and
standardize health care by setting forth more stringent standards relating to
planning, monitoring and reporting on the progress of prescription drug therapy
as well as facility-wide drug usage. Noncompliance with these regulations may
result in monetary sanctions as well as the potential loss of the facility's
ability to participate in Medicare and Medicaid reimbursement programs.
The Company provides consultant pharmacist services that help clients comply
with federal and state regulations applicable to long-term care facilities. The
Company's services include (i) reviewing each patient's drug regimen to assess
the appropriateness and efficacy of drug therapies, including a review of the
patient's medical records, monitoring drug reactions to other drugs or food and
monitoring lab results; (ii) participating on the Pharmacy and Therapeutics,
Quality Assurance and other committees of the Company's clients; (iii)
inspecting medication carts and storage rooms each month; (iv) monitoring and
reporting monthly on facility-wide drug usage and drug administration systems
and practices; (v) developing and maintaining pharmaceutical policy and
procedure manuals; and (vi) assisting the long-term care facility in complying
with state and federal regulations as they pertain to patient care.
The Company, through certain of its operating subsidiaries, also offers on a
limited basis a specialized line of consulting services that help long-term care
facilities enhance care and reduce and contain costs as well as comply with
state and federal regulations. Under this service line, the Company provides (i)
data required for OBRA and other regulatory purposes, including reports on
psychotropic drug usage (chemical restraints), antibiotic usage (infection
control) and other drug usage; (ii) plan of care programs which assess each
patient's state of health upon admission and monitor progress and outcomes using
data on drug usage as well as dietary, physical therapy and social service
inputs; (iii) counseling related to appropriate drug usage and implementation of
drug protocols; (iv) on-site educational seminars for the long-term care
facilities' staff on topics such as drug information relating to clinical
indications, adverse drug reactions, drug protocols and special geriatric
considerations in drug therapy, information and training on intravenous drug
therapy and updates on OBRA and other regulatory compliance issues; and (v)
nurse consultant services and consulting for dietary, social services and
medical records.
THERAPY SERVICES. The Company also provides its client facilities with
infusion therapy services, inhalation and respiratory therapy services and wound
care management supplies and services. Infusion therapy is the intravenous
delivery of medication or introduction of parenteral and enteral nutritional
formulas. The Company's infusion therapy services include pain management,
antibiotic therapy services, chemotherapy and parenteral and enteral nutritional
therapy services for long-term care residents and home care patients. The
Company prepares the product to be administered and delivers the product to the
long-term care facility for administration by the nursing staff. Because the
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proper administration of infusion therapy services requires a highly trained
nursing staff, the Company provides education and certification programs to its
clients in order to assure proper staff training and compliance with regulatory
requirements. The Company believes that by enhancing the ability of client
facilities to administer infusion therapy services, these programs have led to a
greater use of infusion therapy services throughout the Company's long-term care
facility customer base.
OTHER. The Company also offers non-prescription medical devices and
equipment and, primarily through Good Samaritan Supply, long-term care facility
medical supplies, prescription medical supplies and home care medical supplies.
FORMULARY MANAGEMENT
The Company recently began employing formulary management techniques that
are tailored to the needs of each of the markets in which it operates. These
techniques are designed to assist physicians in making the best choice of drug
therapy for patients at the lowest cost. Under the Company's various formulary
programs, AMC clinical and dispensing pharmacists assist prescribing physicians
in designating the use of particular drugs from among therapeutic alternatives
(including generic substitutions) and in the use of more cost-effective delivery
systems and dose forms. The formulary takes into account such factors as
pharmacology, safety and toxicity, efficacy, drug administration, quality of
life and other considerations specific to the elderly population of long-term
care facilities. The Company's formulary guidelines also provide relative
pharmaceutical cost information to residents, their insurers or other payors.
Successful implementation of formulary guidelines is dependent upon close
interaction between the clinical and dispensing pharmacists and the prescribing
physician. The Company seeks to attract and retain highly trained clinical and
dispensing pharmacists and encourages their active participation in the caring
for residents of long-term care facilities, including consultation with the
facilities' medical staff and other prescribing physicians, to increase the
likelihood that the most efficacious, safe and cost-effective drug therapy is
prescribed. The Company believes that adherence to its formulary guidelines
improves drug therapy results, lowers costs for residents and strengthens the
Company's purchasing power with pharmaceutical manufacturers.
SALES AND MARKETING
The Company's marketing efforts are directed towards long-term care
facilities, third-party payors, physicians, nurses and patients. Because
customer relationships are such a strong factor in the long-term care pharmacy
industry, AMC's marketing activities are primarily the responsibility of local
management and are coordinated and supplemented by the Company's Vice
President-National Sales. The Company's consultant pharmacists, dispensing
pharmacists and nursing consultants, because of their direct and ongoing
personal contact with client facility staff, physicians and patients, also play
a significant role in developing new business and maintaining relationships with
existing clients. The Company's Vice President-National Sales coordinates
marketing efforts to nursing home chains, multi-state customers and potential
customers in states in which the Company has no presence. The Vice
President-National Sales also works with local management on cross-marketing
services and broadening their product offerings to existing clients.
The Company also markets its products and services by encouraging its
professionals to build and maintain high visibility in the long-term care
pharmacy industry. The Company participates in trade associations, industry
trade shows and "in-house" seminars on specialized topics in its regional
services areas. The Company believes that these seminars enhance its
professional image and credibility, and accordingly, serve as an indirect source
of additional business.
In marketing its services and products, the Company also emphasizes its
ability to control the pharmacy costs related to patient care, which allows it
to tailor the services and products it provides to the needs of particular
clients. The Company also seeks to serve its customers most effectively through
a willingness to utilize creative contracting arrangements, such as alternative
billing and risk-sharing arrangements.
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MANAGEMENT INFORMATION SYSTEMS
The Company licenses its various pharmacy, financial and information
management systems from third parties. The Company believes that it is more
cost-effective to outsource its information management system requirements to
qualified third parties than to develop such systems internally as many of the
Company's competitors do. Due in part to differences in state licensing and
reporting requirements, each of the Company's operating subsidiaries licenses
its own information system that provides detailed information to clients and
third-party payors while providing the Company's pharmacists with computerized
access to medication and treatment records for long-term care facility residents
as well as data regarding drug interactions and contraindications, patient
medication profiles and information on patient allergies.
Under the Company's agreements with MHA and McKesson, the Company licenses
information systems that allow it to manage its pharmaceutical purchasing by
taking advantage of purchasing opportunities, controlling inventory and gaining
access to utilization information. These systems operate at the dispensing
pharmacy level, but are interconnected at both the regional and corporate-wide
level. For example, under the McKesson agreement, each of the Company's
dispensing pharmacies and each regional office as well as the Company's
corporate headquarters are supplied with McKesson's EconoLink-TM- system.
EconoLink-TM- is a purchasing and inventory management system, which is capable
of consolidated reporting, opening order management, contract development and
tracking product movement by location.
The EconoLink-TM- system allows the Company and/or its dispensing pharmacies
to generate formulary compliance reports; to confirm orders on-line within five
minutes of their transmission; to generate standard usage reports, monthly
purchase reports, inventory value reports and other customized reports; to view
a database of all products available at the servicing distribution center of the
supplier and to search for items by generic name, therapeutic name, trade name,
UPC number, McKesson item number or customer product identification number. In
addition, the system provides a warning when a non-contract product is ordered
or when a better priced equivalent is available.
Under the Company's agreement with MHA, MHA supplies the Company with
software and training to enable the Company's employees to use MHA's systems,
including AccuLink-TM-, AccuChoice-TM- and MHAx Electronic Catalogue-TM-
Software. These systems are used to improve the Company's purchasing
effectiveness, contract compliance and inventory control. The AccuLink-TM-
system also allows MHA to review the Company's invoices from its wholesaler for
pricing discrepancies and credits due to the Company.
The Company's licensed financial management and reporting system, which it
continually seeks to upgrade, allows for analysis of operating data on a
site-by-site, as well as system-wide, basis, enabling the Company to improve its
budgeting capabilities and more keenly focus its future operating strategies.
PURCHASING
The Company purchases pharmaceuticals primarily from McKesson, a national
wholesale distributor, with which it has negotiated a prime vendor contract, and
directly from certain pharmaceutical manufacturers. Under the Company's
agreement with McKesson the Company is supplied with Telxon-TM- order entry
devices and bar-coded shelf labels. Using the Telxon-TM- device to read the bar-
coded shelf labels allows the Company to transmit orders to McKesson
electronically. Such electronic transmission allows orders to be placed and
filled efficiently and accurately, and allows the Company and each of the
dispensing pharmacies to track and control inventory in an efficient manner.
The Company is also a member of MHA, which is a pharmaceutical group
purchasing organization, as well as other industry buying groups that contract
with manufacturers for volume-based discounted prices that are passed through to
the Company by its wholesale distributor. The Company's agreement with MHA
provides that MHA will negotiate special pricing discounts and rebates with
various pharmaceutical suppliers and implement contract purchasing compliance
programs, will
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institute a "preferred rebate" processing program in cooperation with certain
wholesale distributors and manufacturers and will provide the Company with
formulary information. The Company has numerous sources of supply available to
it and has not experienced any difficulty in obtaining pharmaceuticals or other
products and supplies used in the conduct of its business.
CUSTOMERS
At October 23, 1996, the Company had contracts to provide services to
approximately 41,800 residents in over 540 long-term care facilities. These
contracts, as is typical in the industry, are generally for a period of one year
but are terminable by either party for any reason upon thirty days' written
notice. For the six months ended June 30, 1996, on a pro forma basis, no single
customer or customer group (other than facilities operated by the Society, which
in the aggregate accounted for approximately 10%), accounted for more than 5% of
the Company's total revenues. Nevertheless, the loss by the Company of a
significant customer in a particular market might have a material adverse effect
on the Company's results of operations.
COMPETITION
The business of providing pharmacy services to long-term care facilities is
highly competitive. On the national level and with respect to its program of
acquiring long-term care pharmacy providers, the Company's principal competitors
include Omnicare, Inc., NCS HealthCare, Inc., Capstone Pharmacy Services, Inc.
and "captive" long-term care pharmacy companies such as Vitalink Pharmacy
Services, Inc. (a subsidiary of Manor Care, Inc.) and Pharmacy Corporation of
America (a subsidiary of Beverly Enterprises, Inc.), as well as several other
companies with similar acquisition strategies, many of which may have greater
resources than those of the Company. Regionally, the Company believes that
competition within a particular market is based principally on customer
relationships, operations, marketing abilities, professional support and
customer service.
REIMBURSEMENT AND BILLING
As is generally the case for long-term care facility services, the Company
receives payments through reimbursement from Medicaid and Medicare programs and
directly from individual residents (private pay), private third-party insurers
and long-term care facilities. For the six months ended June 30, 1996 on a pro
forma basis, the Company's payor mix was approximately 32% Medicaid, 10%
Medicare, 26% long-term care facilities (including amounts for which the
long-term care facility receives reimbursement under Medicare Part A), 21%
private pay, 9% third-party insurance and 2% commercial accounts. Medicare and
Medicaid are highly regulated. The failure of the Company and/or its client
institutions to comply with applicable reimbursement regulations could adversely
affect the Company's business.
MEDICAID. The Medicaid program is a federal-state cooperative program
designed to enable states to provide medical assistance to aged, blind or
disabled individuals, or to members of families with dependent children whose
income and resources are insufficient to meet the costs of necessary medical
services. State participation in the Medicaid program is voluntary. To become
eligible to receive federal funds, a state must submit a Medicaid "state plan"
to the Secretary of Health and Human Services for approval. The federal Medicaid
statute specifies a variety of requirements which the state plan must meet,
including requirements relating to eligibility, coverage of services, payment
and administration. For residents eligible for Medicaid, the Company bills the
individual state Medicaid program. Medicaid programs are funded jointly by the
federal government and individual states and are administered by the states. The
reimbursement rates for pharmacy services under Medicaid are determined on a
state-by-state basis subject to review by the Health Care Financing
Administration and applicable federal law. Federal regulations and the
regulations of many states establish "upper limits" for reimbursement for
prescription pharmaceuticals under Medicaid. In most states pharmacy services
are priced at the lower of "usual and customary" charges, cost (which generally
is defined as a function of average wholesale price less a discount) plus a
dispensing fee or the pre-
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established upper limits. In some states, such as New York, Medicaid
reimbursement for pharmacy products and services is paid to the nursing facility
operator as part of its comprehensive per diem rates. The nursing facility
operator, in turn, is responsible for paying the pharmacy provider.
State Medicaid programs generally have long-established programs for
reimbursement which have been revised and refined over time. To date, such
programs have determined the pricing policies and receivables collection for
long-term care pharmacy providers. Any future changes in such reimbursement
programs or in regulations relating thereto, such as reductions in the allowable
reimbursement levels or the timing of processing of payments, could adversely
affect the Company's business. The U.S. Congress passed a fiscal year 1996
budget reconciliation bill that provided for substantial reductions in the rate
of spending increases in the Medicare program and in the federal share of the
Medicaid program. While such bill was vetoed by President Clinton, such
provisions or any similar provisions, if ultimately signed into law, could
adversely affect the Company's business.
MEDICARE. The Medicare program is a federally funded and administered
health insurance program for individuals age 65 and over and for certain
individuals who are disabled. The Medicare program consists of two parts: Part
A, which covers, among other things, inpatient hospital, skilled long-term care
facility, home health care and certain other types of health care services; and
Medicare Part B, which covers physicians' services, outpatient services and
certain items and services provided by medical suppliers. Medicare Part B also
covers a limited number of specifically designated prescription drugs. Medicare
Part A requires long-term care facilities to submit all of their costs for
patient care, including pharmaceutical costs, in a unified bill. Thus, fees for
pharmaceuticals provided to Medicare Part A patients are paid to the Company by
the long-term care facility on a monthly basis. Pricing is consistent with that
of private pay residents and Medicaid rates. Medicare Part A has a cost-sharing
arrangement under which beneficiaries must pay a portion of their costs. These
co-payments are billed by the facility directly to residents or to the state
Medicaid plan, as the case may be.
Medicare Part B provides benefits covering, among other things, outpatient
treatment, physicians' services, durable medical equipment ("DME"), orthotics,
prosthetic devices and medical supplies. Products and services covered for
Medicare Part B eligible residents in the long-term care facility include, but
are not limited to, enteral feeding products, ostomy supplies, urological
products, orthotics, prosthetics, surgical dressings, tracheostomy care supplies
and a limited number of other medical supplies. All claims for DME, prosthetics,
orthotics, prosthetic devices, including enteral therapy, and medical supplies
("DMEPOS") are submitted to and paid by four regional carriers known as Durable
Medical Equipment Regional Carriers ("DMERCs"). The DMERCs establish coverage
guidelines, allowable utilization frequencies and billing procedures for DMEPOS.
Payment is based on a fee schedule, which varies depending on the state in which
the patient receiving the items resides. Payments for Medicare Part B products
to eligible suppliers, which include long-term care facilities and suppliers
such as the Company, are made on a per-item basis directly to the supplier. In
order to receive Medicare Part B reimbursement payments, suppliers must meet
certain conditions set by the federal government. The Company, as an eligible
supplier, either bills Medicare directly for Part B-covered products for each
patient or, alternatively, assists the long-term care facility in meeting
Medicare Part B eligibility requirements and prepares bills on behalf of the
facility. Medicare Part B also has an annual deductible as well as a co-payment
obligation on behalf of the patient, and the portion not covered by Medicare is
billed directly to the patient or appropriate secondary payor.
LONG-TERM CARE FACILITIES. In addition to occasional private patient
billings and those related to pharmaceuticals for Medicare-eligible residents,
long-term care facilities are billed directly for consulting services, certain
over-the-counter medications and bulk house supplies. In some states, such as
New York, Medicaid reimbursement for pharmacy products and services is paid to
the nursing facility operator as part of its comprehensive per diem rates. The
nursing facility operator, in turn, is responsible for paying the pharmacy
provider.
PRIVATE PAY. For those customers who are not covered by
government-sponsored programs, the Company generally collects cash or bills the
customer or other responsible party on a monthly basis.
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Depending upon local market practices, the Company may alternatively bill
private residents through the long-term care facility. Pricing for private pay
customers is based on prevailing regional market rates or "usual and customary"
charges.
THIRD-PARTY INSURANCE. Third-party insurance includes funding for customers
covered by private plans, veterans' benefits, workers' compensation and other
programs. The resident's individual insurance plan is billed monthly and rates
are consistent with those for other private pay residents.
COMMERCIAL ACCOUNTS. Commercial accounts include businesses that purchase
medical supplies, products or pharmaceuticals on a non-prescription basis,
generally for use within their operations or for resale.
GOVERNMENT REGULATION
Long-term care pharmacies, as well as the long-term care facilities they
serve, are subject to extensive federal, state and local laws and regulations.
These laws and regulations cover required qualifications, day-to-day operations,
reimbursement and the documentation of activities. The Company continuously
monitors the effects of regulatory activity on its operations.
LICENSURE, CERTIFICATION AND REGULATION. States generally require that
companies operating a pharmacy within that state be licensed by the state board
of pharmacy. The Company currently has pharmacy licenses in each of the eight
states in which it operates a pharmacy. In addition, the Company's pharmacies
are registered with the appropriate state and federal authorities pursuant to
statutes governing the regulation of controlled substances.
Long-term care facilities are also separately required to be licensed in the
states in which they operate and, if serving Medicare or Medicaid patients, must
be certified to be in compliance with applicable program participation
requirements. Long-term care facilities are also subject to the long-term care
facility reforms of OBRA, which impose strict compliance standards relating to
the quality of care for long-term care operations, including vastly increased
documentation and reporting requirements. In addition, pharmacists, nurses and
other health professionals who provide services on the Company's behalf are in
most cases required to obtain and maintain professional licenses and are subject
to state regulation regarding professional standards of conduct.
FEDERAL AND STATE LAWS AFFECTING THE REPACKAGING, LABELING AND INTERSTATE
SHIPPING OF PHARMACEUTICALS. Federal and state laws impose certain repackaging,
labeling and package insert requirements on pharmacies that repackage
pharmaceuticals for distribution beyond the regular practice of dispensing or
selling drugs directly to patients at retail. A pharmaceutical repackager must
register with the FDA. The Company believes that it holds all required
registrations and licenses and that its repackaging operations are in compliance
with applicable state and federal requirements.
MEDICARE AND MEDICAID. The long-term care facility pharmacy business
operates under regulatory and cost containment pressures from state and federal
legislation primarily affecting Medicaid and, to a lesser extent, Medicare.
The Medicare program establishes certain requirements for participation of
providers and suppliers in the Medicare program. Pharmacies are not subject to
such certification requirements. Skilled long-term care facilities and suppliers
of DMEPOS, however, are subject to specified standards. Failure to comply with
these requirements and standards may adversely affect an entity's ability to
participate in the Medicare program and receive reimbursement for services
provided to Medicare beneficiaries. See "-- Reimbursement and Billing."
Federal law and regulations contain a variety of requirements relating to
the furnishing of prescription pharmaceuticals under Medicaid. First, states are
given broad authority, subject to certain standards, to limit or to specify
conditions as to the coverage of particular drugs. Second, federal Medicaid law
establishes standards affecting pharmacy practice. These standards include
general requirements relating to patient counseling and drug utilization review
and more specific requirements for long-term care facilities relating to drug
regimen reviews for Medicaid patients in
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such facilities. Recent regulations clarify that, under federal law, a pharmacy
is not required to meet the general standards for pharmaceuticals dispensed to
long-term care facility residents if the long-term care facility complies with
the drug regimen review requirements. However, the regulations indicate that
states may nevertheless require pharmacies to comply with the general standards,
regardless of whether the long-term care facility satisfies the drug regimen
review requirements, and the states in which the Company operates currently
require its pharmacies to comply therewith. Third, federal regulations impose
certain requirements relating to reimbursement for prescription pharmaceuticals
furnished to Medicaid residents. See "-- Reimbursement and Billing -- Medicaid."
In addition to requirements imposed by federal law, states have substantial
discretion to determine administrative, coverage, eligibility and payment
policies under their state Medicaid programs which may affect the Company's
operations. For example, some states have enacted "freedom of choice"
requirements which prohibit a long-term care facility from requiring its
residents to purchase pharmacy or other ancillary medical services or supplies
from particular providers that deal with the long-term care facility. Such
limitations may increase the competition which the Company faces in providing
services to long-term care facility patients.
REFERRAL RESTRICTIONS. The Company is subject to federal and state laws
which govern financial and other arrangements between health care providers.
These laws include the federal anti-kickback statute, which was originally
enacted in 1977 and amended in 1987, and which prohibits, among other things,
knowingly and willfully soliciting, receiving, offering or paying any
remuneration directly or indirectly in return for or to induce the referral of
an individual to a person for the furnishing of any item or service for which
payment may be made in whole or in part under Medicare or Medicaid. Many states
have enacted similar statutes which are not necessarily limited to items and
services for which payment is made by Medicare or Medicaid. Violations of these
laws may result in fines, imprisonment and exclusion from the Medicare and
Medicaid programs or other state-funded programs. Federal and state court
decisions interpreting these statutes are limited, but have generally construed
the statutes to apply if "one purpose" of remuneration is to induce referrals or
other conduct within the statute.
Federal regulations establish "Safe Harbors," which grant immunity from
criminal or civil penalties to parties in good faith compliance. While the
failure to satisfy all the criteria for a specific Safe Harbor does not
necessarily mean that an arrangement violates the statute, the arrangement is
subject to review by the HHS Office of Inspector General ("OIG"), which is
charged with administering the federal anti-kickback statute. There are no
procedures for obtaining binding interpretations or advisory opinions from the
OIG on the application of the federal anti-kickback statute to an arrangement or
its qualification for a Safe Harbor upon which the Company can rely.
The OIG has issued "Fraud Alerts" identifying certain questionable
arrangements and practices which it believes may implicate the federal
anti-kickback statute. The OIG has issued a Fraud Alert providing its views on
certain joint venture and contractual arrangements between health care
providers. The OIG has recently issued a Fraud Alert concerning prescription
pharmaceutical marketing practices that could potentially violate the federal
anti-kickback statute. Pharmaceutical marketing activities may implicate the
federal anti-kickback statute because drugs are often reimbursed under the
Medicaid program. According to the Fraud Alert, examples of practices that may
implicate the statute include certain arrangements under which remuneration is
made to pharmacists to recommend the use of a particular pharmaceutical product.
In addition, a number of states have recently undertaken enforcement actions
against pharmaceutical manufacturers involving pharmaceutical marketing
programs, including programs containing incentives to pharmacists to dispense
one particular product rather than another. These enforcement actions arise
under state consumer protection laws which generally prohibit false advertising,
deceptive trade practices and the like. Further, a number of the states involved
in these enforcement actions have requested that the Food and Drug
Administration ("FDA") exercise greater regulatory oversight in the area of
pharmaceutical promotional activities by pharmacists. It is not possible to
determine whether the FDA will act in this regard or what effect, if any, FDA
involvement would have on the Company's operations.
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The Company believes its contract arrangements with other health care
providers, its pharmaceutical suppliers and its pharmacy practices are in
compliance with these laws. There can be no assurance that such laws will not,
however, be interpreted in the future in a manner inconsistent with the
Company's interpretation and application.
EMPLOYEES
As of October 23, 1996, the Company had approximately 485 full-time and 180
part-time employees. None of the Company's employees is represented by a union.
The Company considers relations with its employees to be good. In addition, the
Company employs approximately 190 people through staff leasing companies.
PROPERTIES
The Company presently maintains its executive offices in approximately 900
square feet of space in Naperville, Illinois pursuant to a lease expiring in
June 1997. The Company currently considers this space to be sufficient for its
corporate headquarters operations.
As of October 23, 1996, the Company leased 34 pharmacy locations aggregating
approximately 172,000 square feet and 11 warehouse and office locations
aggregating approximately 37,000 square feet. The remaining terms of the leases
relating to these properties vary in length from one to ten years, and such
leases, in some cases, include options to extend.
INSURANCE
The Company's business exposes it to risks that are inherent in the
packaging and distribution of pharmaceuticals and the provision of other
services, such as consultant pharmacist services and formulary management
services. The Company maintains general/professional liability insurance in the
amount of $1 million per claim and $3 million aggregate per pharmacy location
and umbrella liability insurance in the amount of $10 million per occurrence and
$10 million aggregate. There can be no assurance that the coverage limits of
such insurance will be adequate to protect the Company against future claims. In
addition, there can be no assurance that the Company will be able to maintain
professional liability insurance in the future on acceptable terms or with
adequate coverage against potential liabilities.
LEGAL PROCEEDINGS
While the Company is not currently involved in any legal proceedings, the
Company is from time to time involved in various legal proceedings incidental to
the conduct of its business.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information as of the date of this
Prospectus concerning each of the directors, executive officers and certain key
employees of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Bryan C. Cressey (1)(2).............. 47 Chairman of the Board of Directors
Timothy L. Burfield.................. 48 President, Chief Executive Officer and Director
Charles R. Wallace................... 47 Vice President -- Finance, Chief Financial Officer,
Treasurer and Secretary
Michael B. Freedman.................. 29 Vice President -- Business Development
J. Jeffrey Gephart................... 45 Vice President -- National Sales
James H.S. Cooper (1)(2)............. 42 Director
Charles C. Halberg................... 53 Director; President and Chief Executive Officer --
Good Samaritan Supply Services, Inc.
Mark A. Jerstad (1)(2)............... 54 Director
Lee M. Mitchell...................... 53 Director
OTHER KEY EMPLOYEES:
Charles L. Brown..................... 50 President -- Sterling Healthcare Services, Inc.
William J. Gatti..................... 55 Chief Executive Officer -- Gatti LTC Services, Inc.
Frank R. Gelafio..................... 43 Executive Vice President -- Nihan & Martin, Inc.
Howard A. Juni....................... 48 Director of Pharmacy Operations
Ronald E. Keith...................... 53 President -- Dixon Pharmacy, Inc.
Nelson L. Showalter.................. 52 Chief Executive Officer -- Williamson Drug Company,
Inc.
Lee R. Youngberg..................... 45 President -- Nihan & Martin, Inc.
Vitas A. Marcinkevicius.............. 48 Vice President -- Royal Care Holdings, Inc.
</TABLE>
- ------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
BRYAN C. CRESSEY has been Chairman of the Board of the Company since
December 1993. In 1993, Mr. Cressey co-founded and became a principal of Golder,
Thoma, Cressey, Rauner, Inc., and for the past fifteen years he has been a
general partner of Golder, Thoma, Cressey, Rauner L.P. Golder, Thoma, Cressey,
Rauner, Inc. and Golder, Thoma, Cressey, Rauner L.P. are private equity
investing firms. Golder, Thoma, Cressey, Rauner, Inc. is the general partner of
GTCR IV, L.P., which is the general partner of the GTCR Fund. Mr. Cressey serves
on various boards of directors, including Cable Design Technologies Corporation
and Paging Network Inc. Mr. Cressey is a graduate of the University of
Washington (B.A.), Harvard Law School (J.D.) and Harvard Business School
(M.B.A.).
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TIMOTHY L. BURFIELD is a founder of the Company and has served as the
President and Chief Executive Officer and as a director of the Company since
December 1993. Mr. Burfield was the Secretary of the Company from December 1993
to September 1996. From February 1988 to July 1993, Mr. Burfield was Chairman,
President and Chief Executive Officer of Abbey Pharmaceutical Services, Inc., a
leading provider of long-term care pharmacy services and medical equipment.
Prior to that time, Mr. Burfield held a variety of executive positions with
Abbey Healthcare Group, Inc., Medical Services Company of ARA Services and
American Hospital Supply Corporation. Mr. Burfield had more than 19 years of
experience in the health care field prior to forming the Company. Mr. Burfield
is a graduate of Villanova University (B.A.).
CHARLES R. WALLACE has served as the Vice President -- Finance, Chief
Financial Officer and Treasurer of the Company since September 1995 and has
served as the Secretary since September 1996. From December 1993 to February
1995, Mr. Wallace was the Corporate Controller of Household International, Inc.,
a consumer finance and banking organization, and from 1989 to 1993, he was
Executive Vice President and Chief Operating Officer of Hamilton Investments,
Inc., a securities and investment firm. Mr. Wallace is a certified public
accountant and is a graduate of the University of Illinois (B.S.).
MICHAEL B. FREEDMAN is the Vice President -- Business Development of the
Company and has served in that capacity since August 1994. From August 1994 to
September 1995, Mr. Freedman also served as the Company's acting Chief Financial
Officer. From April 1993 to August 1994, Mr. Freedman was an associate at
Golder, Thoma, Cressey, Rauner, Inc. From April 1992 to April 1993, Mr. Freedman
was the President of Stadium Promotions, Inc., a sports marketing company, and
from February 1991 to April 1992, Mr. Freedman was the Controller of Power
Conversion, Inc., a battery manufacturer. Mr. Freedman is a certified public
accountant and is a graduate of Dartmouth College (B.A.) and the Stern School of
Business, New York University (M.B.A.).
J. JEFFREY GEPHART is the Vice President -- National Sales of the Company
and has served in that capacity since January 1995. From May 1990 until January
1995, Mr. Gephart held various positions at Abbey Pharmaceuticals, Inc.,
including most recently Vice President -- Sales. Mr. Gephart had over 17 years
of sales and marketing experience in the long-term care industry when he joined
the Company, including sales management positions with General Medical
Corporation, Continental Health Affiliates, Nutrition Technology Corporation and
Kimberly Clark Corporation. Mr. Gephart is a licensed nursing home administrator
and is a graduate of Purdue University (B.S.).
JAMES H.S. COOPER has been a director of the Company since December 1995.
Mr. Cooper has been a Managing Director, Investment Banking for Equitable
Securities Corporation in Nashville, Tennessee since April 1995. Mr. Cooper
served as a member of the United States House of Representatives from January
1983 until January 1995. Mr. Cooper authored the "Managed Competition Act" as an
alternative to President Clinton's health care reform plan. He is an adjunct
professor, Health Policy, Owen School of Management, Vanderbilt University. Mr.
Cooper is a graduate of the University of North Carolina (B.A.), graduated from
Oxford University as a Rhodes Scholar and is a graduate of Harvard Law School
(J.D.).
CHARLES C. HALBERG has been a director of the Company since August 1996. Mr.
Halberg has served as a Director and as the President and Chief Executive
Officer of Good Samaritan Supply Services, Inc. since January 1996. From June
1991 to December 1995, Mr. Halberg served as Senior Vice President, General
Counsel and Chief Financial Officer of The Evangelical Lutheran Good Samaritan
Society and was Chairman of the Society's Board of Directors from 1989-1991. Mr.
Halberg was a partner in the law firm of O'Connor & Hannan from 1980 to 1988.
Mr. Halberg served in the Minnesota State Senate from 1990 through 1992 and the
Minnesota House of Representatives from 1978 to 1986, serving as Speaker in
1985-86. Mr. Halberg is a graduate of St. Olaf College (B.A.) and William
Mitchell College of Law (J.D.).
MARK A. JERSTAD has been a director of the Company since August 1996. Dr.
Jerstad has served as the President and Chief Executive Officer of The
Evangelical Lutheran Good Samaritan Society since
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October 1989. Dr. Jerstad currently serves as Vice President of the American
Health Care Association Multifacility Steering Committee and he is a Fellow in
the American College of Health Care Administrators. Dr. Jerstad serves on the
board of directors of Home Federal Savings Bank. Dr. Jerstad is a graduate of
St. Olaf College (B.A.), Luther Northwestern Theological Society (M.Div.) and
Union Theological Seminary (M.Theo. and Ph.D.).
LEE M. MITCHELL has been a director of the Company since October 1996. Since
1994, Mr. Mitchell has been a principal of Golder, Thoma, Cressey, Rauner, Inc.
Prior to joining Golder, Thoma, Cressey, Rauner, Inc., Mr. Mitchell was the
president and CEO of The Field Corporation and its predecessor, Field
Enterprises, Inc., private management and holding companies with interests in
publishing, communications, paper manufacturing and commercial real estate. Mr.
Mitchell serves as a member of the Board of Governors of The Chicago Stock
Exchange and as a director of Paging Network, Inc., Washington National
Corporation, ERO Industries, Inc., and a number of private companies. Mr.
Mitchell is a graduate of Wesleyan University (A.B.) and the University of
Chicago Law School (J.D.).
CHARLES L. BROWN has served as the President and Chief Executive Officer of
Sterling Healthcare Services, Inc., the Company's operating subsidiary in
Louisiana, since August 1995, the date of its acquisition by the Company. From
April 1991 until August 1995, Mr. Brown was the President of Sterling HealthCare
Services, Inc. Mr. Brown has over 20 years of experience in medical supply,
long-term care pharmacy and related industries. Mr. Brown is a graduate of
Northeast Louisiana University College of Pharmacy (B.S.), a graduate of
Louisiana Tech University College of Business (M.B.A.) and a registered
pharmacist.
WILLIAM J. GATTI has served as the Chief Executive Officer and President of
Gatti LTC Services, Inc., the Company's operating subsidiary in Pennsylvania,
since August 1994, the date of its acquisition by the Company. From 1966 until
August 1994, Mr. Gatti was the sole owner of Gatti LTC Services, Inc. and served
as its Chief Executive Officer, and from 1978 to 1994, Mr. Gatti was the
President of Gatti Medical Supply, Inc., a provider of medical supplies. Mr.
Gatti is a graduate of the University of Pittsburgh (B.S.) and a registered
pharmacist.
FRANK R. GELAFIO has served as the Executive Vice President of Nihan &
Martin, Inc., the Company's operating subsidiary in Northern Illinois and
Southern Wisconsin, since March 1995, the date of its acquisition by the
Company. Mr. Gelafio was a 50% owner of Nihan & Martin, Inc. and served as its
Secretary from September 1990 to March 1995. Mr. Gelafio has over 19 years
experience in the management of pharmacy operations. Mr. Gelafio currently
represents the region of Northern Illinois as a delegate to The Illinois
Pharmaceutical Association and has served as President of the Northern Illinois
Pharmaceutical Association from 1994 to 1996. Mr. Gelafio is a graduate of the
University of Illinois College of Pharmacy (B.A.) and a registered pharmacist.
HOWARD A. JUNI has served as the Director of Pharmacy Operations of Good
Samaritan Supply since June 1994 and as the Director of the Company's Pharmacy
Operations since June 1996. From 1986 until 1994, Dr. Juni was a partner in
Capitol Drug and Medical Supply, and from 1981 until 1986, he was the Director
of Pharmacy Services of Capitol Drug Co., Inc., a provider of medical supplies
and long-term care pharmacy services. Dr. Juni was the President of the
Minnesota State Board of Pharmacy from 1992 until 1995, the Chairman of the
Board of Pharmaceutical Specialties in 1991/1992 and Chairman of the Board of
the Minnesota Pharmacists Association in 1988/1989. Dr. Juni is a graduate of
the University of Minnesota College of Pharmacy (B.S. and Pharm.D.) and a
registered pharmacist.
RONALD E. KEITH has served as the President of Dixon Pharmacy, Inc., the
Company's operating subsidiary in Central Illinois, since April 1995, the date
of its acquisition by the Company. From 1971 until April 1995, Mr. Keith was the
majority owner of Dixon Pharmacy, Inc. and served as its President. Mr. Keith is
an active member of the American Society of Consultant Pharmacists. Mr. Keith is
a graduate of South Dakota State University (B.S.) and a registered pharmacist
in the states of Illinois, South Dakota and Florida.
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NELSON L. SHOWALTER has served as the Chief Executive Officer of Williamson
Drug Company, Inc., the Company's operating subsidiary in Virginia, since August
1994, the date of its acquisition by the Company. From May 1970 until August
1994, Mr. Showalter was the sole owner of Williamson Drug Company, Inc. and
served as its President. Mr. Showalter served as the President of the American
Society of Consultant Pharmacists in 1989/1990 and currently serves on an
advisory board of Bristol-Meyers Squibb Company and of Eli Lilly and Company.
Mr. Showalter is a graduate of the Medical College of Virginia School of
Pharmacy (B.S.) and a registered pharmacist.
LEE R. YOUNGBERG has served as the President of Nihan & Martin, Inc. since
March 1995. Mr. Youngberg was a 50% owner of Nihan & Martin, Inc. and served as
its President from August 1990 until March 1995 and as its Secretary and
Treasurer from October 1987 to August 1990. Mr. Youngberg is a graduate of the
University of Illinois College of Pharmacy (B.A.) and a registered pharmacist.
VITAS A. MARCINKEVICIUS has served as the Vice President of Royal Care
Holdings, Inc., the Company's operating subsidiary in New York, since August
1996, the date of the acquisition of its business by the Company. From September
1992 until August 1996, Mr. Marcinkevicius served as Vice President of Royal
Care of America, Inc. Mr. Marcinkevicius has over 25 years experience in the
long-term care pharmacy industry. In September 1973 Mr. Marcinkevicius
co-founded Pharmacy Associates of Glens Falls, Inc., a long-term care pharmacy,
which was acquired by Royal Care of America in September 1992. Mr.
Marcinkevicius is a member of the American Society of Consultant Pharmacists.
Mr. Marcinkevicius is a graduate of the Massachusetts College of Pharmacy (B.S.)
and a registered pharmacist.
Messrs. Burfield, Cressey, Mitchell and Cooper were elected to the Board,
and Mr. Cressey was designated the Chairman of the Board, pursuant to the terms
of a Stockholders Agreement (the "Stockholders Agreement") among the Company,
the GTCR Fund and Timothy L. Burfield. The Stockholders Agreement has been
amended and restated, and the provisions of the Stockholders Agreement governing
the composition of the Company's Board of Directors will terminate upon the
closing of the Offering. In October 1996 the Company and the GTCR Fund entered
into an agreement pursuant to which, upon the request of the GTCR Fund, the
Company will take all necessary and desirable actions within its control to
expand the size of the Board to seven members and to nominate a representative
of the GTCR Fund for election to the Board. This agreement terminates at such
time as the GTCR Fund owns less than 15% of the Company's voting stock on a
fully-diluted basis. See "-- Compensation Committee Interlocks and Insider
Participation -- Stockholders Agreement of the Company" and "-- Nominating
Agreement."
Pursuant to the terms of the Good Samaritan Shareholders Agreement, Mr.
Halberg and Dr. Jerstad became directors of the Company in August 1996, and the
Company has agreed to nominate Dr. Jerstad (or such other individual who may be
Chief Executive Officer of The Evangelical Lutheran Good Samaritan Society) and,
if and for so long as he shall be Chief Executive Officer of Good Samaritan
Supply, Mr. Halberg, for election to the Board of Directors in each subsequent
election of directors. The provisions of the Good Samaritan Shareholders
Agreement pertaining to designation of directors terminate upon such date as (i)
either the Company owns 10% or less of the outstanding common stock of Good
Samaritan, or the Foundation and any Foundation affiliate own 10% or less of the
outstanding common stock of Good Samaritan and (ii) the Foundation and the
Foundation affiliates collectively own 5% or less of the outstanding Company
Common Stock. See "Certain Transactions -- Good Samaritan Relationship."
Following the Offering, the Board of Directors will be composed of three
classes, with each class as nearly equal in number as possible. Upon the
expiration of the term of each class of directors, directors comprising such
class will be elected for a three-year term at the annual meeting of
stockholders in the year in which such term expires. Messrs. Burfield and
Halberg will be in Class I, which class will stand for election at the annual
meeting of stockholders to be held in 1997. Mr. Cooper and Dr. Jerstad will be
in Class II, which class will stand for election at the annual meeting of
stockholders to be held in
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1998. Messrs. Cressey and Mitchell will be in Class III, which class will stand
for election at the annual meeting of stockholders to be held in 1999. All
officers serve at the pleasure of the Board of Directors. There are no family
relationships among any of the directors or officers of the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established two standing committees: the Audit
Committee and the Compensation Committee. The Audit Committee recommends the
appointment of auditors and oversees the accounting and audit functions of the
Company. The Compensation Committee determines executive officers' salaries,
bonuses and other compensation and administers the 1996 Stock Option Plan. Mr.
Cressey, Mr. Cooper and Dr. Jerstad are the members of the Audit Committee and
the Compensation Committee.
DIRECTOR COMPENSATION
Directors who are not currently receiving compensation as officers or
employees of the Company, other than Mr. Cressey and Mr. Mitchell, are entitled
to a fee of $1,000 plus reimbursement of expenses for attending each meeting of
the Board of Directors and each meeting of any committee not held concurrently
with a meeting of the Board of Directors. In addition, Mr. Halberg is President
and Chief Executive Officer of Good Samaritan Supply, from which he receives
compensation. See "Certain Transactions -- Arrangement with Director."
EXECUTIVE COMPENSATION
The following table sets forth information with respect to compensation for
the twelve months ended December 31, 1995 paid by the Company to the Company's
Chief Executive Officer and the other executive officer whose total salary and
bonus for such fiscal year exceeded $100,000 (collectively, the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------
NAME AND PRINCIPAL POSITION SALARY BONUS
- --------------------------------------------------------------------- ----------- ---------
<S> <C> <C>
Timothy L. Burfield, ................................................ $ 263,313 $ 72,450
President and Chief Executive
Officer (1)
Michael B. Freedman ................................................. 88,333 42,000
Vice President-Business
Development
</TABLE>
- ------------------------------
(1) At December 31, 1995, Mr. Burfield held 537,288 restricted shares of Common
Stock, which were valued at $757,576 at that date. Value is calculated by
multiplying the estimated fair market value at December 31, 1995 by the
number of restricted shares held. Of Mr. Burfield's 537,288 restricted
shares, 273,905 shares were vested at December 31, 1995. Upon consummation
of the Offering, all or a portion of Mr. Burfield's unvested restricted
shares will vest pursuant to an amended management agreement contemplated to
be entered into by Mr. Burfield and the Company. Dividends will be payable
on the shares if and to the extent paid on Common Stock generally. Mr.
Burfield did not receive any restricted share awards in 1995.
MANAGEMENT AGREEMENTS
Mr. Burfield and the Company entered into a Senior Management Agreement in
December 1993 pursuant to which Mr. Burfield has been employed as President and
Chief Executive Officer of the Company. The Senior Management Agreement provides
for an annual base salary at a rate of $241,500, subject to such increases, but
not decreases, as determined by the Board. If Mr. Burfield is terminated by the
Company other than for cause, Mr. Burfield is entitled to receive payments at
the rate of his annual base salary for a period of six months. Pursuant to the
Senior Management Agreement, the Company issued to Mr. Burfield 7,867.1
restricted shares of Class B Common Stock
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(547,944 restricted shares of Common Stock as reclassified), which shares,
subject to certain acceleration events, vest over a seven-year period. See Note
12 of Notes to the Consolidated Financial Statements.
Mr. Burfield and the Company contemplate entering into an Amended and
Restated Senior Management Agreement (the "Burfield Management Agreement")
following the consummation of the Offering. The Burfield Management Agreement is
expected to provide that Mr. Burfield will receive a base salary as determined
by the Board of Directors at a rate of not less than $265,000 per annum, subject
to such increases, but not decreases, as determined by the Board in its sole
discretion. The Board may award Mr. Burfield a bonus in an amount not to exceed
45% of his annual base salary for the year. In the event Mr. Burfield is
terminated other than for cause or Mr. Burfield resigns as a result of a change
in control of the Company, any material breach by the Company of the terms of
the Burfield Management Agreement or reassignment or relocation of, or change in
the duties of, Mr. Burfield, Mr. Burfield shall be entitled to receive the
annual base salary and annual bonus awarded during the previous year for 24
months following the date of termination, payable in monthly installments. Under
the Burfield Management Agreement, Mr. Burfield's employment period will
continue until his resignation, disability (as reasonably determined by the
Board of Directors of the Company) or death or until the Board of Directors of
the Company determines in its good faith judgment that termination of Mr.
Burfield's employment is in the best interest of the Company.
Pursuant to the terms of a Senior Management Agreement between Mr. Freedman
and the Company entered into as of September 5, 1996, in the event Mr.
Freedman's employment is terminated other than for cause, Mr. Freedman shall be
entitled to six months' notice or, if the Company determines to immediately
terminate Mr. Freedman's employment, Mr. Freedman shall be entitled to his
annual base salary for six months. Under the Senior Management Agreement, Mr.
Freedman's employment period will continue until his resignation, disability (as
reasonably determined by the Board of Directors or chief executive officer of
the Company) or death or until the Board of Directors of the Company determines
in its good faith judgment that termination of Mr. Freedman's employment is in
the best interest of the Company.
EMPLOYEE BENEFIT PLANS
1996 STOCK INCENTIVE PLAN. The Company's 1996 Stock Incentive Plan was
adopted in October 1996. The Company has reserved 1,150,000 shares of Common
Stock for issuance under the 1996 Stock Incentive Plan. The 1996 Stock Incentive
Plan is administered by the Compensation Committee of the Board of Directors.
The Committee has the authority and discretion, subject to the provisions of the
1996 Stock Incentive Plan, to select persons to whom awards will be granted, to
designate the number of shares to be covered by awards, and to establish all
other terms and conditions of each award. Upon consummation of the Offering, the
Company intends to grant pursuant to the 1996 Stock Incentive Plan options to
purchase an aggregate of 160,000 shares to members of management of Good
Samaritan Supply and Royal Care Holdings, Inc. at an exercise price per share
equal to the initial public offering price.
The 1996 Stock Incentive Plan provides for the grant of stock options, stock
awards and stock appreciation rights to employees of the Company and its
subsidiaries and to non-employee directors and non-employee consultants and
advisors. Options granted under the 1996 Stock Incentive Plan may be qualified
or non-qualified stock options.
SUBSIDIARY OPTION PLANS. In October 1995, four of the Company's operating
subsidiaries (Gatti LTC Services, Inc., Williamson Drug Company, Inc., Nihan &
Martin, Inc. and Dixon Pharmacy, Inc.) adopted Stock Option Plans for Executives
and Key Employees (the "Subsidiary Option Plans"). Each Subsidiary Option Plan
is administered by the Board of Directors, or a committee thereof, of the
respective subsidiary. Each Subsidiary Option Plan provides for the grant of
options to purchase common stock of such subsidiary, at an exercise price of not
less than fair market value of such stock, to directors, executives or other key
employees of the subsidiary. Pursuant to the terms of the Subsidiary Option
Plans and as part of the Minority Interest Conversions, the stock options
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granted pursuant to the Subsidiary Option Plans were converted to options to
purchase Company Common Stock. The Company has reserved 160,790 shares of Common
Stock for issuance under the Subsidiary Option Plans. As of the date of this
Prospectus, options covering 146,635 shares of Company Common Stock, with an
average weighted exercise price of $7.31 per share, have been granted under the
Subsidiary Option Plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
PROFESSIONAL SERVICES AGREEMENT. Pursuant to the terms of a Professional
Services Agreement (the "Services Agreement") dated December 3, 1993 between
GTCR IV, L.P. (an affiliate of the GTCR Fund and two principals of the general
partner of which are Bryan C. Cressey, a member of the Compensation Committee of
the Company's Board of Directors, and Lee M. Mitchell, a member of the Company's
Board of Directors) ("GTCR") and the Company, GTCR has provided the Company with
management and financial consulting services, for which the Company accrued
management fees of $50,000 during each of 1994 and 1995, and $25,000 during 1996
through June 30. In addition, pursuant to the terms of the Services Agreement,
GTCR is entitled to 1% of the dollar amount of capital received by the Company
upon the closing of any issuance of debt or equity securities from parties other
than GTCR, its directors, its officers or its employees or the Company's
management. No amounts have been or will be paid to GTCR pursuant to this
provision of the Services Agreement. The Company and GTCR have agreed to
terminate the Services Agreement effective upon the consummation of the
Offering. Simultaneously with the consummation of the Offering, the Company will
pay GTCR $450,000 from the proceeds of the Offering, of which $162,500 is in
payment of accrued but unpaid fees under the Services Agreement and $287,500 is
in exchange for the termination of the Services Agreement.
AGREEMENT WITH GTCR FUND REGARDING CLASS A COMMON STOCK. Pursuant to the
terms of the Company's Class A Common Stock, upon the occurrence of the Offering
and from the net proceeds thereof, the GTCR Fund, as the sole holder of the
Class A Common Stock, is entitled to a preferential cash distribution in the
amount of the lesser of (a) 25% of the net proceeds from the Offering (after
deducting all discounts and reasonable expenses) or (b) the amount of all Unpaid
Yield (as defined therein) ($2.3 million at November 15, 1996) plus Unreturned
Original Cost (as defined therein) ($22.5 million) with respect to the Class A
Common Stock. Accordingly, the Company anticipates paying to the GTCR Fund the
amount of approximately $16.9 million from the proceeds of the Offering
(approximately $19.5 million if the Underwriters' over-allotment option is
exercised in full). See "Use of Proceeds." In addition, upon the occurrence of
future public offerings, the holder of Class A Common Stock would otherwise be
entitled to additional preferential distributions until the entire Unpaid Yield
and Unpaid Original Cost is paid in full. In August 1996, the Company and the
GTCR Fund entered into an agreement contemplating the GTCR Fund's relinquishment
of any future preferences with respect to the Company's Class A Common Stock.
Pursuant to the agreement and effective upon the effectiveness of the
Registration Statement of which this Prospectus is a part, the Company will
issue and deliver to the GTCR Fund an additional number of shares of Common
Stock (the "Additional GTCR Shares") obtained by dividing (a) the then remaining
Unpaid Yield and Unreturned Original Cost (giving effect to the amount thereof
paid with the proceeds of the Offering) by (b) the initial public offering price
of shares of Common Stock. Based upon an assumed initial public offering price
of $14.00 per share, the Company will issue to the GTCR Fund 565,625 Additional
GTCR Shares (378,833 Additional GTCR Shares if the Underwriters' over-allotment
option is exercised in full). Contemporaneously with the Offering, pursuant to
the terms of the Amended and Restated Certificate of Incorporation, all shares
of Class A Common Stock will be converted into shares of Common Stock.
REGISTRATION RIGHTS. The Company and all holders of Common Stock prior to
the Offering have entered into a registration rights agreement (the
"Registration Agreement") pursuant to which the Company's stockholders have been
granted certain rights with respect to the registration under the Securities
Act, for resale to the public, of their respective Registrable Securities (as
defined in the
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Registration Agreement). Following the Offering, such stockholders will own in
the aggregate approximately 52.5% of the issued and outstanding Common Stock.
The Registration Agreement provides, among other things, that following the
Offering, the GTCR Fund has the right to require the Company to effect as many
as three "long-form" and five "short-form" demand registrations under the
Securities Act with respect to all or a portion of the GTCR Fund's Registrable
Securities. Other holders of Registrable Securities are entitled to include in
such demand registrations (and in primary registrations by the Company) all
Registrable Securities with respect to which the Company has received written
requests for inclusion therein, subject to certain limitations, including
priority provisions. The Company has agreed to bear all reasonable and customary
expenses associated with such registrations (other than underwriters' discounts
and commissions).
STOCKHOLDERS AGREEMENT OF THE COMPANY. The Company and all holders of
Common Stock prior to the Offering have entered into an Amended and Restated
Stockholders Agreement, dated as of August 23, 1996 (the "Stockholders
Agreement"), pursuant to which all such holders of Common Stock (other than the
GTCR Fund) have the right to participate on a pro rata basis in any disposition
of shares of Common Stock held by the GTCR Fund, other than dispositions to an
affiliate or sales to the public pursuant to an offering registered under the
Securities Act or pursuant to Rule 144 under the Securities Act.
NOMINATING AGREEMENT. On October 9, 1996, the Company and the GTCR Fund
entered into an agreement pursuant to which, upon the request of the GTCR Fund,
the Company will take all necessary and desirable actions within its control to
expand the size of the Board to seven members and to nominate a representative
of the GTCR Fund for election to the Board. This agreement terminates at such
time as the GTCR Fund owns less than 15% of the Company's voting stock on a
fully-diluted basis.
FINANCIAL ADVISORY FEES. Pursuant to a letter agreement, dated as of
February 23, 1996, as amended (the "Equitable Agreement"), Equitable Securities
Corporation ("Equitable") has provided the Company with certain strategic and
financial advisory services. Equitable is one of the Representatives of the
Underwriters in the Offering, and Mr. James H. S. Cooper, a director of the
Company and a member of the Compensation Committee of the Company's Board of
Directors, is a Managing Director of Equitable. For such strategic and advisory
investment banking services, the Company paid Equitable a retainer fee in the
amount of $25,000. In the event the Company utilizes the services of Equitable
in connection with any acquisition, Equitable will receive a transaction fee in
an amount mutually agreed to in advance of such transaction, based on the size
and complexity of the contemplated acquisition.
The Equitable Agreement is effective through December 31, 1996, unless
earlier terminated by the Company or Equitable, provided that Equitable shall
receive any amounts due and owing to it in the event that a transaction with
respect to which Equitable has provided advisory services closes on or before
June 30, 1997. After December 31, 1996 the Equitable Agreement automatically
terminates unless the Company and Equitable mutually agree to an extension. In
the event that the Company terminates the Equitable Agreement prior to December
31, 1996, the Company is obligated to pay Equitable a termination fee of $75,000
plus all fees and amounts due and owing up to the date of termination. If
Equitable terminates the Equitable Agreement prior to December 31, 1996,
Equitable shall refund to the Company the $25,000 retainer fee previously paid
by the Company.
BRIDGE LOAN GUARANTY. The GTCR Fund has guaranteed repayment by the Company
of its indebtedness under the Bridge Loan (the "GTCR Guaranty"). Pursuant to a
Reimbursement and Conversion Rights Agreement (the "Reimbursement Agreement")
between the Company and the GTCR Fund, the Company, subject to certain
conditions, will reimburse the GTCR Fund for payments made by the GTCR Fund
under the GTCR Guaranty by either (i) paying cash or other monetary
reimbursement to the GTCR Fund or (ii) issuing shares of the Company's Common
Stock to the GTCR Fund, the form of such reimbursement to be at the election of
the GTCR Fund. If the Company is required to reimburse the GTCR Fund under the
Reimbursement Agreement and the GTCR Fund
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elects to be reimbursed in shares of the Company's Common Stock, the number of
shares which it would receive would be computed pursuant to a formula set forth
in the Reimbursement Agreement. The Company anticipates that the Bridge Loan
will be repaid out of a portion of the net proceeds of the Offering and,
consequently, the obligations of the Company under the Reimbursement Agreement
will be terminated. See "Use of Proceeds."
DIRECTOR STOCK ISSUANCES. In September 1996, the Company issued to each of
James H.S. Cooper and Mark A. Jerstad (directors of the Company and members of
the Compensation Committee of the Company's Board of Directors) 170.1807 shares
of Class B common stock (11,853 shares of Common Stock as reclassified) for an
aggregate consideration of $16,756, or $98.46 per share of Class B common stock
($1.41 per share of Common Stock), of which $1,676 was paid in cash and $15,080
was paid by delivery to the Company of a promissory note.
CERTAIN TRANSACTIONS
MINORITY INTEREST CONVERSIONS
As part of the Company's acquisition strategy of identifying and
incentivizing strong management teams, management of the acquired companies has
generally retained minority equity interests in their respective companies. In
August 1996, the Company exercised its right to convert management's minority
equity interests in the acquired companies into shares of Common Stock, and
options to purchase shares of such acquired companies were converted into
options to purchase an aggregate of 146,635 shares of Common Stock (the
"Minority Interest Conversions"). The conversion formula was based on a
percentage derived from each subsidiary's proportionate share of the Company's
consolidated trailing earnings giving pro forma effect to recent acquisitions.
The former holders of the minority equity interests received an aggregate of
794,581 shares of Common Stock.
GOOD SAMARITAN RELATIONSHIP
On April 30, 1996, pursuant to the terms of a Share Purchase Agreement (the
"Purchase Agreement") between the Company and Good Samaritan Supply, the Company
purchased shares of Good Samaritan Supply ("Good Samaritan Common Stock")
representing 40% of the outstanding Good Samaritan Common Stock on a
fully-diluted basis, for an aggregate purchase price of $6.0 million. Pursuant
to the Purchase Agreement and upon consummation of the Offering, the Company
will purchase additional shares of Good Samaritan Common Stock for an aggregate
purchase price of $2.0 million, which, together with the Good Samaritan Common
Stock already owned by the Company, will represent 50.1% of the outstanding Good
Samaritan Common Stock on a fully diluted basis.
In connection with the execution of the Purchase Agreement, the Company, The
Evangelical Lutheran Good Samaritan Foundation (the Company's co-investor in
Good Samaritan Supply) (the "Foundation") and Good Samaritan Supply also entered
into a Shareholders Agreement (the "Good Samaritan Shareholders Agreement"), and
the Company, Good Samaritan Supply, the Foundation and the Society entered into
a Non-Competition and Marketing Assistance Agreement (the "Non-Competition and
Marketing Agreement"). The Foundation currently holds 60% of the outstanding
Good Samaritan Common Stock and will, after the Good Samaritan Consolidation,
hold 49.9% of the outstanding Good Samaritan Common Stock.
The Good Samaritan Shareholders Agreement contains provisions (i) governing
the composition of the Board of Directors of Good Samaritan Supply, (ii)
granting rights of first refusal with respect to the sale or transfer of Good
Samaritan Common Stock, (iii) governing the composition of the Board of
Directors of the Company following an initial public offering of Company Common
Stock (see "Management -- Directors, Executive Officers and Key Employees"),
(iv) granting to the Foundation or any affiliate holding Good Samaritan Common
Stock an option, exercisable after the Company's initial public offering, to
convert its Good Samaritan Common Stock into shares of the Company's Common
Stock (the "Initial Public Offering Option"), (v) granting to the Foundation or
any affiliate holding Good Samaritan Common Stock a right to put its shares of
Good Samaritan Common Stock to the Company (the "Good Samaritan Put"), (vi)
granting to the Company an option to purchase all shares
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of Good Samaritan Common Stock held by other parties to the Good Samaritan
Shareholders Agreement ("Company Call Option"), (vii) granting registration
rights to the Foundation with respect to its Company Common Stock (See "-- Good
Samaritan Registration Rights") and (viii) granting certain rights to the
Foundation or any affiliate holding Good Samaritan Common Stock upon certain
changes in the Company's ownership.
The Initial Public Offering Option provides that on or after an initial
public offering of Company Common Stock, the Foundation or any affiliate of the
Foundation holding Good Samaritan Common Stock shall have the option to exchange
any or all of its shares of Good Samaritan Common Stock for Common Stock of the
Company. The formula for determining the number of shares of Common Stock issued
upon exercise of the Initial Public Offering Option is based upon several
factors, including (a) the total consolidated market capitalization of the
Company (which, in turn, depends upon the market price of the Company's Common
Stock), (b) the book value of Good Samaritan Supply, (c) the Company's
percentage ownership of Good Samaritan Supply, and (d) Good Samaritan Supply's
relative contribution to the Company's consolidated net income over a trailing
twelve-month period, with each entity's net income being adjusted for
extraordinary, unusual or non-recurring gains or losses, including the effects
of acquisitions, divestitures, discontinued operations, etc. See "Risk Factors
- -- Possible Dilution Resulting from Good Samaritan Option and Put." Prior to
April 30, 1999, the maximum number of shares of Good Samaritan Common Stock
which may be exchanged is 200 shares, representing 10% of the shares of Good
Samaritan Common Stock to be issued and outstanding after the Good Samaritan
Consolidation. From April 30, 1999 until April 30, 2001, the maximum number of
shares of Good Samaritan Common Stock which may be exchanged is a number of
shares which, together with all other shares previously exchanged, shall not
cause the Foundation and the Foundation affiliates, collectively, to own less
than 10% of the then issued and outstanding shares of Good Samaritan Common
Stock.
The Good Samaritan Put provides that, at any time after April 30, 1999, the
Foundation may demand that the Company or any affiliate of the Company holding
Good Samaritan Common Stock purchase any or all shares of Good Samaritan Common
Stock held by the Foundation or any affiliate of the Foundation; provided that
the Foundation may only exercise this put right to the extent that after the
exercise the Foundation and any such affiliate shall own at least 10% of the
then issued and outstanding shares of Good Samaritan Common Stock. The Good
Samaritan Put also provides that at any time after April 30, 2001, the
Foundation may demand that the Company or any affiliate of the Company holding
Good Samaritan Common Stock purchase all shares of Good Samaritan Common Stock
held by the Foundation and such affiliates. The Company's obligations with
respect to the Good Samaritan Put will continue notwithstanding any sale or
transfer by the Company of any or all of its Good Samaritan Common Stock.
The Company Call Option provides that, at any time after April 30, 2001, the
Company may demand that the Foundation and any affiliate of the Foundation
holding shares of Good Samaritan Common Stock sell any or all such shares to the
Company; provided, that the Foundation and the Foundation affiliates shall have
the right to retain, collectively, a number of shares equal to 10% of the then
issued and outstanding shares of Good Samaritan Common Stock.
The Good Samaritan Put and the Company Call Option may only be exercised
once in any ninety day period. If the Company shares are publicly traded on
NASDAQ National Market, the American Stock Exchange or the New York Stock
Exchange ("Publicly Traded") at the time the Good Samaritan Put is exercised,
then the Company shall be entitled to elect whether the consideration to be
received shall be cash, Common Stock or a combination thereof. If the Company
shares are Publicly Traded at the time the Company Call Option is exercised,
then the Foundation and affiliate transferees shall have the right to elect
whether the consideration to be received shall be cash, Common Stock or a
combination thereof. If the Company shares are not Publicly Traded, then the
consideration to be received shall be cash.
The formula for determining the number of shares of Common Stock issuable
upon exercise of the Initial Public Offering Option, the Good Samaritan Put or
the Company Call Option is based upon
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<PAGE>
several factors, including (a) the total consolidated market capitalization of
the Company (which, in turn, depends upon the market price of the Company's
Common Stock), (b) the book value of Good Samaritan Supply, (c) the Company's
percentage ownership of Good Samaritan Supply, and (d) Good Samaritan Supply's
relative contribution to the Company's consolidated net income over a trailing
twelve-month period, with each entity's net income being adjusted for
extraordinary, unusual or non-recurring gains or losses, including the effects
of acquisitions, divestitures, discontinued operations, etc. While this formula
is intended to approximate the fair value of the shares of Good Samaritan Common
Stock being converted or exchanged, there can be no assurance that the value of
the shares of Company Common Stock issuable upon exercise of the Initial Public
Offering Option, the Good Samaritan Put or the Company Call Option will in fact
approximate the fair value of such shares of Good Samaritan Common Stock. Based
upon management's current estimate of the relative future performance of the
Company and Good Samaritan Supply, the number of shares of Common Stock issuable
to the Foundation upon exercise of the Initial Public Offering Option, the Good
Samaritan Put or the Company Call Option would be substantially less than 10% of
the then issued and outstanding shares of the Company's Common Stock. It is
possible, however, that, under certain extraordinary circumstances (i.e., the
Company's recognizing a consolidated net loss (without regard to Good Samaritan
Supply), Good Samaritan Supply's performing extraordinarily better than
projected and the Company's market capitalization approaching zero) the Company
would be obligated to issue a number of shares which, after giving effect to
such issuance, would be in excess of 99% of the issued and outstanding shares of
Common Stock upon exercise of the Initial Public Offering Option, the Company
Call Option or the Good Samaritan Put (but, in the case of the Good Samaritan
Put, only if the Company elected to exchange Common Stock rather than cash for
the Foundation's shares of stock in Good Samaritan Supply). The Company believes
that the probability of occurrence of such circumstances is extremely remote. In
the event the number of shares of Common Stock issuable upon exercise of the
Initial Public Offering Option, the Good Samaritan Put or the Company Call
Option equals or exceeds 20% of the then issued and outstanding shares of Common
Stock, the rules of the National Association of Securities Dealers, Inc. would
require shareholder approval of such issuance.
If the Company enters into discussions involving a transaction or series of
transactions whereby the Company would become controlled by a nursing home chain
(a "Nursing Home Change in Control"), the Company must give the Foundation
notice of the discussions. Upon receipt of the notice, the Foundation shall have
the option to consent or not consent to the Nursing Home Change in Control. If
the Foundation does not consent to the Nursing Home Change in Control, the
Foundation will be deemed to have made an irrevocable offer to sell its shares
of Good Samaritan Common Stock to the Company. If the Company does not accept
the Foundation's offer, the Company will be deemed to have made an irrevocable
offer to sell its shares of Good Samaritan Common Stock to the Foundation. If
the Foundation declines the Company's offer, then the Company may engage in the
Nursing Home Change in Control. Any purchase of Good Samaritan Common Stock by
the Company or the Foundation shall be for the appraised value thereof and may
only occur if the Nursing Home Change in Control described in the notice has
actually occurred. If the Company completes a transaction or series of
transactions resulting in a Nursing Home Change in Control and the Company had
not given the Foundation notice that discussions pertaining to a Nursing Home
Change in Control had been in progress, then the Foundation may either put the
Good Samaritan Common Stock owned by it to the Company or call the Good
Samaritan Common Stock owned by the Company, in each case at such shares'
appraised value. The appraised value of the Good Samaritan Common Stock shall be
determined by one appraiser selected by the Company and one appraiser selected
by the Foundation, each of which is either a big six accounting firm or an
investment banking firm having operations nationwide. If the two appraisers do
not agree and the difference is not greater than 10% of the higher number, the
two appraisals shall be averaged. If the two appraisers do not agree and the
difference in the appraised value is greater than 10%, then the first two
appraisers shall select a third appraiser. The appraised value shall be the
average of the two appraisals which shall be nearest to one another in total
amounts.
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Any shares of Company Common Stock issued to the Foundation or any affiliate
of the Foundation pursuant to the Good Samaritan Put and/or the Company Call
Option shall have the registration rights described herein under "-- Good
Samaritan Registration Rights."
The Non-Competition and Marketing Assistance Agreement among the Company,
Good Samaritan Supply, the Foundation and the Society contains provisions that
(i) limit the Company's ability other than through Good Samaritan Supply to
engage in institutional long-term care pharmacy operations in certain states;
(ii) limit the Company's ability other than through Good Samaritan Supply to
engage in the provision of home medical equipment and supplies (such as
wheelchairs, walkers, beds, canes, bandages, or sutures, but excluding drugs)
("Home Medical Equipment and Supplies"); (iii) limit Good Samaritan Supply's
ability to engage in institutional long-term care pharmacy operations in certain
states; and (iv) preclude the Foundation and the Society from engaging in
institutional long-term care pharmacy operations and the provision of Home
Medical Equipment and Supplies other than through ownership of the Company or
Good Samaritan Supply. In addition, the Non-Competition and Marketing Assistance
Agreement provides that the Company shall assist Good Samaritan Supply in Good
Samaritan Supply's marketing of Home Medical Equipment and Supplies to the
current and future customers of the Company's institutional pharmacies. The
Non-Competition and Marketing Assistance Agreement also contains provisions
concerning non-solicitation, confidentiality and use of the Good Samaritan
Supply name.
Pursuant to the terms of the Non-Competition and Marketing Assistance
Agreement, the Company may not, subject to certain exceptions, engage in or
conduct (collectively "engage") (i) any institutional long-term care pharmacy
which is located in or derives more than 5% of its revenues from sales in the
states of Arizona, Colorado, Idaho, Iowa, Kansas, Minnesota, Missouri, Nebraska,
New Mexico, North Dakota, South Dakota and Wyoming (the "Excluded States") or
(ii) any business or enterprise that provides Home Medical Equipment and
Supplies in the United States of America. Good Samaritan Supply may not, subject
to certain exceptions, engage in (i) any institutional long-term care pharmacy
which is located outside of or derives more than 5% of its revenues from sales
outside of the Excluded States or Florida; or (ii) any institutional long-term
care pharmacy which is located in Florida, other than such pharmacies that serve
primarily assisted living facilities or congregate care facilities. The existing
direct and indirect subsidiaries of the Company are permitted to continue to
operate their Home Medical Equipment and Supply businesses as operated by such
subsidiaries on April 30, 1996, provided that the Company uses reasonable
efforts to cause these subsidiaries to transfer or combine such lines of
business with Good Samaritan Supply's business activities of this type on terms
mutually satisfactory to all parties. If after April 30, 1996, the Company
desires to acquire a business that provides Home Medical Equipment and Supplies,
the Company may do so if it causes such lines of business to be combined with
Good Samaritan Supply's business activities of that type. While the Company may
acquire such business through Good Samaritan Supply, the Company does not
currently own a majority of the outstanding voting stock of Good Samaritan
Supply and, therefore, cannot at the present time necessarily control Good
Samaritan Supply's decisions regarding acquisitions. However, upon consummation
of the Offering, the Company will own 50.1% of the Good Samaritan Common Stock.
The non-competition, non-solicitation and confidentiality provisions of the
Non-Competition and Marketing Assistance Agreement terminate five years after
the Company and all affiliates of the Company no longer own any Good Samaritan
Common Stock or after the Foundation and all affiliates of the Foundation no
longer own any Good Samaritan Common Stock.
GOOD SAMARITAN REGISTRATION RIGHTS
Pursuant to the terms of the Good Samaritan Shareholders Agreement, the
Company granted the Foundation and any affiliate of the Foundation two demand
registration rights with respect shares of Common Stock received by the
Foundation or such affiliates upon the exercise of the Good Samaritan Put and/or
the Company Call Option. The Good Samaritan Shareholders Agreement also provides
that, in the event the Company proposes to register any of its securities under
the Securities Act at any time or times, subject to certain limitations, the
Company will use its best efforts to include the
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<PAGE>
Common Stock received by the Foundation and any Foundation affiliate upon the
exercise of the Initial Public Offering Option, the Good Samaritan Put and the
Company Call Option in such registrations. The Company has agreed to bear all
reasonable and customary expenses associated with such registrations (other than
underwriters' discounts and commissions). See "Management -- Compensation
Committee Interlocks and Insider Participation" for a discussion of registration
rights held by other holders of the Company's Common Stock.
COMPANY COMMON STOCK ISSUANCES
In August 1994 the Company issued 7,867.1 restricted shares of Class B
common stock (547,944 restricted shares of Common Stock as reclassified) (889.7
of which shares of Class B common stock (61,966 shares of Common Stock) were
subsequently forfeited, see Note 9 of Notes to Consolidated Financial Statements
of the Company) to Timothy L. Burfield, President and Chief Executive Officer of
the Company at a purchase price of $8.83 per share of Class B common stock
(approximately $0.13 per share of Common Stock). The purchase price was paid 50%
in cash and 50% by delivery of an interest-bearing demand note. Upon
consummation of the Offering, all or a portion of Mr. Burfield's unvested
restricted shares will vest pursuant to the Burfield Management Agreement.
In September 1996 the Company issued Mr. Burfield 340 shares of Class B
Common Stock (23,681 shares of Common Stock as reclassified) at a purchase price
of $98.46 per share of Class B common stock ($1.41 per share of Common Stock).
The purchase price for such shares was made by delivery of cash (in the amount
of 10% of the purchase price) and a promissory note (in the principal amount of
90% of the purchase price).
In September 1996 the Company issued 170.1807 shares of Class B common stock
(11,853 shares of Common Stock as reclassified) to each of James H.S. Cooper,
Charles C. Halberg and Mark A. Jerstad (each a director of the Company) at a
purchase price of $98.46 per share of Class B common stock ($1.41 per share of
Common Stock). All of such shares were issued subject to the terms of separate
stock purchase agreements, and the purchase price for such shares was made by
delivery of cash (in the amount of 10% of the purchase price) and a promissory
note (in the principal amount of 90% of the purchase price).
In September 1996 the Company issued an aggregate of 3,403.259 shares of
Class B common stock (237,038 shares of Common Stock as reclassified) to certain
executive officers of the Company (1,496.4457 Class B shares (104,228 shares of
Common Stock), 1,156.0843 Class B shares (80,522 shares of Common Stock) and
750.7229 Class B shares (52,288 shares of Common Stock) to Charles R. Wallace,
Michael B. Freedman and J. Jeffrey Gephart, respectively), at a purchase price
of $98.46 per share of Class B common stock ($1.41 per share of Common Stock).
All of such shares were issued subject to the terms of separate stock purchase
agreements, and the purchase price for such shares was made by delivery of cash
(in the amount of 10% of the purchase price) and a promissory note (in the
principal amount of 90% of the purchase price).
ARRANGEMENT WITH DIRECTOR
Charles C. Halberg (a member of the Company's Board of Directors) and Good
Samaritan Supply entered into an Executive Employment Agreement dated January 1,
1996 (the "Halberg Employment Agreement"), pursuant to which Mr. Halberg is
employed as President and Chief Executive Officer of Good Samaritan Supply. The
Halberg Employment Agreement is for a term of four years and, commencing on
January 1, 1997 and each subsequent anniversary thereof, shall automatically
extend for an additional one-year term unless Good Samaritan Supply shall
provide Mr. Halberg with 90 days' notice prior to the extension of any term.
Under the terms of the Halberg Employment Agreement, Mr. Halberg is entitled to
receive an annual base salary of $220,000, subject to upward adjustment by the
compensation committee of the board of directors of Good Samaritan Supply, and
other benefits including health, dental, disability and life insurance. In
addition, Mr. Halberg and Good Samaritan Supply entered into a Change-in-Control
Agreement as of April 29, 1996 (the "Change-in-Control
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<PAGE>
Agreement"). If Mr. Halberg is terminated by Good Samaritan Supply after a
Change-in-Control (which the Good Samaritan Consolidation will constitute) other
than for certain reasons, he will be entitled to certain severance payments.
Upon consummation of the Offering, the Company intends to grant Mr. Halberg
pursuant to the 1996 Stock Incentive Plan options to purchase 50,000 shares of
Common Stock at an exercise price per share equal to the initial public offering
price.
TRANSACTIONS WITH MINORITY OWNER
During the year ended June 30, 1995 and the six months ended December 31,
1995, Gatti LTC Services, Inc. (a subsidiary of the Company) purchased
pharmaceuticals from entities affiliated with William F. Gatti (a holder of in
excess of 5% of the Company's Common Stock) in the amount of $111,000 and
$810,000, respectively, and during such periods Gatti LTC Services, Inc. sold
pharmaceuticals to such affiliated entities in the amount of $285,000 and
$320,000, respectively. The Company believes that these transactions were on
terms no less favorable to the Company than would otherwise have been obtained
by the Company from an unaffiliated third party.
For a discussion of certain transactions between the Company and members of
the Compensation Committee of the Company's Board of Directors and/or their
affiliates, see "Management -- Compensation Committee Interlocks and Insider
Participation."
The Company has adopted a policy that future transactions with affiliated
persons or companies will be on terms no less favorable to the Company than
could be obtained from unrelated parties and must be approved by a majority of
disinterested directors.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth ownership of the Company's Common Stock,
immediately prior to and immediately following completion of the Offering
(assuming no exercise of the Underwriters' over-allotment option), by (i) each
person who is known to the Company to own beneficially more than 5% of the
outstanding Common Stock, (ii) each director, (iii) the Named Executive Officers
and (iv) all directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-----------------------------------------------
PERCENT
----------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER(1) BEFORE OFFERING AFTER OFFERING
- ------------------------------------------------------------------------- ----------- ----------------- ---------------
<S> <C> <C> <C>
Golder, Thoma, Cressey, Rauner Fund IV, L.P. (2) ........................ 4,500,863 70.8% 38.6%
6100 Sears Tower
Chicago, IL 60606
Bryan C. Cressey (2)(3).................................................. 4,500,863 70.8 38.6
Timothy L. Burfield (4).................................................. 509,659 9.2 4.4
Michael B. Freedman (4).................................................. 80,522 1.4 *
James H.S. Cooper (4).................................................... 11,853 * *
Charles C. Halberg (4)................................................... 11,853 * *
Mark A. Jerstad (4)...................................................... 11,853 * *
Lee M. Mitchell (2)(3)................................................... 4,500,863 70.8 38.6
All directors and executive officers as a group (9 persons) (2)(3)(4).... 5,283,119 84.9% 45.3%
</TABLE>
- ------------------------
* Less than one percent.
(1) Except as indicated in the footnotes to this table, the persons named in
this table have sole voting and investment power with respect to all shares
shown as beneficially owned by them.
(2) Number of shares beneficially owned and percent owned after Offering reflect
the issuance to the GTCR Fund of 565,625 additional shares of Common Stock
in satisfaction of an unpaid preference with respect to the Company's Class
A Common Stock. Percent owned before Offering does not reflect the issuance
of such shares. See "Company Background."
(3) Bryan C. Cressey and Lee M. Mitchell are principals of Golder, Thoma,
Cressey, Rauner, Inc., which is the general partner of GTCR IV, L.P., which
is the general partner of Golder, Thoma, Cressey, Rauner Fund IV, L.P.
Accordingly, Mr. Cressey and Mr. Mitchell may be attributed beneficial
ownership of the shares owned of record by Golder, Thoma, Cressey, Rauner
Fund IV, L.P. Mr. Cressey and Mr. Mitchell disclaim beneficial ownership of
such shares.
(4) Includes 509,659 restricted shares owned by Mr. Burfield, 80,522 shares
owned by Mr. Freedman, 11,853 shares owned by Mr. Cooper, 11,853 shares
owned by Mr. Halberg, 11,853 shares owned by Mr. Jerstad and 782,256 shares
owned by all directors and executive officers as a group. Upon consummation
of the Offering, all or a portion of Mr. Burfield's unvested restricted
shares will vest pursuant to the Burfield Management Agreement.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Amended and Restated Certificate of Incorporation of the Company
provides that the authorized capital stock of the Company consists of 30,000,000
shares of Common Stock, $.01 par value (the "Common Stock") and 1,000,000 shares
of Preferred Stock, $.01 par value (the "Preferred Stock"). As of the date of
this Prospectus, there were 5,559,625 shares of Common Stock outstanding and no
shares of Preferred Stock outstanding. As of the date of this Prospectus, there
were 24 holders of record of Common Stock. All shares of Common Stock are, and
the Common Stock offered hereby will be, when issued, fully paid and
non-assessable.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters subject to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights of
outstanding Preferred Stock. Upon the liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to receive ratably the net
assets of the Company available after the payment of all debts and other
liabilities and subject to the prior rights of holders of any outstanding
Preferred Stock. Holders of Common Stock have no preemptive, subscription,
redemption or conversion rights.
The Company and all holders of Common Stock prior to the Offering have
entered into an Amended and Restated Stockholders Agreement, pursuant to which
all such holders of Common Stock (other than the GTCR Fund) have the right to
participate on a pro rata basis in any disposition of shares of Common Stock
held by the GTCR Fund, other than dispositions to an affiliate or sales to the
public pursuant to an offering registered under the Securities Act or pursuant
to Rule 144 under the Securities Act. See "Management -- Compensation Committee
Interlocks and Insider Participation -- Stockholders Agreement of the Company."
PREFERRED STOCK
Pursuant to the Amended and Restated Certificate of Incorporation, the
Company is authorized to issue 1,000,000 shares of Preferred Stock, which may be
issued from time to time in one or more series upon authorization by the
Company's Board of Directors. The Board of Directors, without further approval
of the stockholders, is authorized to fix the number of shares constituting any
series, dividend rights and terms, conversion rights and terms, voting rights
and terms, redemption rights and terms, liquidation preferences and any other
rights, preferences, privileges and restrictions applicable to each series of
the Preferred Stock. The issuance of the Preferred Stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes could, among other things, adversely affect the voting power of the
holders of the Common Stock and, under certain circumstances, have the effect of
making it more difficult for a third party to acquire, or discouraging a third
party from acquiring, a majority of the outstanding voting stock of the Company,
or otherwise adversely affect the market price for the Common Stock. The Company
is not aware of any plans by a third party to seek control of the Company. The
Company has no current plans to issue any Preferred Stock.
CERTAIN LIMITED LIABILITY, INDEMNIFICATION AND ANTI-TAKEOVER PROVISIONS
INDEMNIFICATION AND LIMITATION OF LIABILITY
The Company's Amended and Restated Certificate of Incorporation and Amended
and Restated By-laws provide that the Company shall, subject to certain
limitations, indemnify its directors and officers against expenses (including
attorneys' fees, judgments, fines and certain settlements) actually and
reasonably incurred by them in connection with any suit or proceeding to which
they are a party
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so long as they acted in good faith and in a manner reasonably believed to be in
or not opposed to the best interests of the corporation, and, with respect to a
criminal action or proceeding, so long as they had no reasonable cause to
believe their conduct to have been unlawful.
Section 102 of the Delaware General Corporation Law ("DGCL") permits a
Delaware corporation to include in its certificate of incorporation a provision
eliminating or limiting a director's liability to a corporation or its
stockholders for monetary damages for breaches of fiduciary duty. DGCL Section
102 provides, however, that liability for breaches of the duty of loyalty, acts
or omissions not in good faith or involving intentional misconduct, or knowing
violation of the law, and the unlawful purchase or redemption of stock or
payment of unlawful dividends or the receipt of improper personal benefits
cannot be eliminated or limited in this manner. The Company's Certificate of
Incorporation includes a provision which eliminates, to the fullest extent
permitted, director liability for monetary damages for breaches of fiduciary
duty.
SECTION 203 OF DELAWARE GENERAL CORPORATION LAW
Section 203 of the DGCL prohibits certain transactions between a Delaware
corporation and an "interested stockholder", which is defined as a person who,
together with any affiliates or associates of such person, beneficially owns,
directly or indirectly, 15% or more of the outstanding voting shares of a
Delaware corporation. This provision prohibits certain business combinations
(defined broadly to include mergers, consolidations, sales or other dispositions
of such assets having an aggregate value in excess of 10% of the consolidated
assets of the corporation, and certain transactions that would increase the
interested stockholder's proportionate share ownership in the corporation)
between an interested stockholder and a corporation for a period of three years
after the date the interested stockholder becomes an interested stockholder,
unless (i) the business combination is approved by the corporation's board of
directors prior to the date the interested stockholder becomes an interested
stockholder, (ii) the interested stockholder acquired at least 85% of the voting
stock of the corporation (other than stock held by directors who are also
officers or by certain employee stock plans) in the transaction in which it
becomes an interested stockholder or (iii) the business combination is approved
by a majority of the board of directors and by the affirmative vote of 66 2/3%
of the outstanding voting stock that is not owned by the interested stockholder.
SPECIAL MEETINGS OF STOCKHOLDERS; NO STOCKHOLDER ACTION BY WRITTEN CONSENT
The Amended and Restated Certificate of Incorporation provides that special
meetings of stockholders of the Company may be called only by a majority of the
Board of Directors, the Chairman or the President. In addition, the Amended and
Restated Certificate of Incorporation provides that, following the consummation
of the offering, the stockholders of the Company may only take actions at a duly
called annual or special meeting of stockholders and may not take action by
written consent.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND NOMINATION OF
DIRECTORS
The Amended and Restated By-laws provide that stockholders seeking to bring
business before or nominate directors at any annual meeting of stockholders,
must provide timely notice thereof in writing. To be timely, a stockholder's
notice must be given in writing to the Secretary of the Company not less than
120 days prior to the meeting. The Amended and Restated By-laws also specify
certain requirements for a stockholder's notice to be in proper written form.
CLASSIFIED BOARD OF DIRECTORS
The Amended and Restated Certificate of Incorporation and Amended and
Restated By-Laws of the Company provide that the Board of Directors is divided
into three classes of directors serving staggered three-year terms. As a result,
one-third of the Company's Board of Directors is elected each year. See
"Management -- Directors, Executive Officers and Key Employees."
NUMBER OF DIRECTORS; REMOVAL; VACANCIES
The Amended and Restated By-Laws provide that there shall be at least three
directors, with the exact number fixed by the Board of Directors. Vacancies on
the Board of Directors may be filled only by the affirmative vote of the
remaining Directors then in office. The Amended and Restated Certificate
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<PAGE>
of Incorporation provides that directors may be removed only for cause and only
by the holders of at least 80% of the outstanding shares of stock entitled to
vote generally in the election of Directors, voting together as a single class.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock will be LaSalle
National Bank, Chicago, Illinois.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of the Offering, the Company will have outstanding
11,656,804 shares of Common Stock. Of these shares, the 5,357,000 to be sold in
the offering will be freely tradable without restriction under the Securities
Act by persons other than "affiliates" of the Company as that term is defined in
Rule 144 under the Securities Act. The remaining 6,299,804 shares of Common
Stock (the "Restricted Shares") were acquired in transactions exempt from
registration under the Securities Act and, accordingly, are "restricted
securities" as that term is defined in Rule 144. Restricted Shares may not be
resold unless they are registered under the Securities Act or are sold pursuant
to an applicable exemption from such registration, such as is contained in Rule
144.
All directors and executive officers and other stockholders of the Company,
holding in the aggregate all of the Company's currently outstanding shares of
Common Stock, have agreed with the Company at the request of the Underwriters
not to sell or otherwise dispose of any shares of Common Stock in the public
market for a period of 180 days after the date of this Prospectus without the
prior written consent of William Blair & Company, L.L.C. Upon expiration of the
180-day lock-up period, 2,567,282 of the Restricted Shares will be eligible for
sale pursuant to Rule 144 described below.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned Restricted Shares for at least two years, or any person who
may be deemed an "affiliate" of the Company and who owns Common Stock, is
entitled, subject to certain conditions, to sell within any three-month period a
number of those shares which does not exceed the greater of (i) 1% of the
Company's then outstanding Common Stock (116,568 shares immediately after the
offering) or (ii) the average weekly trading volume of the Common Stock during
the four calendar weeks preceding such sale. Sales under Rule 144 are also
subject to certain manner-of-sale and notice requirements and requirements
concerning the availability of public information about the Company. If three
years have elapsed since the later of the date of acquisition of Restricted
Shares from the Company or any "affiliate" of the Company, and such person is
deemed not to have been an "affiliate" of the Company for at least three months
preceding a sale, such person would be entitled to sell such shares in the
public market under Rule 144(k) without regard to the requirements mentioned
above. A proposed amendment to Rule 144 would, if adopted, lower the two and
three year holding periods referred to above to one and two years, respectively.
Pursuant to the Good Samaritan Shareholders Agreement and the Registration
Agreement, the Company has granted certain stockholders the right to require the
Company to register their stock under the Securities Act. See "Management --
Compensation Committee Interlocks and Insider Participation -- Registration
Rights" and "Certain Transactions -- Good Samaritan Registration Rights."
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<PAGE>
UNDERWRITING
The Company has entered into an underwriting agreement (the "Underwriting
Agreement") with the underwriters listed in the table below (the
"Underwriters"), for whom William Blair & Company, L.L.C., Donaldson, Lufkin &
Jenrette Securities Corporation and Equitable Securities Corporation are acting
as Representatives (the "Representatives"). Subject to the terms and conditions
set forth in the Underwriting Agreement, the Company has agreed to sell to each
of the Underwriters, and each of the Underwriters has severally agreed to
purchase from the Company, the number of shares of Common Stock set forth
opposite each Underwriter's name in the table below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------------------------------------------------------------------------------------- -----------
<S> <C>
William Blair & Company, L.L.C.............................................................
Donaldson, Lufkin & Jenrette Securities Corporation........................................
Equitable Securities Corporation...........................................................
-----------
Total.................................................................................. 5,357,000
-----------
-----------
</TABLE>
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters have agreed to purchase all of the Common Stock being sold pursuant
to the Underwriting Agreement if any is purchased (excluding shares covered by
the over-allotment option granted therein). In the event of a default by any
Underwriter, the Underwriting Agreement provides that, in certain circumstances,
purchase commitments of the non-defaulting Underwriters may be increased or the
Underwriting Agreement may be terminated.
The Representatives have advised the Company that they propose to offer the
Common Stock to the public initially at the public offering price set forth on
the cover page of this Prospectus and to selected dealers at such price less a
concession of not more than $ per share. In addition, the Underwriters may
allow, and such dealers may re-allow, a concession of not more than $ per
share to other dealers. After the initial public offering, the public offering
price and other selling terms may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable within 30
days after the date of this Prospectus, to purchase up to an additional 803,550
shares of Common Stock at the same price per share to be paid by the
Underwriters for the other shares offered hereby. If the Underwriters purchase
any such additional shares pursuant to this option, each of the Underwriters
will be committed to purchase such additional shares in approximately the same
proportion as set forth in the table above. The Underwriters may exercise the
option only for the purpose of covering over-allotments, if any, made in
connection with the distribution of the Common Stock offered hereby.
The Company, its officers, directors and all of its existing stockholders
have agreed not to offer, sell, contract to sell or otherwise dispose of any
capital stock of the Company, any security convertible into or exchangeable for
such capital stock or any shares of Common Stock issuable upon exercise of any
options for Common Stock for a period of 180 days after the date of this
Prospectus without the prior written consent of William Blair & Company, L.L.C.,
except for the Common Stock offered hereby (and except, in the case of the
Company, for the issuance of the Additional GTCR Shares and
74
<PAGE>
shares issuable upon exercise of currently outstanding options, upon conversion
of the Royal Care Note, pursuant to the Good Samaritan Shareholders Agreement
and in connection with possible future acquisitions).
There has been no public market for the shares of Common Stock prior to the
offering. The initial public offering price for the Common Stock will be
determined by negotiation between the Company and the Representatives. Among the
factors to be considered in determining the initial public offering price are
prevailing market conditions, revenues and earnings of the Company, estimates of
the business potential and prospects of the Company, the present state of the
Company's business operations, an assessment of the Company's management and the
consideration of the above factors in relation to the market valuation of
certain publicly traded companies.
The Representatives have informed the Company that the Underwriters will
not, without customer authority, confirm sales to any accounts over which they
exercise discretionary authority.
The Company has agreed to indemnify the Underwriters and their controlling
persons against certain liabilities, including liabilities under the Securities
Act, or to contribute to payments the Underwriters may be required to make in
respect thereof.
Mr. James H.S. Cooper, a Managing Director of Equitable Securities
Corporation (one of the Representatives), is a member of the Company's Board of
Directors. Equitable Securities Corporation has provided and is currently
retained to provide certain investment banking services to the Company for which
it has received and is entitled to receive advisory or transaction fees, as
applicable, plus out-of-pocket expenses, of the nature and in amounts customary
in the industry for such services. See "Management -- Compensation Committee
Interlocks and Insider Participation -- Financial Advisory Fees."
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Gardner, Carton & Douglas, Chicago, Illinois. Chapman and Cutler,
Chicago, Illinois has acted as counsel to the Underwriters in connection with
certain legal matters relating to the Common Stock offered hereby.
EXPERTS
The consolidated financial statements and schedule of American Medserve
Corporation at June 30, 1995 and December 31, 1995 and for the year ended June
30, 1995 and six months ended December 31, 1995, appearing in this Prospectus
and Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein
which, as to the year ended June 30, 1995, are based in part on the report of
S.B. Hoover & Company, L.L.P., independent auditors. The financial statements
referred to above are included in reliance upon such reports given upon the
authority of such firms as experts in accounting and auditing.
The combined financial statements of G.S.H.C., Inc. and the Contract
Services Division of Louis F. Gatti, Inc. at December 31, 1993 and August 2,
1994, and for the year ended December 31, 1993 and for the period from January
1, 1994 to August 2, 1994; the financial statements of Nihan & Martin, Inc. for
the years ended December 31, 1993 and 1994 and for the period from January 1,
1995 to March 8, 1995; the financial statements of Sterling Acquisition
Partners, Inc. for the years ended December 31, 1993 and 1994 and for the period
from January 1, 1995 to July 31, 1995; the financial statements of Good
Samaritan Supply Services, Inc. at December 31, 1993, 1994 and 1995 and for each
of the three years in the period ended December 31, 1995; the financial
statements of Johnson's Pharmacy and Medical Supply, Inc. for the period from
April 1, 1995 to April 16, 1995; and the financial statements of Pharmed, Inc.
at December 31, 1994 and 1995 and for each of the two years in the period ended
December 31, 1995 appearing in this Prospectus and Registration Statement have
75
<PAGE>
been audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon appearing elsewhere herein, and are included in reliance on such
reports given upon the authority of such firm as experts in accounting and
auditing.
The financial statements of Williamson's Pharmacy - Institutional Division
at June 30, 1993 and for the four months then ended, the year ended June 30,
1994, and at August 10, 1994 and for the period from July 1, 1994 to August 10,
1994; the financial statements of Williamson Drug Company, Inc. at June 30, 1995
and for the period from August 11, 1994 to June 30, 1995; and the financial
statements of Extended Care Associates, Inc. at April 15, 1995 and for the
period from April 1, 1995 to April 15, 1995, included in this Prospectus have in
each case been audited by S.B. Hoover & Company, L.L.P., independent auditors,
as set forth in their reports thereon appearing elsewhere herein, and are
included in reliance on such reports given upon the authority of such firm as
experts in accounting and auditing.
The financial statements of Dixon Pharmacy, Inc. for the years ended October
31, 1993 and 1994 and for the period from November 1, 1994 to April 17, 1995
included in this Prospectus have been audited by Lindgren, Callihan, Van Osdol &
Co., Ltd., independent auditors, as set forth in their reports thereon appearing
elsewhere herein, and are included in reliance on such reports given upon the
authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Royal Care of America, Inc. for the
years ended December 31, 1994 and 1995 included in this Prospectus have been
audited by Coopers & Lybrand L.L.P., independent accountants, as set forth in
their reports thereon appearing elsewhere herein, and are included in reliance
on such reports given upon the authority of such firm as experts in accounting
and auditing.
The consolidated statements of operations and changes in accumulated capital
and of cash flows for Royal Care of America, Inc. for the year ended December
31, 1993 included in this Prospectus have been so included in reliance on the
report of Price Waterhouse LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C., a Registration Statement on Form S-1 (including
all amendments thereto, the "Registration Statement") under the Securities Act
with respect to the Common Stock offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and the Common Stock, reference is made to such Registration Statement,
including the exhibits and schedules thereto, a copy of which may be obtained
from the Securities and Exchange Commission. The statements contained in this
Prospectus as to the contents of any document filed as an exhibit are of
necessity brief descriptions thereof and are not necessarily complete; each such
statement is qualified in its entirety by reference to such document. The
Registration Statement, including exhibits and schedules thereto, may be
inspected without charge at the facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the regional offices of the Commission located at Seven World Trade Center, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of the materials may be obtained from the
Public Reference Section of the Commission, Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and its public reference facilities
in New York, New York, and Chicago, Illinois, at prescribed rates.
The Company is not currently subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). As a result of
the Offering, the Company will become subject to the informational requirements
of the Exchange Act. The Company will fulfill its obligations with respect to
the requirements of the Exchange Act by filing periodic reports and other
information with the Commission. The Commission maintains a Web site at
http:\\www.sec.gov that will contain reports, proxy statements and other
information to be filed by the Company.
76
<PAGE>
AMERICAN MEDSERVE CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
AMERICAN MEDSERVE CORPORATION AND SUBSIDIARIES:
Report of Independent Auditors......................................................................... F-4
Consolidated Balance Sheets as of June 30, 1995, December 31, 1995 and June 30, 1996 (unaudited)....... F-5
Consolidated Statements of Operations for the year ended June 30, 1995, the six months ended December
31, 1995 and the six months ended June 30, 1995 and 1996 (unaudited).................................. F-6
Consolidated Statements of Stockholders' Equity for the year ended June 30, 1995 and the six months
ended December 31, 1995 and June 30, 1996 (unaudited)................................................. F-7
Consolidated Statements of Cash Flows for the year ended June 30, 1995, the six months ended December
31, 1995 and the six months ended June 30, 1995 and 1996 (unaudited).................................. F-8
Notes to Consolidated Financial Statements............................................................. F-9
G.H.S.C., INC. AND THE CONTRACT SERVICES DIVISION OF LOUIS F. GATTI, INC. (PREDECESSOR):
Report of Independent Auditors......................................................................... F-22
Combined Balance Sheets as of December 31, 1993 and August 2, 1994..................................... F-23
Combined Statements of Income for the year ended December 31, 1993 and for the period beginning January
1, 1994 and ended August 2, 1994...................................................................... F-24
Combined Statements of Stockholders' Equity for the year ended December 31, 1993 and for the period
beginning January 1, 1994 and ended August 2, 1994.................................................... F-25
Combined Statements of Cash Flows for the year ended December 31, 1993 and for the period beginning
January 1, 1994 and ended August 2, 1994.............................................................. F-26
Notes to Combined Financial Statements................................................................. F-27
DIXON PHARMACY, INC.:
Independent Auditor's Report........................................................................... F-34
Balance Sheets as of April 17, 1995, October 31, 1994 and October 31, 1993............................. F-35
Statements of Income and Retained Earnings for the period beginning November 1, 1994 and ended April
17, 1995 and for each of the years ended October 31, 1994 and 1993.................................... F-36
Statements of Cash Flows for the period beginning November 1, 1994 and ended April 17, 1995 and for
each of the years ended October 31, 1994 and 1993..................................................... F-37
Notes to Financial Statements.......................................................................... F-38
EXTENDED CARE ASSOCIATES, INC.:
Independent Auditors' Report........................................................................... F-42
Balance Sheet as of April 15, 1995..................................................................... F-43
Statement of Operations and Retained Earnings for the period beginning April 1, 1995 and ended April
15, 1995.............................................................................................. F-44
Statement of Cash Flows for the period beginning April 1, 1995 and ended April 15, 1995................ F-45
Notes to Financial Statements.......................................................................... F-46
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
GOOD SAMARITAN SUPPLY SERVICES, INC.:
<S> <C>
Report of Independent Auditors......................................................................... F-49
Balance Sheets as of December 31, 1993, December 31, 1994, December 31, 1995 and April 30, 1996
(unaudited)........................................................................................... F-50
Statements of Operations and Retained Earnings (Deficit) for each of the years ended December 31, 1993,
1994 and 1995 and for the four months ended April 30, 1996 (unaudited)................................ F-51
Statements of Cash Flows for each of the years ended December 31, 1993, 1994 and 1995 and for the four
months ended April 30, 1996 (unaudited)............................................................... F-52
Notes to Financial Statements.......................................................................... F-53
JOHNSON'S PHARMACY AND MEDICAL SUPPLY, INC.:
Report of Independent Auditors......................................................................... F-60
Statement of Income for the period beginning April 1, 1995 and ended April 16, 1995.................... F-61
Statement of Cash Flows for the period beginning April 1, 1995 and ended April 16, 1995................ F-62
Notes to Financial Statements.......................................................................... F-63
NIHAN & MARTIN, INC.:
Report of Independent Auditors......................................................................... F-65
Statements of Income and Retained Earnings for each of the years ended December 31, 1993 and 1994 and
for the period beginning January 1, 1995 and ended March 8, 1995...................................... F-66
Statements of Cash Flows for each of the years ended December 31, 1993 and 1994 and for the period
beginning January 1, 1995 and ended March 8, 1995..................................................... F-67
Notes to Financial Statements.......................................................................... F-68
PHARMED, INC.:
Report of Independent Auditors......................................................................... F-71
Balance Sheets as of December 31, 1994, December 31, 1995 and May 8, 1996 (unaudited).................. F-72
Statements of Operations for each of the years ended December 31, 1994 and 1995 and for the period
beginning January 1, 1996 and ended May 8, 1996 (unaudited)........................................... F-73
Statements of Stockholders' Equity for each of the years ended December 31, 1994 and 1995 and for the
period beginning January 1, 1996 and ended May 8, 1996 (unaudited).................................... F-74
Statements of Cash Flows for each of the years ended December 31, 1994 and 1995 and for the period
beginning January 1, 1996 and ended May 8, 1996 (unaudited)........................................... F-75
Notes to Financial Statements.......................................................................... F-76
ROYAL CARE OF AMERICA, INC.:
Reports of Independent Accountants..................................................................... F-79
Consolidated Balance Sheets as of December 31, 1995 and 1994 and June 30, 1996 (unaudited)............. F-81
Consolidated Statements of Operations and Changes in Accumulated Capital for each of the years ended
December 31, 1993, 1994 and 1995 and for the six months ended June 30, 1996 (unaudited)............... F-82
Consolidated Statements of Cash Flows for each of the years ended December 31, 1993, 1994 and 1995 and
for the six months ended June 30, 1996 (unaudited).................................................... F-83
Notes to Consolidated Financial Statements............................................................. F-84
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
STERLING ACQUISITION PARTNERS, INC.:
<S> <C>
Report of Independent Auditors......................................................................... F-91
Statements of Income for each of the years ended December 31, 1993 and 1994 and for the period
beginning January 1, 1995 and ended July 31, 1995..................................................... F-92
Statements of Stockholders' Equity for each of the years ended December 31, 1993 and 1994 and for the
period beginning January 1, 1995 and ended July 31, 1995.............................................. F-93
Statements of Cash Flows for each of the years ended December 31, 1993 and 1994 and for the period
beginning January 1, 1995 and ended July 31, 1995..................................................... F-94
Notes to Financial Statements.......................................................................... F-95
WILLIAMSON'S PHARMACY -- INSTITUTIONAL DIVISION:
Independent Auditors' Report........................................................................... F-98
Balance Sheets as of June 30, 1993 and 1994, and August 10, 1994....................................... F-99
Statements of Income and Divisional Equity for the four months ended June 30, 1993, the year ended June
30, 1994 and the period beginning July 1, 1994 and ended August 10, 1994.............................. F-100
Statements of Cash Flows for the four months ended June 30, 1993, the year ended June 30, 1994 and the
period beginning July 1, 1994 and ended August 10, 1994............................................... F-101
Notes to Financial Statements.......................................................................... F-102
WILLIAMSON DRUG COMPANY, INC.:
Independent Auditors' Report........................................................................... F-108
Balance Sheet as of June 30, 1995...................................................................... F-109
Statement of Income for the period beginning August 11, 1994 and ended June 30, 1995................... F-110
Statement of Changes in Stockholders' Equity for the period beginning August 11, 1994 and ended June
30, 1995.............................................................................................. F-111
Statement of Cash Flows for the period beginning August 11, 1994 and ended June 30, 1995............... F-112
Notes to Financial Statements.......................................................................... F-113
</TABLE>
F-3
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
American Medserve Corporation
We have audited the accompanying consolidated balance sheets of American
Medserve Corporation as of June 30, 1995 and December 31, 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year and the six months then ended. 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 did not audit the
financial statements of Williamson Drug Company, Inc., a subsidiary of the
Company, for the period from August 11, 1994 (Date of Acquisition) to June 30,
1995, which statements reflect total assets of $4,564,286 as of June 30, 1995,
and total revenues of $4,566,490. Such statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
data included for Williamson Drug Company, Inc. is based solely on the report of
the other auditors.
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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of American Medserve
Corporation as of June 30, 1995 and December 31, 1995, and the consolidated
results of its operations and its cash flows for the year and the six months
then ended in conformity with generally accepted accounting principles.
Chicago, Illinois
April 25, 1996,
except for Notes 11 and 14 as to which the date is
November , 1996
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion
of the common stock reclassification described in Note 14.
ERNST & YOUNG LLP
Chicago, Illinois
November 8, 1996
F-4
<PAGE>
AMERICAN MEDSERVE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1995 1995
--------- ------------ JUNE 30 PRO FORMA
1996 FOR
----------- DISTRIBUTION
(NOTE 3) JUNE
(UNAUDITED) 30
1996
--------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 1,200 $ 1,437 $ 500 $ 500
Accounts receivable, less allowance of $362 at June 30,
1995, $473 at December 31, 1995, and $495 at June 30,
1996.................................................... 7,446 8,403 11,313 11,313
Due from minority owner affiliates....................... 126 44 319 319
Inventories.............................................. 3,321 3,939 4,615 4,615
Income taxes receivable.................................. -- -- 571 571
Prepaid expenses and other............................... 119 294 475 475
--------- ------------ ----------- --------------
Total current assets....................................... 12,212 14,117 17,793 17,793
Equipment, net............................................. 1,676 2,084 3,027 3,027
Excess of cost over net assets acquired, less accumulated
amortization of $362 at June 30, 1995, $782 at December
31, 1995, and $1,057 at June 30, 1996..................... 22,805 27,829 32,988 32,988
Deferred financing costs, less accumulated amortization of
$142 at June 30, 1995, $206 at December 31, 1995, and $62
at June 30, 1996.......................................... 761 871 1,410 1,410
Investment in affiliate.................................... -- -- 6,000 6,000
Other assets............................................... 57 96 612 612
--------- ------------ ----------- --------------
Total assets............................................... $ 37,511 $ 44,997 $ 61,830 $ 61,830
--------- ------------ ----------- --------------
--------- ------------ ----------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 1,974 $ 2,170 $ 2,432 $ 2,432
Preferential distribution payable........................ -- -- -- 24,832
Current portion of long-term debt........................ 3,472 1,191 3,951 3,951
Accrued expenses......................................... 1,367 1,133 1,526 1,526
Note payable to minority owner........................... 500 -- -- --
Current obligations under capital leases................. 75 83 66 66
--------- ------------ ----------- --------------
Total current liabilities.................................. 7,388 4,577 7,975 32,807
Long-term debt, less current portion....................... 15,653 23,477 28,100 28,100
Long-term obligations under capital leases, less current
portion................................................... 54 28 67 67
Minority interest.......................................... 1,821 2,168 2,743 2,743
Deferred income taxes...................................... 68 174 109 109
Stockholders' equity:......................................
Common stock:
Common Stock, $.01 par value: 30,000,000 shares
authorized; 4,421,216 shares issued and outstanding at
June 30, 1996......................................... -- -- 44 44
Class A -- $.01 par value: shares issued and
outstanding -- June 30, 1995 -- 565,000 shares;
December 31, 1995 -- 56,500 shares, liquidation
preference of $24,832 at June 30, 1996................ 6 1 -- --
Class B -- $.01 par value: shares issued and
outstanding -- June 30, 1995 -- 78,671 shares;
December 31, 1995 -- 7,714 shares..................... 1 -- -- --
Additional paid-in capital............................... 12,463 14,219 22,526 --
Retained earnings (accumulated deficit).................. 92 388 301 (2,005)
Note receivable from stockholder......................... (35) (35) (35) (35)
--------- ------------ ----------- --------------
Total stockholders' equity (net capital deficiency)........ 12,527 14,573 22,836 (1,995)
--------- ------------ ----------- --------------
Total liabilities and stockholders' equity................. $ 37,511 $ 44,997 $ 61,830 $ 61,830
--------- ------------ ----------- --------------
--------- ------------ ----------- --------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
AMERICAN MEDSERVE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED SIX MONTHS ENDED JUNE 30
JUNE 30 DECEMBER 31 ------------------------
1995 1995 1995 1996
----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues.................................................. $ 24,793 $ 27,347 $ 16,702 $ 32,357
Cost of revenues.......................................... 17,896 19,559 11,905 23,259
----------- ------------ ----------- -----------
Gross profit.............................................. 6,897 7,788 4,797 9,098
Selling, general, and administrative expenses............. 5,663 6,275 3,754 7,290
----------- ------------ ----------- -----------
Operating income.......................................... 1,234 1,513 1,043 1,808
Other (expense) income:
Interest expense........................................ (1,001) (1,053) (709) (1,213)
Minority interest....................................... (43) 5 (37) 4
Other, net.............................................. 171 210 102 75
----------- ------------ ----------- -----------
(873) (838) (644) (1,134)
----------- ------------ ----------- -----------
Income before income taxes and extraordinary item......... 361 675 399 674
Provision for income taxes................................ 269 379 290 324
----------- ------------ ----------- -----------
Income before extraordinary item.......................... 92 296 109 350
Write off of deferred financing costs, net of taxes of
$404..................................................... -- -- -- (437)
----------- ------------ ----------- -----------
Net income (loss)......................................... $ 92 $ 296 $ 109 $ (87)
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
Pro forma for distribution net income (loss) per share:
Before extraordinary item............................... $ .01 $ .04 $ .05
Extraordinary item...................................... -- -- (.06)
----------- ------------ -----------
Net income (loss)......................................... $ .01 $ .04 $ (.01)
----------- ------------ -----------
----------- ------------ -----------
Shares used in computing pro forma for distribution net
income (loss) per share.................................. 6,209,098 6,577,533 6,577,533
</TABLE>
See accompanying notes.
F-6
<PAGE>
AMERICAN MEDSERVE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------------------------------------------
COMMON STOCK CLASS A CLASS B ADDITIONAL NOTE RECEIVABLE
-------------------- ---------------------- ------------------------ PAID-IN FROM
SHARES PAR VALUE SHARES PAR VALUE SHARES PAR VALUE CAPITAL STOCKHOLDER
--------- --------- --------- ----------- --------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1,
1994................ -- -- -- $ -- -- $ -- $ -- $ --
Sale of shares to
Class A
stockholder......... -- -- 565,000 6 -- -- 5,644 --
Sale of shares to
executive........... -- -- -- -- 78,671 1 69 (35)
Capital contributions
from Class A
stockholder......... -- -- -- -- -- -- 6,750 --
Net income........... -- -- -- -- -- -- -- --
--
--------- --------- --------- ----------- --------- ----------- ---
Balance at June 30,
1995................ 565,000 6 78,671 1 12,463 (35)
Capital contributions
from Class A
stockholder......... -- -- -- -- -- -- 1,750 --
Forfeiture of Class B
shares.............. -- -- -- -- (1,530) -- -- --
Reverse stock split,
one-for-ten......... -- -- (508,500) (5) (69,427) (1) 6 --
Net income........... -- -- -- -- -- -- -- --
--
--------- --------- --------- ----------- --------- ----------- ---
Balance at December
31, 1995............ -- -- 56,500 1 7,714 -- 14,219 (35)
Net loss for the
period
(unaudited)......... -- -- -- -- -- -- -- --
Capital contributions
from Class A
stockholder
(unaudited)......... -- -- -- -- 8,350 --
Forfeiture of Class B
shares
(unaudited)......... -- -- -- -- (737) -- -- --
Reclassification of
each Class A and
Class B share to
69.65 shares of
Common Stock
(unaudited) (See
Note 14)............ 4,421,216 44 (56,500) (1) (6,977) -- -- --
--
--------- --------- --------- ----------- --------- ----------- ---
Balance at June 30,
1996 (unaudited).... 4,421,216 $ 44 -- $ -- -- $ -- $ 22,526 $ (35)
--
--
--------- --------- --------- ----------- --------- ----------- ---
--------- --------- --------- ----------- --------- ----------- ---
<CAPTION>
TOTAL
RETAINED STOCKHOLDERS'
EARNINGS EQUITY
------------- -------------
<S> <C> <C>
Balance at July 1,
1994................ $ -- $ --
Sale of shares to
Class A
stockholder......... -- 5,650
Sale of shares to
executive........... -- 35
Capital contributions
from Class A
stockholder......... -- 6,750
Net income........... 92 92
----- -------------
Balance at June 30,
1995................ 92 12,527
Capital contributions
from Class A
stockholder......... -- 1,750
Forfeiture of Class B
shares.............. -- --
Reverse stock split,
one-for-ten......... -- --
Net income........... 296 296
----- -------------
Balance at December
31, 1995............ 388 14,573
Net loss for the
period
(unaudited)......... (87) (87)
Capital contributions
from Class A
stockholder
(unaudited)......... -- 8,350
Forfeiture of Class B
shares
(unaudited)......... -- --
Reclassification of
each Class A and
Class B share to
69.65 shares of
Common Stock
(unaudited) (See
Note 14)............ -- --
----- -------------
Balance at June 30,
1996 (unaudited).... $ 301 $ 22,836
----- -------------
----- -------------
</TABLE>
See accompanying notes.
F-7
<PAGE>
AMERICAN MEDSERVE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS ENDED JUNE
YEAR ENDED ENDED 30
JUNE 30 DECEMBER 31 ---------------------
1995 1995 1995 1996
----------- ------------ ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).............................................. $ 92 $ 296 $ 109 $ (87)
Adjustments to reconcile net income (loss) to net cash (used
in) provided by operating activities:
Provision for doubtful accounts.............................. 50 97 31 66
Depreciation................................................. 275 272 164 318
Amortization................................................. 504 432 337 484
Write off of deferred financing costs........................ -- -- -- 841
Minority interest............................................ 43 (5) 37 (4)
Deferred income taxes........................................ 68 138 30 (65)
Changes in operating assets and liabilities:
Accounts receivable........................................ (1,509) (272) (759) (1,969)
Inventories................................................ (304) (289) (223) (18)
Prepaid expenses and other................................. (136) (168) 374 (752)
Accounts payable and accrued expenses...................... 448 (793) 417 289
----------- ------------ ---------- ---------
Net cash (used in) provided by operating activities............ (469) (292) 517 (897)
INVESTING ACTIVITIES
Capital expenditures........................................... (375) (423) (285) (763)
Advances (to) from minority owner affiliates, net.............. (127) 3 (127) (275)
Acquisition of entities, net of cash acquired.................. (28,411) (5,605) (16,369) (13,247)
----------- ------------ ---------- ---------
Net cash used in investing activities.......................... (28,913) (6,025) (16,781) (14,285)
FINANCING ACTIVITIES
Proceeds from (repayments of) revolving line of credit, net.... 1,300 2,700 700 (2,100)
Proceeds from long-term debt................................... 18,000 4,000 9,945 30,100
Repayments of long-term debt and capital lease obligations..... (250) (1,222) (294) (20,633)
Repayment of note payable to minority owner.................... -- (500) -- --
Capital contributions.......................................... 12,435 1,750 6,785 8,350
Fees paid for financing arrangements........................... (903) (174) (538) (1,472)
----------- ------------ ---------- ---------
Net cash provided by financing activities...................... 30,582 6,554 16,598 14,245
----------- ------------ ---------- ---------
Net increase (decrease) in cash and cash equivalents........... 1,200 237 334 (937)
Cash and cash equivalents, beginning of period................. -- 1,200 866 1,437
----------- ------------ ---------- ---------
Cash and cash equivalents, end of period....................... $ 1,200 $ 1,437 $ 1,200 $ 500
----------- ------------ ---------- ---------
----------- ------------ ---------- ---------
Supplemental disclosure of cash flow information and noncash
investing and financing activities:
Note payable issued in an acquisition........................ $ 500 $ -- $ 500 $ 105
Equipment acquired under capital leases...................... 42 -- 28 38
Cash paid during the period for income taxes................. 139 395 83 594
Cash paid during the period for interest..................... 907 1,108 685 1,215
</TABLE>
See accompanying notes.
F-8
<PAGE>
AMERICAN MEDSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 AND ALL PRO
FORMA DATA ARE UNAUDITED)
1. DESCRIPTION OF BUSINESS
American Medserve Corporation (the Company) purchases, repackages and
dispenses pharmaceuticals to patients or residents in its client long-term care
facilities and provides such facilities with related consultant pharmacist and
information services, including formulary management, automated medical
record-keeping, drug therapy evaluation and assistance with regulatory
compliance. The Company also provides infusion therapy, parenteral and enteral
nutrition therapy, inhalation and respiratory therapy and wound care management
services, as well as medical supplies and devices. The Company was formed in
November 1993 and began operations on August 2, 1994 with the acquisition of
G.S.H.C., Inc. and the Contract Services Division of Louis F. Gatti, Inc. (Gatti
LTC Services, Inc.), the combined predecessor company, through the Company's
wholly-owned subsidiary, AMC Regional Holdings, Inc. (Regional Holdings).
Substantially all of the Company's operations have been conducted through
Regional Holdings.
Effective December 14, 1995, the Board of Directors of the Company elected
to change the year-end of the Company for financial reporting and tax purposes
from June 30 to December 31.
2. ACQUISITIONS
On August 11, 1994, the Company acquired 90.0% of the stock of Williamson
Drug Company, Inc. ("WDC"), based in Harrisonburg, Virginia, for cash of $2,520,
including expenses. The Company may be required to make additional payments
aggregating up to $3,000 contingent upon increases in operating income for each
of the years ended June 30, 1995 through June 30, 1999. No contingent payments
were made during the year ended June 30, 1995 or the six months ended December
31, 1995 and $14 was paid during the six months ended June 30, 1996.
On March 9, 1995, the Company acquired substantially all of the assets of
Nihan & Martin, Inc., based in Rockford, Illinois, for cash of $9,942, including
expenses. The seller retained approximately 15.8% of the stock of Nihan &
Martin, Inc.
On April 15, 1995, the Company acquired substantially all of the assets of
Extended Care Associates, Inc., located in Lynchburg, Virginia, for cash of
$1,200, including expenses and approximately 3.0% of the stock of WDC, which had
a fair value of $19. The Company may be required to make additional payments
aggregating up to $1,000 contingent upon increases in operating income for each
of the years ended June 30, 1996 through June 30, 2000. No contingent payments
were made during the year ended June 30, 1995, the six months ended December 31,
1995 or the six months ended June 30, 1996.
On April 17, 1995, the Company acquired substantially all of the assets of
Dixon Pharmacy, Inc., based in Dixon, Illinois, for cash of $3,734, including
expenses. The seller retained approximately 20.0% of the stock of Dixon
Pharmacy, Inc.
During the year ended June 30, 1995, the Company also acquired substantially
all of the assets of two other less significant companies for cash of $1,509 and
$500 note payable to a minority owner.
On August 3, 1995, the Company acquired substantially all of the assets of
Sterling Healthcare Services, Inc. ("Sterling"), based in Shreveport, Louisiana,
for cash of $5,650, including expenses. The seller retained approximately 20.0%
of the stock of Sterling Healthcare Services, Inc.
F-9
<PAGE>
AMERICAN MEDSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 AND ALL PRO
FORMA DATA ARE UNAUDITED)
2. ACQUISITIONS (CONTINUED)
On May 8, 1996, the Company acquired substantially all of the assets of
Pharmed, Inc., based in Alexandria, Louisiana, and Pharmed of Baton Rouge, Inc.,
based in Baton Rouge, Louisiana, for cash of $6,582, including expenses. The
seller retained approximately 20.0% of the stock in each of these companies. The
allocation of the purchase price of these acquisitions will be finalized upon
the completion of the acquisition date balance sheets, which may result in an
adjustment to the purchase price. The acquisition date balance sheet is
anticipated to be completed prior to December 31, 1996. To the extent net
tangible assets (excluding accounts receivable) as presented in the final
acquisition date balance sheet differ from the preliminary acquisition date
balance sheet, the acquisition agreement provides for an adjustment to the
purchase price equal to that difference. There may also be a decrease in the
purchase price related to accounts receivable if the amount subsequently
collected is less than the amount on the preliminary acquisition date balance
sheet. The Company does not anticipate that the adjustments, if any, will be
material to the original purchase price.
During the six months ended June 30, 1996, the Company completed three other
less significant acquisitions for cash of $548, including expenses, and a note
payable to one of the sellers for $100.
Each acquisition has been accounted for using the purchase method of
accounting. Accordingly, the purchase price for each respective acquisition was
allocated to the respective net assets acquired based on their estimated fair
market values at the respective acquisition dates. Obligations related to
contingent payments will be reflected as increases to goodwill in the period in
which it is probable the contingencies will be resolved. The consolidated
statements of income include the results of operations of each acquired entity
from the effective date of the respective acquisition. All of the businesses
acquired provide substantially similar products and services as the Company.
The minority interests (the Retained Stock) retained by the former owners of
the acquired businesses carry certain restrictions and provide the subsidiary
and Regional Holdings with rights of first refusal regarding the repurchase of
the Retained Stock. The Retained Stock is subject to repurchase at fair market
value in the event of the former owner's termination of employment. The Retained
Stock is convertible at the option of the Company at any time, and by the holder
thereof under certain circumstances (including the sale of the Company or an
initial public offering), in each case into shares of the Company's Class B
Common Stock (See Note 14).
In conjunction with certain of the acquisitions, the entities also entered
into administrative services agreements with minority owners whereby the
entities may provide or receive certain administrative services with entities
directly owned by these minority owners. Net revenues received under these
agreements amounted to approximately $65 for the year ended June 30, 1995, and
$37 for the six months ended December 31, 1995. See also Note 7 for information
concerning leases with minority owners.
F-10
<PAGE>
AMERICAN MEDSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 AND ALL PRO
FORMA DATA ARE UNAUDITED)
2. ACQUISITIONS (CONTINUED)
Unaudited pro forma data as though the Company had purchased all of the
above businesses at the beginning of each of the fiscal periods ending June 30,
1995, the six-month period ending December 31, 1995 and the six month period
ending June 30, 1996 are set forth below:
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30 SIX MONTHS ENDED SIX MONTHS ENDED
1995 DECEMBER 31, 1995 JUNE 30, 1996
----------- ----------------- -----------------
<S> <C> <C> <C>
Sales................................................. $ 51,124 $ 32,663 $ 36,071
Income before extraordinary item...................... 195 245 280
Net Income (Loss)..................................... 195 245 (157)
Income per share before extraordinary item............ .03 .04 .04
Net Income (Loss) Per Share........................... .03 .04 (.02)
</TABLE>
On April 30, 1996, the Company acquired a 40% equity interest in Good
Samaritan Supply Services, Inc. ("Good Samaritan") for cash of $6,000. Good
Samaritan provides pharmaceutical products and services and medical supplies to
the long-term care market. This investment is accounted for using the equity
method of accounting. The difference between the carrying amount of the
Company's equity interest in the net assets of Good Samaritan, $3,988, is being
amortized over 40 years. The stock of Good Samaritan has been pledged to secure
certain debt obligations of Good Samaritan.
In connection with this acquisition of a 40% equity interest in Good
Samaritan, the Company, Good Samaritan and the other shareholder of Good
Samaritan, entered into a shareholders' agreement. Among other things, the
shareholders' agreement contains provisions whereby the other shareholder has an
option (the "Initial Public Offering Option"), exercisable after an initial
public offering of the Company, to convert the shares of Good Samaritan held by
it (limited, prior to April 30, 1999, to 10% of the total outstanding shares of
Good Samaritan) into shares of the Company's common stock. The shareholders'
agreement also contains provisions whereby the other shareholder may demand that
the Company purchase any or all shares of Good Samaritan held by the other
shareholder in excess of 10% of the total outstanding shares of Good Samaritan
(the "Good Samaritan Put"). The Good Samaritan Put becomes effective after April
1, 1999. In addition, the Company has an option whereby it may demand that the
other shareholder sell any or all shares of Good Samaritan held by the other
shareholder in excess of 10% of the total outstanding shares of Good Samaritan
(the "Company Call Option"). The Company Call Option becomes effective after
April 1, 2001. The purchase price for additional purchases of stock pursuant to
the shareholders' agreement is based on estimated fair value as determined
pursuant to a formula agreed to by the Company and Good Samaritan's other
shareholder. The formula, based upon several factors, is designed to calculate a
price based on the relative fair value of Good Samaritan to the total fair value
of the Company at the date of purchase. While the formula is intended to
approximate fair value at the date of additional purchase(s), the actual fair
value at that date may differ from the amount calculated pursuant to the
formula. All additional purchases shall be accounted for using the purchase
method of accounting.
The Company also has the right, upon the occurrence of certain events,
including an initial public offering of the Company's common stock, to acquire
an additional 10.1% of the total outstanding shares of Good Samaritan in
exchange for $2,000.
F-11
<PAGE>
AMERICAN MEDSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 AND ALL PRO
FORMA DATA ARE UNAUDITED)
3. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRO FORMA FOR DISTRIBUTION PRESENTATION (UNAUDITED)
The pro forma balance sheet gives effect to the one-time mandatory
preferential distribution to the Company's principal stockholder, which is
payable from the proceeds of an initial public offering. The distribution,
estimated at $24,832, will be satisfied through the remittance of $16,913 in
cash and the issuance of 565,625 shares of common stock. Pro forma earnings per
share data reflects the issuance of these shares as well the issuance of
1,208,036 additional shares of common stock whose proceeds will be used to pay
the distribution.
INTERIM FINANCIAL INFORMATION
The condensed financial statements at June 30, 1996 and for the six months
ended June 30, 1995 and 1996 are unaudited but include all adjustments
(consisting only of normal recurring adjustments) which the Company considers
necessary for a fair presentation of the financial position at such date and of
the operating results and cash flows for those periods. Results of the 1996
period are not necessarily indicative of results expected for the entire year.
These condensed financial statements do not include all of the interim
disclosures normally provided in annual financial statements.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly and majority-owned subsidiaries. The Company's 40% equity
investment is accounted for under the equity method. All significant
intercompany balances and transactions have been eliminated in consolidation.
ACCOUNTING ESTIMATES
Accounting estimates are an integral part of the consolidated financial
statements prepared by Company management and are based on management's current
judgments. These judgments are based on knowledge and experience about past and
current events and on assumptions about future events. The Company will accrue
for estimated liabilities when the financial impact is probable and can be
estimated by management. Actual results could differ from those estimates.
CASH EQUIVALENTS
Cash equivalents, which include financial instruments with an original
maturity of three months or less, are carried at cost which approximates fair
market value.
REVENUE RECOGNITION
Revenue is recognized when the products or services are provided to the
Company's customers and is generally based on the amount invoiced. As
significant portions of the Company's revenues are paid through various
departments of public aid (Medicaid) and Medicare programs and are subject to
adjustment by the programs, the Company monitors its receivables and reports
such revenue at the net realizable amounts expected to be received from these
programs.
INVENTORIES
Inventories, which consist principally of pharmaceuticals and medical
supplies, are stated at the lower of cost (first-in, first-out basis) or market.
F-12
<PAGE>
AMERICAN MEDSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 AND ALL PRO
FORMA DATA ARE UNAUDITED)
3. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
EQUIPMENT
Equipment, including capitalized leases and leasehold improvements, is
stated at cost, less accumulated depreciation and amortization. Equipment is
being depreciated or amortized using either straight-line or accelerated methods
based on the estimated useful lives of the assets or the lease terms as
appropriate.
Equipment acquired through business combinations is stated at fair value at
the date of acquisition.
EXCESS OF COST OVER NET ASSETS ACQUIRED
Excess of cost over net assets acquired is being amortized using the
straight-line method over a period of 40 years. The Company has established a
policy whereby it will evaluate the recoverability of the excess of cost over
net assets acquired on a periodic basis utilizing undiscounted net cash flows of
the acquired entities. In management's opinion, no impairment of value of the
excess of cost over net assets acquired existed at December 31, 1995 or June 30,
1996.
DEFERRED FINANCING COSTS
Deferred financing costs are being amortized over the term of the related
debt using the straight-line method.
INCOME TAXES
The Company accounts for income taxes under the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between the financial reporting and income tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include accounts receivable, accounts
payable, accrued expenses, a stockholder note receivable, and debt. The fair
values of all financial instruments were not materially different from their
carrying values.
STOCK-BASED COMPENSATION EXPENSE
The Company recognizes stock-based compensation expense based on the excess
of the estimated fair value of the stock on the measurement date, which is the
grant date for stock options and the issue date for other employee stock
issuance, over the exercise price of options granted or shares issued to
employees.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." This statement encourages
companies to record compensation costs for stock options granted to employees on
the date of grant based on the fair value of these options. Alternatively, it
allows companies to continue to measure compensation based on the difference
between the option exercise price and the fair market value on the date of
grant. The Company has elected to continue measuring compensation under
Accounting Principle Board Opinion No. 25, and will provide the pro forma
disclosure requirements of SFAS No. 123 beginning with the financial statements
for the year ending December 31, 1996.
F-13
<PAGE>
AMERICAN MEDSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 AND ALL PRO
FORMA DATA ARE UNAUDITED)
3. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
PRO FORMA NET INCOME (LOSS) PER SHARE
Except as noted below, pro forma net income (loss) per share is computed
using the weighted average number of common shares outstanding. Common
equivalent shares are excluded from the computation as their effect is
antidilutive, except that, pursuant to the Securities and Exchange
Commission (SEC) Staff Accounting Bulletins, common and common equivalent shares
issued during the 12-month period prior to the initial filing of a proposed
offering at prices below the assumed public offering price have been included in
the calculation as if they were outstanding for all periods presented using the
treasury stock method for stock options, and adjusted for the stock splits
described in Note 14. In addition, the shares used in computing pro forma net
income (loss) per share have been adjusted to reflect 1,773,661 shares assumed
to have been issued for the preferential distribution (See Pro Forma
Presentation).
RECLASSIFICATION
Certain amounts in the 1995 financial statements have been reclassified to
conform with the 1996 presentation.
4. EQUIPMENT
Equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1995 1995
--------- ------------
<S> <C> <C>
Office and nursing home equipment..................................... $ 788 $ 860
Leasehold improvements................................................ 191 204
Transportation equipment.............................................. 195 362
Furniture, fixtures, and equipment.................................... 614 1,053
Equipment under capital lease......................................... 164 164
--------- ------------
1,952 2,643
Accumulated depreciation and amortization............................. (276) (559)
--------- ------------
$ 1,676 $ 2,084
--------- ------------
--------- ------------
</TABLE>
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1995 1995
--------- ------------
<S> <C> <C>
Accrued professional fees............................................. $ 338 $ 337
Accrued compensation.................................................. 559 541
Accrued income taxes.................................................. 182 26
Accrued interest...................................................... 94 46
Other accrued expenses................................................ 194 183
--------- ------------
$ 1,367 $ 1,133
--------- ------------
--------- ------------
</TABLE>
F-14
<PAGE>
AMERICAN MEDSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 AND ALL PRO
FORMA DATA ARE UNAUDITED)
6. LONG-TERM DEBT
Long-term debt, all of which relates to Regional Holdings, consists of the
following:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1995 1995
--------- ------------
<S> <C> <C>
Revolving line of credit............................................ $ 1,300 $ 4,000
Acquisition loan.................................................... 10,000 13,722
Term loan........................................................... 7,750 6,861
Other long-term debt................................................ 75 85
--------- ------------
19,125 24,668
Less: Current portion............................................... 3,472 1,191
--------- ------------
$ 15,653 $ 23,477
--------- ------------
--------- ------------
</TABLE>
Amounts outstanding under the revolving line of credit, acquisition loan,
and term loan were borrowed under a credit agreement with two banks which
provided for maximum borrowings of $33,000 (the Original Credit Agreement). The
Original Credit Agreement also provided for a $500 letter of credit facility,
under which $100 was outstanding at December 31, 1995.
On March 22, 1996, Regional Holdings refinanced the amounts then outstanding
under the Original Credit Agreement ($24,583) with the same two banks. The New
Credit Agreement provides for maximum borrowings in the aggregate of $50,000,
consisting of a $10,000 revolving line of credit, a $15,000 revolving
acquisition loan facility, and a $25,000 term loan (the New Credit Agreement).
The New Credit Agreement also provides for a $500 letter of credit facility. The
revolving acquisition loan facility expires on March 15, 1998 and any amounts
outstanding under this facility convert to a term loan on that date. Outstanding
commitments for the revolving line of credit and the term loans are due on March
15, 2002. The New Credit Agreement is collateralized by substantially all of the
assets of Regional Holdings and its majority-owned subsidiaries. In conjunction
with the New Credit Agreement, all issued and outstanding common stock of
Regional Holdings was pledged by the Company to secure the debt obligations. As
a result of the refinancing of the Original Credit Agreement, Regional Holdings
wrote off unamortized deferred financing costs of $841 at March 22, 1996,
resulting in an extraordinary charge of $437, net of taxes, and capitalized the
financing costs associated with the New Credit Agreement.
The interest rates initially established under the credit agreements were
the lead bank's floating rate, defined as the higher of the bank's corporate
base rate or the federal funds' rate plus one half of 1%, plus an applicable
floating rate margin (as defined within the credit agreements). At Regional
Holdings' option, Regional Holdings can convert the interest rate to the London
Interbank Borrowing Rate (LIBOR), plus an applicable Eurodollar rate margin (as
defined within the credit agreements). The floating rate margin and Eurodollar
rate margin used to establish the effective interest rates decrease as Regional
Holdings' leverage ratio (as defined in the credit agreements) declines.
Interest is generally payable on a quarterly basis at a minimum.
The weighted-average interest rate on the revolving line of credit was 9.50%
and 9.25% at June 30, 1995 and December 31, 1995, respectively. Borrowings under
the revolving line of credit are limited to specified percentages of eligible
inventories and accounts receivable, as defined within the credit agreement.
Regional Holdings had $900,000 available under the revolving line of credit at
December 31, 1995. The credit agreement also provides for a 0.50% commitment fee
on the unused portion of the revolving line of credit and revolving acquisition
loan facility.
F-15
<PAGE>
AMERICAN MEDSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 AND ALL PRO
FORMA DATA ARE UNAUDITED)
6. LONG-TERM DEBT (CONTINUED)
The interest rate under the acquisition loan is LIBOR (6.03% and 5.67% at
June 30, 1995, and December 31, 1995, respectively) plus 2.75%. The interest
rate under the term loan is LIBOR (6.125% and 5.69% at June 30, 1995 and
December 31, 1995, respectively) plus 2.75%. The LIBOR rate in effect for both
the acquisition and term loans represents the LIBOR rate on the date Regional
Holdings exercises its option to convert from the bank's floating rate.
The New Credit Agreement contains various provisions and covenants, which
include: (i) restrictions on Regional Holdings' ability to pay dividends and to
incur additional indebtedness; (ii) limitations on future capital expenditures;
(iii) restrictions on the disposition of property; and (iv) restrictions on the
issuance and repurchase of capital stock. Regional Holdings has also agreed to
maintain certain financial ratios, including interest expense coverage, fixed
charge coverage, maximum leverage, and minimum operating income (all as defined
within the New Credit Agreement).
Future maturities of long-term debt as of December 31, 1995 based on the
provisions of the New Credit Agreement, are as follows:
<TABLE>
<S> <C>
1996.............................................................. $ 1,191
1997.............................................................. 3,019
1998.............................................................. 3,593
1999.............................................................. 3,624
2000 and thereafter............................................... 13,241
---------
$ 24,668
---------
---------
</TABLE>
In May 1995, Regional Holdings entered into a 15-month interest rate cap
agreement with a bank, whereby the bank has agreed to reimburse Regional
Holdings during periods in which the floating rate, as defined, on $4,000 of
notional amount of debt exceeds the interest rate cap of 8.00%. Regional
Holdings bears the market risk that arises from changes in interest rates and
the credit risk should the bank fail to perform under the interest rate cap
agreement. If the interest rate cap agreement were terminated on June 30, 1996,
no significant gain or loss would be recognized by Regional Holdings. Payments,
if any, received with respect to this agreement are reflected as an adjustment
to interest expense. There can be no assurance that the strategy in relation to
this interest rate cap agreement will be effective. Regional Holdings is
amortizing the cost of this agreement ratably over the life of the agreement.
The unamortized cost of this agreement in the amount of $30 and $15 at June 30,
1995 and December 31, 1995, respectively, is included in other assets.
On June 23, 1995, Regional Holdings entered into a one-year interest rate
swap agreement, effective on September 22, 1995, to hedge the impact of changes
in interest rates. The interest rate swap agreement converts the interest rate
on $7,500 of notional amount of debt to a fixed rate of 5.48%. If the interest
rate swap agreement were terminated on June 30, 1996, no significant gain or
loss would be realized by Regional Holdings.
Net payments made or received on interest rate swap agreements that qualify
as hedges are reflected as adjustments to interest expense. Realized gains and
losses resulting from the termination of interest rate swap agreements are
recognized over the remaining term of the underlying debt. Unrealized gains and
losses from interest rate swap agreements are deferred until realized.
The notional amounts related to the above agreements are not reflected on
the Company's balance sheets.
F-16
<PAGE>
AMERICAN MEDSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 AND ALL PRO
FORMA DATA ARE UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES
The Company leases certain property and equipment under various
noncancelable operating and capital leases. These leases contain various terms
and provide for renewal at prevailing market rates.
Future minimum lease payments for noncancelable operating and capital leases
having an initial term of more than one year as of December 31, 1995, are as
follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
----------- -----------
<S> <C> <C>
1996..................................................................... $ 630 $ 89
1997..................................................................... 500 28
1998..................................................................... 381 9
1999..................................................................... 257 6
2000..................................................................... 89 1
----------- ---
$ 1,857 133
-----------
-----------
Less: Amounts representing interest...................................... 22
---
Capital lease obligations................................................ 111
Less: Current portion.................................................... 83
---
$ 28
---
---
</TABLE>
The Company also assumed liabilities for certain leased properties and
equipment of the entities acquired during the six months ended June 30, 1996.
In conjunction with certain of the acquisitions, subsidiaries of Regional
Holdings entered into noncancelable operating lease agreements for office and
facility space with minority owners. Future minimum lease payments included in
the above table relating to these agreements are $163, $164, $149, $159, and $43
for the years ending December 31, 1996, 1997, 1998, 1999, and 2000,
respectively.
Rent expense amounted to $302 and $382 for the year ended June 30, 1995, and
for the six months ended December 31, 1995, respectively, of which approximately
$69,000 and $85,000, respectively, related to the leases entered into with
minority owners.
8. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1995 1995
----------- -------------
<S> <C> <C>
Current:
Federal............................................................. $ 105 $ 140
State............................................................... 95 100
----- -----
200 240
Deferred.............................................................. 69 139
----- -----
$ 269 $ 379
----- -----
----- -----
</TABLE>
F-17
<PAGE>
AMERICAN MEDSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 AND ALL PRO
FORMA DATA ARE UNAUDITED)
8. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax liabilities and assets
are as follows:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1995 1995
----------- -------------
<S> <C> <C>
Deferred tax liabilities:
Amortization of excess of cost over net assets acquired............. $ (163) $ (343)
Other............................................................... (68) (95)
----------- ------
Total deferred tax liabilities........................................ (231) (438)
Deferred tax assets:
Accruals and reserves............................................... 116 216
Other............................................................... 46 48
----------- ------
Total deferred tax assets............................................. 162 264
----------- ------
Net deferred tax liabilities.......................................... $ (69) $ (174)
----------- ------
----------- ------
</TABLE>
A reconciliation of income tax expense computed at the federal statutory tax
rate compared to the reported income tax expense is as follows:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1995 1995
--------- -------------
<S> <C> <C>
Income tax at statutory rate.......................................... 34.0% 34.0%
State income taxes, net of federal tax benefit........................ 19.8 12.4
Nondeductible goodwill amortization................................... 7.6 6.5
Other nondeductible expenses.......................................... 4.1 0.7
Minority interest..................................................... 4.1 (0.3)
Other................................................................. 4.9 2.8
--------- ------
74.5% 56.1%
--------- ------
--------- ------
</TABLE>
9. STOCKHOLDERS' EQUITY
The Company has shares of Class A and Class B common stock authorized,
issued, and outstanding. Class A and B common stock are identical with respect
to voting rights. Approval of certain matters requires the affirmative vote of
holders of a majority of the outstanding shares of Class A. The holders of Class
A are also entitled to a liquidation preference in the amount of original cost
plus a 7.2% annual yield thereon.
In the event the Board and the holders of a majority of the shares of Class
A and B common stock, voting as a single class, approve an initial public
offering pursuant to an effective registration statement, the stockholders shall
take all necessary actions in connection with the consummation of the offering.
Upon the occurrence of a public offering, the Company shall, at the request
of a majority of the holders of Class A, make a distribution to such holders in
the amount of the lesser of (a) 25% of the net proceeds from the offering (after
deducting all discounts and reasonable expenses) or (b) the amount of all Unpaid
Yield plus Unreturned Original Cost, as each term is defined in the Company's
Certificate of Incorporation.
F-18
<PAGE>
AMERICAN MEDSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 AND ALL PRO
FORMA DATA ARE UNAUDITED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
Pursuant to an agreement between the Class A and Class B stockholders, to
the extent that the Class A shareholders acquire an equity interest in excess of
$12,500, the Class B shareholders are required to forfeit shares of common stock
based on a formula as defined in the agreement. The Class B shareholder has
forfeited approximately 11% of his shares as a result of this agreement.
See Note 14 regarding the adoption by the Company of an Amended and Restated
Certificate of Incorporation.
10. EMPLOYEE BENEFIT PLANS
The Company adopted certain profit-sharing and 401(k) plans as previously
established by certain acquired businesses. The plans cover substantially all
full-time employees (as defined in the plans) of the acquired businesses.
Employees can elect to make pretax contributions of a percentage of their annual
compensation, not to exceed IRS limitations. Certain of the plans provide for
discretionary matching or profit-sharing contributions in which participants
vest over three to five years. Contributions of $23 and $38 were made to these
plans during the year ended June 30, 1995, and the six months ended December 31,
1995, respectively.
11. STOCK OPTION PLANS
During 1995, the Company approved the formation of stock option plans, which
provide for the issuance of up to 5% of the outstanding common stock of certain
of the acquired subsidiaries to key employees of those subsidiaries. No options
to purchase shares of common stock were granted during the year ended June 30,
1995 or the six months ended December 31, 1995. In June 1996 the Company granted
subsidiary stock options under these plans. The exercise prices of the options
were at amounts considered to be greater than the fair value of the underlying
subsidiary stock. In August 1996, these subsidiary options were converted into
options to acquire an aggregate of 146,635 shares of Company common stock. The
average exercise price of these options is $7.31 per share, determined based on
a conversion formula. The options generally vest over seven years, beginning
from the date of the various subsidiary acquisitions. At June 30, 1996, 48,186
shares were vested and exercisable.
12. RELATED PARTY TRANSACTIONS
The majority stockholder of the Company provides strategic financial and
management consulting services in conjunction with a five-year agreement for
which it charges the Company a management fee. The management fee expense
amounted to $33 and $25 for the year ended June 30, 1995, and the six months
ended December 31, 1995, respectively.
Upon the issuance of any debt or equity securities of the Company or any of
its subsidiaries, the Company has agreed to pay the majority stockholder an
investment fee of 1% of the capital received by the Company or any of its
subsidiaries. The Company has not paid any investment fees to this stockholder.
On December 3, 1993, the Company entered into a Senior Management Agreement
(Agreement) with an Executive, whereby this Executive was granted the right to
purchase a number of shares, as defined in the Agreement, of the Company's Class
B common stock (Executive Stock) at fair value. Shares acquired are vested over
a seven-year period, as specified in the Agreement. Such vesting shall
accelerate upon the occurrence of certain events, as defined in the Agreement.
If the Executive ceases to be employed by the Company for any reason, the
Company (or if the Company fails to exercise the
F-19
<PAGE>
AMERICAN MEDSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 AND ALL PRO
FORMA DATA ARE UNAUDITED)
12. RELATED PARTY TRANSACTIONS (CONTINUED)
option, the majority stockholder) has a right of repurchase on both vested and
unvested shares. Unvested shares may be repurchased at the lesser of the
Executive's cost or the fair market value of such shares, and vested shares may
be repurchased at fair market value. The Executive has the right to require the
Company to repurchase any vested shares, upon the occurrence of certain events,
as defined in the Agreement. Other than the right to repurchase unvested shares,
such rights of the Company, the majority stockholder and the Executive terminate
upon a sale of the Company or a Qualified Public Offering, as defined in the
Agreement.
On August 2, 1994, the Executive exercised his right to purchase 78,671
shares of Class B common stock (pre-split and reclassification) in exchange for
cash of $35 and a note of $35. The note is secured by a stock pledge agreement.
Subsequently, the Executive forfeited approximately 11% of his shares (see Note
9).
The Agreement provides employment to the Executive and continues until
terminated by the Executive or the Company and provides for salary continuation
for a specified number of months under certain circumstances, as defined.
Subsidiaries of Regional Holdings purchase and sell pharmaceuticals and
medical supplies from and to entities owned by minority owners. Purchases of
these items totaled approximately $111 and $831 during the year ended June 30,
1995, and the six months ended December 31, 1995, respectively. Sales of these
items totaled $285 and $340 during the year ended June 30, 1995 and the six
months ended December 31, 1995, respectively. $127 and $145 are included in
amounts due from minority owners at June 30, 1995 and December 31, 1995,
respectively.
13. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk primarily consist of accounts receivable due from
Medicaid and Medicare, third-party insurance companies, and individuals in
various geographic locations. Credit risks with respect to these receivables are
limited due to the large number of patients comprising the Company's customer
base.
14. SUBSEQUENT EVENTS
During August 1996, the Company entered into a bridge loan agreement (bridge
loan) with a bank in the amount of $5,000. The bridge loan matures on January 2,
1997. The bridge loan bears interest at the floating prime rate (as defined in
the bridge loan). Obligations outstanding under the bridge loan are guaranteed
by the Company's Class A stockholder (the Guaranty). The bridge loan contains
various convenants, the most restrictive of which include: (1) limitations on
the disposition of assets; and (2) restrictions on the acquisitions of assets or
stock of other entities, including entering into joint venture agreements. The
Guaranty provides the Class A stockholder the right to receive equity securities
(as defined) of the Company upon the happenings of certain events as defined.
On August 5, 1996, the Company acquired substantially all of the assets of
Royal Care of American, Inc., based in Malta, New York, for cash of $7,897,
including expenses, and a convertible note for $2,000. The convertible note
bears interest at 8.75% and is convertible into the Company's common stock by
dividing the aggregate principal amount of the note, plus accrued interest
thereon, by 85% of the value of the common stock. The allocation of the purchase
price of this acquisition will be finalized upon the completion of the
acquisition date balance sheet, which may result in an
F-20
<PAGE>
AMERICAN MEDSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 AND ALL PRO
FORMA DATA ARE UNAUDITED)
14. SUBSEQUENT EVENTS (CONTINUED)
adjustment to the purchase price. The acquisition date balance sheet is
anticipated to be completed prior to December 31, 1996. To the extent net
tangible assets as presented in the final acquisition date balance sheet differs
from the preliminary acquisition date balance sheet, the acquisition agreement
provides for an adjustment to the purchase price equal to that difference. The
Company does not anticipate that the adjustment, if any, will be material to the
original purchase price.
In August 1996, the Company elected to convert the minority interests
retained by the former owners of the acquired businesses (Retained Stock) into
shares of the Company's common stock. In connection therewith, the Company
issued 794,581 shares of common stock based upon a conversion formula as defined
in each of the respective acquisition agreements. The fair value of the shares
at the date of issuance was $9.10 per share. The conversion of the Retained
Stock will be accounted for using the purchase method of accounting and is
expected to result in additional goodwill of $4,488.
In September 1996, the Company issued 310,208 shares of common stock to
certain directors and members of management for a purchase price of $1.41 per
share. The Company received cash proceeds of $44 and $394 of demand notes
receivable in connection with this sale. The demand notes bear interest at the
"corporate base rate" of a specified bank. The fair value of the shares at the
date of issuance was $2,823. The shares issued will be fully vested by December
31, 1996. The difference between the purchase price and the fair value of the
shares, $2,385, will be recorded as compensation expense in the third and fourth
quarters of 1996.
During the period July 1, 1996 through October 15, 1996, the Company
completed three other less significant acquisitions for cash of $1,559,
including expenses, a note payable to a seller for $67 and 33,620 shares of the
Company's common stock. The Company may be required to make additional payments
aggregating up to $500 contingent upon increases in operating income for one of
the acquisitions. No contingent payments were made during the six months ended
June 30, 1996.
On February 13, 1996, the Board of Directors declared a ten-for-one reverse
stock split of the Company's common stock. This reverse stock split was
reflected in the financial statements as of December 31, 1995.
In November 1996 the Company adopted an Amended and Restated Certificate of
Incorporation, pursuant to which (i) the Company authorized 30,000,000 shares of
a new class of common stock, designated as shares of Common Stock, $.01 par
value (Common Stock), and (ii) each previously issued and outstanding share of
the Company's Class A Common Stock and Class B Common Stock was reclassified as
69.65 shares of such newly-authorized Common Stock. Accordingly, unless
specified otherwise, all references in these financial statements to income per
share and stock option data have been restated to reflect this reclassification.
Retroactive effect has also been given thereto in the June 30, 1996 pro forma
balance sheet and the statement of stockholders' equity.
F-21
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Gatti LTC Services, Inc. (formerly
G.S.H.C., Inc. and the Contract Services
Division of Louis F. Gatti, Inc.)
We have audited the accompanying combined balance sheets of G.S.H.C., Inc.
and the Contract Services Division of Louis F. Gatti, Inc. as of December 31,
1993 and August 2, 1994, and the related combined statements of income,
stockholders' equity, and cash flows for the year ended December 31, 1993, and
for the period from January 1, 1994 to August 2, 1994. These financial
statements are the responsibility of the Companies' 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 financial statements referred to above present fairly,
in all material respects, the combined financial position of G.S.H.C., Inc. and
the Contract Services Division of Louis F. Gatti, Inc. as of December 31, 1993
and August 2, 1994, and the combined results of their operations and their cash
flows for the year ended December 31, 1993, and for the period from January 1,
1994 to August 2, 1994 in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
July 26, 1996
F-22
<PAGE>
G.S.H.C., INC. AND THE CONTRACT SERVICES
DIVISION OF LOUIS F. GATTI, INC.
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
1993 AUGUST 2 1994
------------- -------------
<S> <C> <C>
Current assets:
Cash................................................................................. $ 89,082 $ 4,097
Accounts receivable, less allowance of $102,000 as of December 31, 1993 and $112,000
as of August 2, 1994................................................................ 1,771,800 2,623,816
Note receivable...................................................................... 40,000 40,000
Due from related parties............................................................. 545,242 569,740
Inventories.......................................................................... 458,691 701,961
Prepaid expenses and other........................................................... 42,179 47,464
Income taxes receivable.............................................................. 29,921 --
------------- -------------
Total current assets............................................................... 2,976,915 3,987,078
Equipment, net......................................................................... 559,144 873,448
Excess of cost over net assets acquired less accumulated amortization of $46,666 as of
December 31, 1993, and $57,277 as of August 2, 1994................................... 235,049 224,238
Intangible assets less accumulated amortization of $408,800 as of December 31, 1993 and
$480,633 as of August 2, 1994......................................................... 175,200 145,567
Other assets........................................................................... 8,195 9,194
------------- -------------
Total assets....................................................................... $ 3,954,503 $ 5,239,525
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................................... $ 453,773 $ 995,356
Notes payable........................................................................ 513,260 600,588
Notes payable to related parties..................................................... 1,209,070 1,519,033
Accrued expenses..................................................................... 144,593 132,209
Due to related parties............................................................... 411,072 456,339
Current obligations under capital leases............................................. 24,191 67,167
------------- -------------
Total current liabilities.......................................................... 2,755,959 3,770,692
Notes payable, less current portion.................................................... 356,762 145,300
Long-term obligations under capital leases, less current portion....................... 45,191 71,828
Notes payable to related parties, less current portion................................. 128,278 46,631
Stockholders' equity:
Common stock......................................................................... 1,000 1,000
Retained earnings.................................................................... 667,313 1,204,074
------------- -------------
668,313 1,205,074
------------- -------------
Total liabilities and stockholders' equity......................................... $ 3,954,503 $ 5,239,525
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
F-23
<PAGE>
G.S.H.C., INC. AND THE CONTRACT SERVICES
DIVISION OF LOUIS F. GATTI, INC.
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
YEAR ENDED 1994
DECEMBER 31, TO AUGUST 2,
1993 1994
------------- -------------
<S> <C> <C>
Revenues............................................................................ $ 9,099,103 $ 6,917,522
Cost of goods sold.................................................................. 6,824,265 4,963,248
------------- -------------
Gross profit........................................................................ 2,274,838 1,954,274
Selling, general, and administrative expenses....................................... 1,759,979 1,315,423
------------- -------------
Income from operations.............................................................. 514,859 638,851
Other expense:
Interest.......................................................................... 161,740 77,791
Other, net........................................................................ 3,616 --
------------- -------------
165,356 77,791
------------- -------------
Income before provision for income taxes............................................ 349,503 561,060
Provision for income taxes.......................................................... 142,713 24,299
------------- -------------
Net income.......................................................................... $ 206,790 $ 536,761
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
F-24
<PAGE>
G.S.H.C., INC. AND THE CONTRACT SERVICES
DIVISION OF LOUIS F. GATTI, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1993, AND
FOR THE PERIOD FROM JANUARY 1, 1994 TO AUGUST 2, 1994
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
-------------------- RETAINED STOCKHOLDERS'
SHARES COST EARNINGS EQUITY
--------- --------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1992.................................... 1,000 $ 1,000 $ 460,523 $ 461,523
Net income...................................................... -- -- 206,790 206,790
--------- --------- ------------- -------------
Balance at December 31, 1993.................................... 1,000 1,000 667,313 668,313
Net income...................................................... -- -- 536,761 536,761
--------- --------- ------------- -------------
Balance at August 2, 1994....................................... 1,000 $ 1,000 $ 1,204,074 $ 1,205,074
--------- --------- ------------- -------------
--------- --------- ------------- -------------
</TABLE>
See accompanying notes.
F-25
<PAGE>
G.S.H.C., INC. AND THE CONTRACT SERVICES
DIVISION OF LOUIS F. GATTI, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
YEAR ENDED 1994 TO
DECEMBER 31, AUGUST 2,
1993 1994
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income............................................................................ $ 206,790 $ 536,761
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Depreciation........................................................................ 134,405 108,410
Amortization........................................................................ 130,076 82,444
Change in accounts receivable allowance............................................. 27,000 10,000
Deferred income taxes............................................................... 15,278 --
(Gain) loss on sale of equipment.................................................... (3,184) 627
Changes in operating assets and liabilities:
Accounts receivable............................................................... (195,485) (862,016)
Note receivable................................................................... (40,000) --
Inventories....................................................................... (59,387) (159,270)
Prepaid expenses and other........................................................ (25,652) (6,284)
Accrued expenses.................................................................. 86,594 (12,384)
Accounts payable.................................................................. (122,104) 541,583
Income taxes receivable........................................................... (4,318) 29,921
------------ ------------
Net cash (used in) provided by operating activities............................. 150,013 269,792
INVESTING ACTIVITIES
Purchases of equipment................................................................ (184,127) (253,378)
Proceeds from sale of equipment....................................................... 5,585 63
Acquisition of an institutional pharmacy.............................................. -- (212,000)
Proceeds from termination of joint venture agreement.................................. 92,339 --
------------ ------------
Net cash used in investing activities................................................. (86,203) (465,315)
FINANCING ACTIVITIES
Notes payable proceeds (payments), net................................................ 335,682 (95,818)
Repayments on capital lease obligations............................................... (10,554) (14,413)
Due from and to related parties, net.................................................. (318,327) 20,769
Proceeds from Note payable to related party in conjunction with an acquisition........ -- 200,000
------------ ------------
Net cash provided by financing activities....................................... 6,801 110,538
------------ ------------
Net increase (decrease) in cash................................................. 70,611 (84,985)
Cash at beginning of period........................................................... 18,471 89,082
------------ ------------
Cash at end of period........................................................... $ 89,082 $ 4,097
------------ ------------
------------ ------------
Supplemental disclosure of cash flow information and noncash investing and financing
activities:
Cash paid during the year for interest.............................................. $ 165,964 $ 87,278
Cash paid during the year for income taxes.......................................... 41,640 4,964
Equipment acquired under capital lease obligations.................................. 67,301 84,026
</TABLE>
See accompanying notes.
F-26
<PAGE>
G.S.H.C., INC. AND THE CONTRACT SERVICES
DIVISION OF LOUIS F. GATTI, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1993, AND
FOR THE PERIOD FROM JANUARY 1, 1994 TO AUGUST 2, 1994
1. DESCRIPTION OF BUSINESS
The accompanying combined financial statements include the accounts of
G.S.H.C., Inc. (GSHC), and the Contract Services Division of Louis F. Gatti,
Inc. (LFG), (the Companies), which are affiliated through common ownership. The
accounts of LFG reflect all expenses incurred by LFG's parent on its behalf. All
significant intercompany and interdivisional balances and transactions have been
eliminated.
The Companies provide pharmaceutical products, medical supplies, intravenous
therapies, and related products and consulting services to patients in long-term
care and assisted living facilities throughout the state of Pennsylvania.
On August 1, 1994, Louis F. Gatti, Inc. declared a dividend of the retail
division of Louis F. Gatti, to its sole stockholder. On August 2, 1994, American
Medserve Corporation (AMC) acquired substantially all of the assets and
liabilities of GSHC in exchange for cash of $6,500,000 and acquired 80% of the
voting stock of Louis F. Gatti, Inc. for approximately $2,500,000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING ESTIMATES
Accounting estimates are an integral part of the combined financial
statements prepared by management of the Companies and are based on management's
current judgments. These judgments are based on knowledge and experience about
past and current events and on assumptions about future events. The Companies
will, when determined necessary, accrue for estimated liabilities when the
financial impact is probable and can be estimated by management. Actual results
could differ from those estimates.
REVENUE RECOGNITION
Revenue is recognized when the products or services are provided to the
Companies' customers and is generally based on the amounts invoiced. As a
significant portion of the Companies' revenues are paid through the Pennsylvania
Department of Public Aid (Medicaid) and Medicare programs and are subject to
adjustment by the programs, the Companies monitor their receivables and report
such revenue at the net realizable amounts expected to be received from these
programs. At December 31, 1993 and August 2, 1994, net accounts receivable
subject to adjustment under these programs amounted to approximately $772,000
and $926,000, respectively.
INVENTORIES
Inventories, which consist principally of pharmaceuticals and medical
supplies, are stated at the lower of cost (first-in, first-out basis) or market.
EQUIPMENT
Equipment is stated at cost less accumulated depreciation and amortization.
Equipment is being depreciated or amortized using either straight-line or
accelerated methods based on the estimated useful lives of the assets or the
lease term, as appropriate.
Equipment acquired through business combinations accounted for as purchases
is stated at fair value at the date of acquisition.
EXCESS OF COST OVER NET ASSETS ACQUIRED
Excess of cost over net assets acquired is being amortized using the
straight-line method over a period of 20 years. GSHC has established a policy
whereby it will evaluate the recoverability of the
F-27
<PAGE>
G.S.H.C., INC. AND THE CONTRACT SERVICES
DIVISION OF LOUIS F. GATTI, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1993, AND
FOR THE PERIOD FROM JANUARY 1, 1994 TO AUGUST 2, 1994
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
excess of cost over net assets acquired on a periodic basis utilizing
undiscounted net cash flows of the acquired entity. In management's opinion, no
impairment of value of the excess of cost over net assets acquired exists at
December 31, 1993 or August 2, 1994.
INTANGIBLE ASSETS
Intangible assets are comprised primarily of noncompete agreements entered
into in conjunction with the July 1990 acquisition of GSHC whereby GSHC agreed
to pay to its former owners the amount of $500,000. The noncompete agreements
are being amortized using the straight line method over the five year term of
the agreements. Amortization expense relating to these noncompete agreements was
$100,000 and $58,333 for the year ended December 31, 1993, and for the period
from January 1, 1994 to August 2, 1994, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Companies' financial instruments include accounts receivable, accounts
payable, accrued expenses, a note receivable, income taxes receivable, amounts
due to and from related parties, and notes payable. The fair values of all
financial instruments were not materially different from their carrying values.
3. ACQUISITION
On June 14, 1994, GSHC acquired certain assets of an institutional pharmacy
located in Allentown, Pennsylvania in exchange for cash of approximately
$212,000. The acquisition has been accounted for using the purchase method of
accounting. Accordingly, the purchase price for the acquisition was allocated to
the respective net assets acquired based on their estimated fair market values
at the acquisition date. The combined statements of income include the results
of operations of the acquired entity from June 14, 1994.
Had this institutional pharmacy been acquired on January 1, 1994, revenues
and operating income of the company would not have been significantly different
than those presented.
4. EQUIPMENT
Equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1993 AUGUST 2 1994
------------ -------------
<S> <C> <C>
Equipment under capital leases................................... $ 82,000 $ 166,026
Transportation equipment......................................... 75,496 103,085
Furniture, fixtures and equipment................................ 741,232 1,042,827
Leasehold improvements........................................... 7,827 9,868
------------ -------------
906,555 1,321,806
Accumulated depreciation and amortization........................ (347,411) (448,358)
------------ -------------
$ 559,144 $ 873,448
------------ -------------
------------ -------------
</TABLE>
Depreciation expense and accumulated depreciation and amortization include
amortization on capital lease obligations.
F-28
<PAGE>
G.S.H.C., INC. AND THE CONTRACT SERVICES
DIVISION OF LOUIS F. GATTI, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1993, AND
FOR THE PERIOD FROM JANUARY 1, 1994 TO AUGUST 2, 1994
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31 AUGUST 2
1993 1994
------------ -----------
<S> <C> <C>
Compensation and benefits.......................................... $ 79,971 $ 106,152
Interest........................................................... 9,487 --
Income taxes....................................................... -- 20,008
Other.............................................................. 55,135 6,049
------------ -----------
$ 144,593 $ 132,209
------------ -----------
------------ -----------
</TABLE>
6. RELATED PARTIES
GSHC routinely receives unsecured operating advances in conjunction with a
note payable arrangement with GSHC's sole stockholder. Such amounts are due on
demand and bear interest at prevailing market rates. $1,193,299 and $1,229,270
were outstanding on this arrangement at December 31, 1993 and August 2, 1994,
respectively.
In conjunction with the noncompete agreements and acquisition referred to
within Note 2, GSHC executed unsecured note payable arrangements totaling
$237,500 with a former owner who continued to be a member of management. The
notes are payable in 60 consecutive monthly payments through July, 1995.
Interest is payable at the prime rate, adjusted yearly at July 1, subject to
certain floors and ceilings (as defined). $144,049 and $136,394, respectively,
were outstanding on these notes at December 31, 1993 and August 2, 1994.
In conjunction with the acquisition referred to in Note 3, GSHC was advanced
$200,000 via a note bearing interest at 8% per annum by the parent company of
the entity which acquired GSHC on August 2, 1994 (Note 1). The note is secured
by substantially all the assets of GHSC, as defined. The note was repaid in
conjunction with the acquisition.
The Companies routinely purchase inventory at cost from related entities.
The purchases from these related entities were $104,567, and $46,813 for the
year ended December 31, 1993, and for the period from January 1, 1994 to August
2, 1994, respectively.
The Companies, along with related entities, routinely engage in intercompany
advances and borrowings with funds received under the debt arrangements (Note 6)
of the Companies, in addition to those entered into by related entities. These
advances and borrowings bear interest at prevailing market rates. Such amounts
are recorded in amounts due from and to related parties. Additionally, the
Companies guaranteed the debt of certain of these related entities totaling
$500,000 and $845,000 at December 31, 1993 and August 2, 1994, respectively.
Amounts due from related parties consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31 AUGUST 2
1993 1994
------------ -----------
<S> <C> <C>
Gatti Medical Supply.............................................. $ 2,173 $ 17,700
Retail Division of Louis F. Gatti, Inc............................ 542,069 552,040
Other............................................................. 1,000 --
------------ -----------
$ 545,242 $ 569,740
------------ -----------
------------ -----------
</TABLE>
F-29
<PAGE>
G.S.H.C., INC. AND THE CONTRACT SERVICES
DIVISION OF LOUIS F. GATTI, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1993, AND
FOR THE PERIOD FROM JANUARY 1, 1994 TO AUGUST 2, 1994
6. RELATED PARTIES (CONTINUED)
The Companies, along with certain related entities (collectively, the
related entities) are charged payroll expense for certain members of a common
management team shared by these related entities. Those amounts calculated as
payable by the Companies to another entity are included in amounts due to
related parties.
Amounts due to related parties for such payroll expenses consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31 AUGUST 2
1993 1994
------------ -----------
<S> <C> <C>
Gatti Medical Supply............................................... $ 411,072 $ 456,339
------------ -----------
$ 411,072 $ 456,339
------------ -----------
------------ -----------
</TABLE>
7. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31 AUGUST 2
1993 1994
------------ -----------
<S> <C> <C>
Notes payable to banks............................................. $ 303,381 $ 232,000
Notes payable -- Noncompete agreements............................. 254,071 244,131
Notes payable -- Consulting agreement.............................. 118,587 61,574
Notes payable -- Equipment loans................................... 27,872 118,738
Notes payable to others............................................ 166,111 89,445
------------ -----------
870,022 745,888
Less current portion............................................... 513,260 600,588
------------ -----------
$ 356,762 $ 145,300
------------ -----------
------------ -----------
</TABLE>
During 1990, GSHC and its sole stockholder entered into a collateral note
(Note Agreement) with their bank for a $250,000 revolving line of credit payable
on demand. Interest is payable at the bank's prime rate plus 1/2 of 1%. The
amounts outstanding under the Note Agreement are secured by substantially all
assets of GSHC as defined. $246,000 and $232,000, respectively, were outstanding
on this Note Agreement at December 31, 1993 and August 2, 1994.
During 1993, GSHC entered into a promissory note agreement (Term Note) with
its bank for $77,570, payable in 48 equal monthly installments. The Term Note
bears interest at the bank's prime rate (7.25% at August 2, 1994) plus 1/2 of
1%. The Term Note is secured by substantially all the assets of GSHC and is
guaranteed by its sole stockholder. $57,381 and $0, respectively, were
outstanding on this Term Note at December 31, 1993 and August 2, 1994.
During 1993, GSHC entered into unsecured promissory note agreement
(Promissory Note) with a major vendor in the amount of $230,000. The Promissory
Note bears interest at the prime rate plus 4%, and is payable in 18 equal
monthly installments. $166,111 and $89,445, respectively, were outstanding on
this Promissory Note at December 31, 1993 and August 2, 1994.
In conjunction with the noncompete agreements and acquisition referred to
within Note 2, GSHC executed unsecured note payable arrangements with these
former owners totaling $512,500. The notes are payable in sixty consecutive
monthly payments through July 1995. Interest is payable at the prime rate,
adjusted yearly at July 1, subject to certain floors and ceilings (as defined).
$254,071 and $244,131, respectively, were outstanding on these notes at December
31, 1993 and August 2, 1994.
F-30
<PAGE>
G.S.H.C., INC. AND THE CONTRACT SERVICES
DIVISION OF LOUIS F. GATTI, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1993, AND
FOR THE PERIOD FROM JANUARY 1, 1994 TO AUGUST 2, 1994
7. NOTES PAYABLE (CONTINUED)
The Company has equipment loans with various institutions with maturity
dates through 1996. Such loans bear interest at rates ranging from 8% to 11%.
$27,872 and $118,738, respectively, were outstanding on these loans at December
31, 1993 and August 2, 1994.
Notes payable include amounts due in conjunction with a consulting agreement
(Note 10) and are $118,587 and $61,574 at December 31, 1993 and August 2, 1994,
respectively.
8. S CORPORATION ELECTION
The stockholder of GSHC elected to be taxed as an S corporation under the
provisions of the Internal Revenue Code effective July 1, 1990. The stockholder
of LFG elected S Corporation treatment effective August 1, 1993. The Companies
were not subject to federal income taxes after such election as the income of
the Companies is included in the taxable income of its respective stockholders.
9. INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued Statement
No. 109, "Accounting for Income Taxes." LFG adopted the provisions of the new
standard in its financial statements for the year ended December 31, 1992. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. Prior to the adoption of Statement
109, income tax expense was determined using the deferred method. Deferred tax
expense was based on items of income and expense that were reported in different
years in the financial statements and tax returns and were measured at the tax
rate in effect in the year the difference originated.
LFG files consolidated federal and state income tax returns with the Retail
Division of Louis F. Gatti, Inc. For purposes of financial statement
presentation, LFG's provision for income taxes has been computed as if LFG were
filing federal and state income tax returns on an individual basis. Those
amounts calculated as payable by LFG in excess of those due to governmental
entities are recorded in amounts due from related parties (Note 7) and are
$98,928 and $11,044, respectively, at December 31, 1993 and August 2, 1994.
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31 AUGUST 2
1993 1994
------------ ---------
<S> <C> <C>
Current:
Federal........................................................... $ 69,927 $ --
State............................................................. 57,508 24,299
------------ ---------
127,435 24,299
Deferred............................................................ 15,278 --
------------ ---------
$ 142,713 $ 24,299
------------ ---------
------------ ---------
</TABLE>
The provision for income taxes for the year ended December 31, 1993
substantially represents the income taxes of LFG prior to LFG electing S
Corporation status, as well as $15,278 of income taxes in conjunction with LFG
electing such status.
The difference between the financial statement provision for income taxes
and the statutory federal income tax rate of 34% is related principally to state
income taxes.
F-31
<PAGE>
G.S.H.C., INC. AND THE CONTRACT SERVICES
DIVISION OF LOUIS F. GATTI, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1993, AND
FOR THE PERIOD FROM JANUARY 1, 1994 TO AUGUST 2, 1994
9. INCOME TAXES (CONTINUED)
Significant components of the Companies deferred tax assets and liabilities
at December 31, 1993 are an allowance for doubtful accounts and depreciation.
10. CONSULTING AGREEMENT
In conjunction with the noncompete agreements (Note 2), GSHC entered into a
five year consulting agreement with a former owner. A liability has been
recorded based upon the net present value of the outstanding payments discounted
at 8%.
11. STOCKHOLDERS' EQUITY
Stockholders' equity consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1993 AUGUST 2 1994
------------ -------------
<S> <C> <C>
Common stock:
G.S.H.C., Inc., no par value; 1,000 Class A shares authorized,
issued, and outstanding....................................... $ 1,000 $ 1,000
------------ -------------
$ 1,000 $ 1,000
------------ -------------
------------ -------------
Retained earnings and divisional equity (deficit):
G.S.H.C., Inc.................................................. $ (236,566) $ 75,552
Contract Services Division of Louis F. Gatti, Inc.............. 903,879 1,128,522
------------ -------------
$ 667,313 $ 1,204,074
------------ -------------
------------ -------------
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
The Companies lease certain property and equipment under various
noncancelable operating and capital leases. These leases contain various terms
and provide for renewal at prevailing market rates.
Future minimum lease payments for noncancelable operating and capital leases
are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -----------
<S> <C> <C>
1995................................................................. $ 45,894 $ 66,829
1996................................................................. 34,416 60,808
1997................................................................. 11,472 28,522
1998................................................................. -- --
1999................................................................. -- --
--------- -----------
$ 91,782 156,159
---------
---------
Less: Amounts representing interest.................................. (17,164)
-----------
Capital lease obligations............................................ 138,995
Less: Current portion................................................ (67,167)
-----------
$ 71,828
-----------
-----------
</TABLE>
Rent expense amounted to approximately $42,435 and $32,162 for the year
ended December 31, 1993 and for the period from January 1, 1994 to August 2,
1994.
F-32
<PAGE>
G.S.H.C., INC. AND THE CONTRACT SERVICES
DIVISION OF LOUIS F. GATTI, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1993, AND
FOR THE PERIOD FROM JANUARY 1, 1994 TO AUGUST 2, 1994
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LFG leases facility space from a related party. Rent expense on this lease
amounted to $14,400 and $8,400 for the year ended December 31, 1993 and for the
period from January 1, 1994 to August 2, 1994.
13. EMPLOYEE BENEFIT PLANS
The Companies, along with a related entity, established a 401(k) and
profit-sharing plan covering substantially all full-time employees (as defined)
who have completed one year of service. Employees can elect to make pre-tax
contributions of a percentage of their annual compensation not to exceed IRS
limitations. All contributions by the Companies are made at the discretion of
each Companies' Board of Directors. Participants cliff vest in employer
contributions after completing five years of service with the Companies.
Contributions of $5,225 and $3,196 were made to this plan for the year ended
December 31, 1993, and for the period from January 1, 1994 to August 2, 1994,
respectively.
The Companies, with the entity noted above, also sponsor a defined benefit
pension plan (Plan). During 1991, the Board of Directors of a related entity
authorized the termination of the Plan, and effective December 31, 1991, the
Plan was frozen. Plan participants became fully vested at this time. The
Companies' recognized no curtailment loss in 1991 as a result of the Plan
termination, and no gain or loss was recognized when the Plan's benefit
obligation was settled in 1996.
14. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Companies to
concentrations of credit risk primarily consist of accounts receivable due from
Medicaid and Medicare, third-party insurance companies, and individuals in
various geographic locations. Credit risks with respect to these receivables are
limited due to the large number of patients comprising each Companies' customer
base.
15. JOINT VENTURE AGREEMENT
During 1992, GSHC entered into a joint venture agreement with an unrelated
party to provide pharmaceutical products and intravenous therapies to residents
in long-term care and assisted living facilities in exchange for cash of
$20,000. During February 1993, GSHC agreed to sell its interest in the joint
venture and all related assets in exchange for cash of $92,339 and a
non-interest-bearing note receivable for $40,000.
F-33
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
Dixon Pharmacy, Inc.
Dixon, Illinois
We have audited the accompanying balance sheets of Dixon Pharmacy, Inc. as
of April 17, 1995, October 31, 1994 and 1993, and the related statements of
income, retained earnings, and cash flows for the period which began November 1,
1994 and ended April 17, 1995, and the fiscal years ended October 31, 1994 and
1993. 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 audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly,
in all material respects, the financial position of Dixon Pharmacy, Inc. as of
April 17, 1995, October 31, 1994 and October 31, 1993, and the results of its
operations and its cash flows for the period which began November 1, 1994 and
ended April 17, 1995 and the fiscal years ended October 31, 1994 and 1993 in
conformity with generally accepted accounting principles.
LINDGREN, CALLIHAN, VAN OSDOL
& CO., LTD.
Dixon, Illinois
September 15, 1995
F-34
<PAGE>
DIXON PHARMACY, INC.
BALANCE SHEETS
APRIL 17, 1995, OCTOBER 31, 1994 AND 1993
ASSETS
<TABLE>
<CAPTION>
APRIL 17, OCTOBER 31, OCTOBER 31,
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Cash................................................................. $ 231,580 $ 267,054 $ 38,919
Trade accounts receivable, net of allowance for doubtful accounts of
$38,457, $38,457 and $5,200, respectively........................... 677,200 636,940 374,099
Inventories.......................................................... 692,821 511,092 529,503
Prepaid federal and state income taxes............................... -- -- 6,438
Prepaid expenses and other assets.................................... 197 6,591 5,869
------------- ------------- -------------
Total current assets............................................. 1,601,798 1,421,677 954,828
Property, plant and equipment, net of accumulated depreciation of
$349,139, $651,055 and $585,140, respectively....................... 163,224 344,134 340,078
------------- ------------- -------------
Total assets..................................................... $ 1,765,022 $ 1,765,811 $ 1,294,906
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES
Cash overdraft....................................................... $ -- $ -- $ 16,768
Obligation under capital lease, current maturities................... 620 1,148 920
Notes payable, current maturities.................................... 52,550 49,300 31,927
Trade accounts payable............................................... 294,931 228,931 237,249
Salaries and wages payable........................................... 58,000 23,922 20,284
Federal and state income taxes payable............................... 132,000 76,934 --
Accrued expenses..................................................... 167,094 312,524 111,512
Lease deposits....................................................... -- 475 475
Deferred income taxes................................................ 3,853 1,924 1,342
------------- ------------- -------------
Total current liabilities........................................ 709,048 695,158 420,477
------------- ------------- -------------
Long-term debt, less current maturities:
Obligation under capital lease..................................... -- -- 1,397
Notes payable...................................................... 16,948 162,740 103,500
------------- ------------- -------------
Total long-term debt............................................. 16,948 162,740 104,897
------------- ------------- -------------
Deferred income taxes................................................ 13,633 21,080 20,250
------------- ------------- -------------
Total liabilities................................................ 739,629 878,978 545,624
------------- ------------- -------------
STOCKHOLDERS' EQUITY
Common stock, par value $100, 10,000 shares authorized, 15 shares
issued (including 5 shares in treasury)............................. 1,500 1,500 1,500
Retained earnings.................................................... 1,137,393 998,833 861,282
------------- ------------- -------------
1,138,893 1,000,333 862,782
Less cost of common stock in treasury................................ 113,500 113,500 113,500
------------- ------------- -------------
Total stockholders' equity....................................... 1,025,393 886,833 749,282
------------- ------------- -------------
Total liabilities and stockholders' equity....................... $ 1,765,022 $ 1,765,811 $ 1,294,906
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See Notes to Financial Statements.
F-35
<PAGE>
DIXON PHARMACY, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
PERIOD WHICH BEGAN NOVEMBER 1, 1994 AND ENDED APRIL 17, 1995,
YEARS ENDED OCTOBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
APRIL 17, OCTOBER 31, OCTOBER 31,
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Revenues............................................................. $ 3,221,862 $ 6,348,927 $ 5,545,584
Cost of goods sold................................................... 2,143,608 4,003,780 3,738,409
------------- ------------- -------------
Gross profit..................................................... 1,078,254 2,345,147 1,807,175
Selling, general and administrative expenses......................... 942,657 2,145,070 1,774,952
------------- ------------- -------------
Income from operations........................................... 135,597 200,077 32,223
------------- ------------- -------------
Other income (expense):
Interest -- net.................................................... (5,782) (16,953) (10,130)
Miscellaneous...................................................... 27,699 53,973 51,502
Gain on distribution of fixed assets and investments to
stockholders (Note (F))........................................... 142,048 -- --
------------- ------------- -------------
Total other income (expense)..................................... 163,965 37,020 41,372
------------- ------------- -------------
Income before income taxes....................................... 299,562 237,097 73,595
Provision for income taxes........................................... 126,482 99,546 21,151
------------- ------------- -------------
Net income before cumulative effect of accounting change......... 173,080 137,551 52,444
Cumulative effect of accounting change on years prior to period which
began November 1, 1994 and ended April 17, 1995 (Note (H)).......... 173,080 -- --
------------- ------------- -------------
Net income....................................................... 346,160 137,551 52,444
Retained earnings, beginning of period............................... 998,833 861,282 808,838
Dividends and distributions.......................................... (207,600) -- --
------------- ------------- -------------
Retained earnings, end of period..................................... $ 1,137,393 $ 998,833 $ 861,282
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See Notes to Financial Statements.
F-36
<PAGE>
DIXON PHARMACY, INC.
STATEMENTS OF CASH FLOWS
PERIOD WHICH BEGAN NOVEMBER 1, 1994 AND ENDED APRIL 17, 1995,
YEARS ENDED OCTOBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
APRIL 17, OCTOBER 31, OCTOBER 31,
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................... $ 346,160 $ 137,551 $ 52,444
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation........................................................... 38,505 66,394 58,877
Loss on sale of equipment.............................................. -- -- 11,623
Gain on distribution of fixed assets and investments to stockholders
(Note (F))............................................................ (142,048) -- --
Deferred income taxes.................................................. (5,518) 1,412 191
Changes in operating assets and liabilities:
(Increase) decrease in net trade accounts receivable................. (40,260) (262,841) (18,693)
(Increase) decrease in inventories................................... (181,729) 18,411 (12,485)
(Increase) decrease in prepaid federal and state income taxes........ -- 6,438 (6,438)
(Increase) decrease in prepaid expenses.............................. 6,128 (481) (2,425)
Increase (decrease) in cash overdraft................................ -- (16,768) (34,430)
Increase (decrease) in trade accounts payable........................ 66,000 (8,318) (30,057)
Increase (decrease) in salaries and wages payable.................... 34,078 3,638 (5,193)
Increase (decrease) in federal and state income taxes payable........ 55,066 76,934 (3,493)
Increase (decrease) in other accrued expenses........................ (133,455) 201,012 70,755
Increase (decrease) in lease deposits................................ (475) -- 250
----------- ----------- -----------
Net cash provided by operating activities.......................... 42,452 223,382 80,926
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment............................. -- -- 3,750
Net contributions to investments......................................... -- (241) 5
Purchase of property, plant and equipment................................ (53,281) (70,450) (63,995)
----------- ----------- -----------
Net cash used in investing activities.............................. (53,281) (70,691) (60,240)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings, including capital lease
obligations............................................................. -- 118,909 65,011
Principal payments on long-term borrowings, including capital lease
obligations............................................................. (24,645) (43,465) (59,720)
----------- ----------- -----------
Net cash provided by (used in) financing activities................ (24,645) 75,444 5,291
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents................... (35,474) 228,135 25,977
CASH AND CASH EQUIVALENTS
Beginning................................................................ 267,054 38,919 12,942
----------- ----------- -----------
Ending................................................................... $ 231,580 $ 267,054 $ 38,919
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest............................................................... $ 7,017 $ 19,930 $ 10,499
----------- ----------- -----------
----------- ----------- -----------
Income taxes........................................................... $ 68,014 $ 14,761 $ 31,094
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Dividends paid (Note (E)):
Fair market value of fixed assets and investments distributed to
stockholders.......................................................... $ 338,000 $ -- $ --
Book value of certain liabilities associated with fixed assets and
investments distributed to stockholders............................... (130,400) -- --
----------- ----------- -----------
Dividends paid..................................................... $ 207,600 $ -- $ --
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See Notes to Financial Statements.
F-37
<PAGE>
DIXON PHARMACY, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 17, 1995
(A) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS:
The Company operations are principally in the retailing of pharmaceutical
products and pharmaceutical consulting. Company locations include Dixon,
Illinois (Dixon Pharmacy, Med-Center Pharmacy, Healthcare and Technicare
operations and Corporate offices), Ashton, Illinois (Ashton Drug) and Oregon,
Illinois (Decker Drug). Credit is granted to customers, substantially all of
whom are either local residents or long-term care facilities located throughout
Northern Illinois. As a health care provider, the Company is dependent on third
party insurance, the Illinois Department of Public Aid and Medicare for a
portion of its collections.
ACCOUNTING METHOD:
The Company follows the accrual method of accounting.
CASH AND CASH EQUIVALENTS:
For the purposes of the statement of cash flows the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
INVENTORIES:
The Company values its inventories at the lower of cost (first-in,
first-out) or market.
INCOME TAXES:
Deferred income taxes are provided on timing differences between financial
statement and taxable income using the liability method. The timing differences
arose principally from the use of accelerated methods of depreciation for income
tax purposes (Note N).
DEPRECIATION:
Depreciation of property and equipment is computed under the straight-line,
double declining balance, accelerated cost recovery system (ACRS) and modified
accelerated cost recovery system (MACRS) methods. The estimated useful lives of
the assets are as follows:
<TABLE>
<CAPTION>
YEARS
---------
<S> <C>
Buildings and improvements......................................................... 6 - 40
Furniture, fixtures and equipment.................................................. 5 - 10
Transportation equipment........................................................... 3 - 12
Rental and investment property..................................................... 15 - 18
</TABLE>
Maintenance and repairs of property and equipment are charged to operations
and major improvements are capitalized. Upon retirement, sale or other
disposition of property and equipment, cost and accumulated depreciation are
eliminated from the accounts and gain or loss is included in operations.
F-38
<PAGE>
DIXON PHARMACY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 17, 1995
(B) LONG-TERM DEBT:
<TABLE>
<CAPTION>
APRIL 17, OCTOBER 31, OCTOBER 31,
1995 1994 1993
--------- ----------- -----------
<S> <C> <C> <C>
Notes payable to banks and others, due in varying
monthly installments, including interest, due at
various dates, collateralized by assets of the
Company................................................ $ 69,498 $ 212,040 $ 135,427
Less current maturities................................. 52,550 49,300 31,927
--------- ----------- -----------
$ 16,948 $ 162,740 $ 103,500
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
Aggregate maturities required on long-term debt at April 17, 1995, October
31, 1994 and October 31, 1993, respectively, are as follows:
<TABLE>
<CAPTION>
APRIL 17, OCTOBER 31, OCTOBER 31,
1995 1994 1993
--------- ----------- -----------
<S> <C> <C> <C>
1994.................................................... $ -- $ -- $ 31,927
1995.................................................... -- 49,300 34,067
1996.................................................... 52,550 60,101 44,233
1997.................................................... 13,734 22,687 13,087
1998.................................................... 3,214 12,100 2,200
1999.................................................... -- 13,100 2,500
Later years............................................. -- 54,752 7,413
--------- ----------- -----------
Total years......................................... $ 69,498 $ 212,040 $ 135,427
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
(C) OPERATING LEASES:
Effective April 13, 1995, the Company began leasing space at various
locations from KEI PIE, Inc. for the branch stores and office space for a total
of $4,785 per month. The term of the leases are five years beginning May 1,
1995. Rents increase by $1,595 per month after each year during the term of the
lease. The Company has the option to extend the lease terms for an additional
five year period. Rent during the option period is $11,165 per month with COLA
adjustments for each year of the option period.
The Company leases space for the Med-Center Pharmacy from the Town Square
Partnership for $867 per month. The term of the lease is through May 31, 2000
with rent increasing to $939 per month effective June 1, 1995. The Company is
also required to pay as additional rent, its share of each year's real estate
taxes in excess of $90,000. If the building's real estate taxes ever exceed
$90,000, the Company would be required to pay its share based on the percentage
the Company's rentable area bears to the total rentable area of the building
calculated as if the building is 95% occupied.
Total minimum rental commitment at April 17, 1995 under these leases is
$542,622, which is due as follows:
<TABLE>
<S> <C>
Fiscal year ending April 17, 1996................................ $ 75,519
Fiscal year ending April 17, 1997................................ 87,831
Fiscal year ending April 17, 1998................................ 106,971
Fiscal year ending April 17, 1999................................ 126,111
Fiscal year ending April 17, 2000 and later years................ 146,190
---------
$ 542,622
---------
---------
</TABLE>
F-39
<PAGE>
DIXON PHARMACY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 17, 1995
(C) OPERATING LEASES: (CONTINUED)
Lease agreement subsequent to April 17, 1995:
Effective June 1, 1995, the Company began leasing space in Dixon from the
Town Square Partnership for the Technicare Medical Supply branch which opened
for business on August 7, 1995. The term of the lease is five years. Rent is
$1,002 per month during the first year. Rents increase by $118 per month after
each year during the term of the lease. The Company is also required to pay as
additional rent, its share of each year's real estate taxes in excess of the
1994 taxes based on the 1994 assessed valuation as finally determined.
(D) PROFIT-SHARING TRUST AGREEMENT:
The Company has a qualified profit-sharing plan covering all employees who
have attained the age of twenty-one and completed at least one (1) year of
continuous service. The Company contributes, at the discretion of its Board of
Directors, on behalf of each of the employees who are members of the plan, an
amount less than or equal to 15% of the annual compensation of these employees
and reflects this as an operating expense. The Company made no contributions for
the period which began November 1, 1994 and ended April 17, 1995. For the years
ended October 31, 1994 and 1993, the Company contributed $147,375 and $50,297,
respectively, to the plan pursuant to respective 15% and 6% contribution rates.
(E) DIVIDENDS PAID:
On March 30, 1995, certain real estate, transportation equipment, and
investments with a determined fair market value of $338,000 were distributed to
the stockholders as part of an agreement with American Medserve Corporation.
That agreement resulted in the purchase of eighty percent (80%) of the
outstanding shares of Dixon Pharmacy, Inc. immediately subsequent to the close
of business on April 17, 1995. In addition, certain liabilities associated with
the aforementioned assets totalling $130,400 were assumed by the stockholders as
part of the same agreement. The difference between the fair market value of the
assets distributed and the assumed liabilities has been recognized in the
financial statements as dividends totalling $207,600 to stockholders of record
on the close of business as of March 30, 1995.
(F) GAIN ON DISTRIBUTION OF FIXED ASSETS AND INVESTMENTS TO STOCKHOLDERS:
Real estate, transportation equipment, and investments with a determined
fair market value of $338,000 and a net book value of $195,952 were distributed
to stockholders of record on the close of business as of March 30, 1995. Gain
from the distribution of the fixed assets and investments to the stockholders in
the amount of $142,048 was required to be recognized by the Company pursuant to
Internal Revenue Code Section 311.
(G) SUBSEQUENT EVENTS:
1. COMMON STOCK TRANSACTION. Subsequent to the close of business on April
17, 1995, eighty (80%) percent of the outstanding shares of Dixon Pharmacy, Inc.
were purchased by American Medserve Corporation, a Company specializing in
providing long-term care pharmacy services.
2. NEW BRANCH LOCATION. On August 7, 1995, the Company opened a new branch
location (Technicare Medical Supply). Technicare Medical Supply provides home
medical equipment, respiratory care, and related home care services.
(H) CHANGE IN INVENTORY METHOD:
During the period which began November 1, 1994 and ended April 17, 1995, the
Company changed its method of determining quantities of inventory from counting
only closed bottles of
F-40
<PAGE>
DIXON PHARMACY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 17, 1995
(H) CHANGE IN INVENTORY METHOD: (CONTINUED)
pharmaceutical products (the "closed bottle" method) to counting all opened and
unopened bottles of pharmaceutical products (the "open bottle" method) to more
closely conform with industry practice. The Company believes the "open bottle"
method more accurately reflects a realistic picture of the Company's overall
financial progress. The effect of the change was to increase net income for the
period which began November 1, 1994 and ended April 17, 1995 by $173,080. The
cumulative effect of the change on prior years of $173,080 is a one-time credit
to income. Pro-forma amounts showing the effect of applying the new method are
as follows:
<TABLE>
<CAPTION>
ACTUAL PRO-FORMA
----------- -----------
<S> <C> <C>
Period which began November 1, 1994 and ended April 17, 1995:
Net income.......................................................... $ 346,160 $ 173,080
----------- -----------
----------- -----------
</TABLE>
(I) DEFERRED COMPENSATION PLAN:
The Company has a non-contributory deferred compensation plan, for all
eligible employees, pursuant to IRC Section 401(k).
(J) PROVISION FOR INCOME TAXES:
Provision for income taxes is as follows:
<TABLE>
<CAPTION>
APRIL 17, OCTOBER 31, OCTOBER 31,
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal.............................................. $ 108,000 $ 80,982 $ 11,829
State................................................ 24,537 18,121 9,769
Deferred:
Federal.............................................. (3,657) 934 126
State................................................ (1,861) 478 65
Investment tax credit -- state......................... (537) (969) (638)
----------- ----------- -----------
$ 126,482 $ 99,546 $ 21,151
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-41
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Boards of Directors and Shareholders
Extended Care Associates, Inc.
Lynchburg, Virginia
Williamson Drug Company, Inc.
Harrisonburg, Virginia
We have audited the accompanying balance sheet of Extended Care Associates,
Inc. (a Virginia corporation) as of April 15, 1995, and the related statements
of operations and retained earnings and cash flows for the period beginning
April 1, 1995 and ending April 15, 1995. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Extended Care Associates,
Inc. as of April 15, 1995, and the results of its operations and its cash flows
for the period then ended, in conformity with generally accepted accounting
principles.
S.B. HOOVER & COMPANY, L.L.P.
Harrisonburg, Virginia,
August 15, 1996
F-42
<PAGE>
EXTENDED CARE ASSOCIATES, INC.
BALANCE SHEET
APRIL 15, 1995
ASSETS
<TABLE>
<S> <C>
Current Assets
Cash and cash equivalents
Checking accounts............................................................ $ 8,734
Money market account......................................................... 20,295
---------
Total Cash and Cash Equivalents............................................ 29,029
Trade receivables (less allowance of $19,000).................................. 130,586
Medicaid receivable (less allowance of $23,500)................................ 127,988
Inventories.................................................................... 56,278
Prepaid expenses............................................................... 3,129
---------
Total Current Assets....................................................... 347,010
---------
Property and Equipment, at Cost
Office equipment............................................................... 54,510
Nursing home equipment......................................................... 97,923
Leasehold improvements......................................................... 13,327
---------
165,760
Less accumulated depreciation.................................................. 72,154
---------
Net Property and Equipment..................................................... 93,606
---------
Other Assets
Deferred charges and intangibles............................................... 627
Investment in marketable securities............................................ 15,250
---------
Total Other Assets......................................................... 15,877
---------
Total Assets............................................................... $ 456,493
---------
---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable............................................................... $ 2,551
Accrued expenses............................................................... 31,850
Line of credit loan............................................................ 114,609
Current portion of long-term liabilities....................................... 21,174
---------
Total Current Liabilities.................................................. 170,184
Long-Term Liabilities............................................................ 33,643
---------
Total Liabilities.......................................................... 203,827
---------
Shareholders' Equity
Common stock (no par value, 1,000 shares issued 5,000 shares authorized)....... 1,000
Retained earnings.............................................................. 251,666
---------
Total Shareholders' Equity................................................. 252,666
---------
Total Liabilities and Shareholders' Equity................................. $ 456,493
---------
---------
</TABLE>
The accompanying notes are an integral part of this statement.
F-43
<PAGE>
EXTENDED CARE ASSOCIATES, INC.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
FOR THE PERIOD BEGINNING APRIL 1, 1995 AND ENDING APRIL 15, 1995
<TABLE>
<S> <C>
Revenues......................................................................... $ 88,724
Cost of Goods Sold............................................................... 50,273
---------
Gross Profit................................................................... 38,451
Selling, General and Administrative Expenses..................................... 39,123
---------
Loss from Operations........................................................... (672)
Other Expenses
Interest....................................................................... 643
---------
Net Loss....................................................................... (1,315)
Retained Earnings, Beginning of the Period....................................... 252,981
---------
Retained Earnings, End of the Period............................................. $ 251,666
---------
---------
</TABLE>
The accompanying notes are an integral part of this statement.
F-44
<PAGE>
EXTENDED CARE ASSOCIATES, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD BEGINNING APRIL 1, 1995 AND ENDING APRIL 15, 1995
<TABLE>
<S> <C>
Cash Flows from Operating Activities:
Net loss....................................................................... $ (1,315)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation................................................................. 1,229
Amortization................................................................. 41
Changes in operating assets and liabilities:
Decrease in accounts receivable............................................ 36,707
Increase in prepaid expenses............................................... (1,588)
Decrease in inventories.................................................... 712
Decrease in accounts payable............................................... (75,421)
Increase in accrued expenses............................................... 897
---------
Net Cash Used in Operating Activities.......................................... (38,738)
Cash Flows from Investing Activities:
Purchase of property and equipment............................................. (582)
---------
Net Cash Used in Investing Activities.......................................... (582)
Cash Flows from Financing Activities:
Repayment of long-term debt.................................................... (1,389)
---------
Net Cash Used in Financing Activities.......................................... (1,389)
---------
Net Decrease in Cash and Cash Equivalents...................................... (40,709)
Cash and Cash Equivalents, Beginning of Period................................... 69,738
---------
Cash and Cash Equivalents, End of Period....................................... $ 29,029
---------
---------
</TABLE>
The accompanying notes are an integral part of this statement.
F-45
<PAGE>
EXTENDED CARE ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- NATURE OF BUSINESS:
Extended Care Associates, Inc. (the Company) was incorporated in May 1992.
The Company provides pharmacy services to extended care facilities located in
Lynchburg, Virginia and the surrounding area within an approximately 40 mile
radius. The Company grants credit to customers within its service area.
The Company's year end is December 31, however, these financial statements
include transactions that occurred in the period from April 1, 1995 through
April 15, 1995.
NOTE 2 -- SUBSEQUENT EVENTS:
The Company sold substantially all of its operating assets to Williamson
Drug Company, Inc., a subsidiary of American Medserve Corporation. The asset
sales agreement was executed April 14, 1995, effective as of the close of
business on April 15, 1995. The amounts reflected in this financial statement
are as of the close of business on April 15, 1995 and are prior to the sale of
the operating assets.
Assets sold include cash on hand and in checking accounts (excluding $20,295
in the money market account), all accounts receivable, inventory, prepaid
expenses, leasehold improvements and equipment. Other assets consisting of
investment in marketable securities and deferred organizational and loan costs
were excluded from the sale. Effective with the sale of the operating assets the
name of the corporation was changed from Extended Care Associates, Inc. to OG
Enterprises, Inc. Subsequent to the sale of the Company's operating assets, the
Company repaid the short-term and long-term debt reflected in this financial
statement.
During the period from April 1, 1995 through April 15, 1995 the Company
incurred legal fees of $10,000 in connection with the sale of these assets. The
fees are included in selling, general and administrative expenses in the
statement of income.
NOTE 3 -- SIGNIFICANT ACCOUNTING POLICIES:
Significant accounting policies of the Company are as follows:
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of checking accounts and money market
funds.
BAD DEBTS AND CONTRACTUAL ADJUSTMENTS
An allowance for contractual adjustments for Medicaid accounts receivable is
deducted from the related receivable. Medicaid accounts receivable are initially
recorded at the normal rates for private pay patients; an adjustment is
subsequently recorded for the difference between the private pay rates and the
rates allowed by Medicaid.
INVENTORY VALUATION
The Company's inventory consists of products held for resale and is valued
at the lower of cost (first-in, first-out method) or market in this financial
statement. Inventory has been valued using the last-in, first-out method for
income tax reporting purposes in prior years.
F-46
<PAGE>
EXTENDED CARE ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
DEPRECIATION
Depreciation is calculated in this financial statement using the
straight-line method for all assets. The depreciation method is designed to
amortize the cost of the assets over their estimated useful lives. The estimated
useful lives of major classes of depreciable assets are as follows:
<TABLE>
<CAPTION>
ASSET YEARS
- ----------------------------------------------------------------------------- ---------
<S> <C>
Office equipment............................................................. 5-7
Nursing home equipment....................................................... 5-7
Leasehold improvements....................................................... 8
</TABLE>
Accelerated methods and lives have been used by the Company for income tax
reporting purposes.
INCOME TAXES
The Company has elected to be taxed as an S corporation under the Internal
Revenue Code whereby, the stockholders are taxed on their share of the
corporation's earnings. Therefore, no provision for income taxes payable is
included in this financial statement.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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 at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
NOTE 4 -- INVESTMENT IN MARKETABLE SECURITIES:
The Company owns 1,000 shares of Cooperative Savings Bank stock which was
purchased for $10,000 and is stated at the estimated market value of $15,250 as
of April 15, 1995. The Company has classified this security as available for
sale as defined by Statement of Financial Accounting Standards number 115. This
stock was not included in the sale of assets described in Note 2.
NOTE 5 -- LINE OF CREDIT LOAN:
At April 15, 1995, the Company has a line of credit with a maximum limit of
$175,000. Borrowings are payable on demand and interest is payable monthly at
prime plus 2%. The line of credit extends through August 4, 1995, and is secured
by various assets of the stockholders and other related parties. The loan
agreement limits the Company's ability to incur additional debt or pay dividends
without the prior consent of the Bank. At April 15, 1995, the Company's total
amount outstanding on the line of credit is $114,609. The outstanding balance
was repaid subsequent to April 15, 1995, as described in Note 2.
NOTE 6 -- LONG-TERM LIABILITIES:
Long-term loans payable consists of the following:
<TABLE>
<CAPTION>
MONTHLY BALANCE
INTEREST RATE MATURITY DATE PAYMENT PAYABLE
------------- --------------------- --------- ---------
<S> <C> <C> <C> <C>
Robert Alstrum......................... 9% December 1, 1996 $ 208 $ 3,886
Cheryl Gerlich......................... 8% April 1, 1997 405 9,313
Thomas Clapham......................... 9% December 1, 1998 415 12,187
William Kiley.......................... 9% December 1, 1998 1,038 29,431
---------
54,817
Less current maturities................ 21,174
---------
$ 33,643
---------
---------
</TABLE>
F-47
<PAGE>
EXTENDED CARE ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- LONG-TERM LIABILITIES: (CONTINUED)
The Company incurred loans and made loan repayments to related parties:
Cheryl Gerlich, spouse of a shareholder; and Thomas Clapham and William Kiley,
fathers-in-law of the shareholders.
Scheduled future maturities of long-term liabilities are listed below,
however, as explained in Note 2, these loans were repaid subsequent to April 15,
1995:
<TABLE>
<S> <C>
April 16, 1995 - April 15, 1996................................... $ 21,174
April 16, 1996 - April 15, 1997................................... 21,923
April 16, 1997 - April 15, 1998................................... 11,720
---------
$ 54,817
---------
---------
</TABLE>
NOTE 7 -- RENTAL AGREEMENTS:
From July 1994 through April 15, 1995, the Company leased the Pharmacy
facilities from GO Enterprises, L.L.C., a related entity owned by the
shareholders of Extended Care Associates, Inc. for $2,200 per month. Effective
with the sale of assets on April 15, 1995, as described in Note 2, Williamson
Drug Company, Inc. has leased these facilities from GO Enterprises, L.L.C. for
$2,450 per month through April 30, 2000. The Company had also rented office
space from one of the shareholders for $200 per month prior to April 15, 1995.
The Company has leased two automobiles for monthly payments totaling $709.
The leases are scheduled to expire in June 1995 and August 1997. The automobile
leases have not been assumed by Williamson Drug Company, Inc. The Company also
entered into a four year lease effective January 12, 1994, for a copier at $251
per month.
Scheduled future minimum lease payments for the copier and automobiles are
as follows:
<TABLE>
<CAPTION>
COPIER AUTOMOBILES TOTAL
--------- ----------- ---------
<S> <C> <C> <C>
April 16, 1995 - April 15, 1996........................... $ 3,012 $ 5,068 $ 8,080
April 16, 1996 - April 15, 1997........................... 3,012 4,380 7,392
April 16, 1997 - April 15, 1998........................... 2,008 1,460 3,468
--------- ----------- ---------
Total................................................. $ 8,032 $ 10,908 $ 18,940
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
F-48
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Good Samaritan Supply Services, Inc.
We have audited the accompanying balance sheets of Good Samaritan Supply
Services, Inc. as of December 31, 1994 and 1995 and the related statements of
operations and retained earnings and cash flows for each of the three years then
ended. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Good Samaritan Supply
Services, Inc. at December 31, 1994 and 1995, and the results of its operations
and cash flows for each of the three years then ended in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
October 4, 1996
F-49
<PAGE>
GOOD SAMARITAN SUPPLY SERVICES, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1994 1995
------------- ------------- APRIL 30,
1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............................................ $ 322,304 $ 19,030 $ 468,303
Trade accounts receivable, less allowances of $203,253 and $325,853
as of December 31, 1994 and 1995, respectively, and $337,424 as of
April 30, 1996.................................................... 1,854,339 2,018,809 1,811,314
Due from related parties........................................... 605,783 1,330,870 1,591,546
Inventories........................................................ 529,169 322,531 478,722
Prepaid expenses and other......................................... 25,372 52,303 119,210
Refundable income taxes............................................ 34,363 372,665 372,665
Deferred income taxes.............................................. 113,618 218,896 272,028
------------- ------------- -------------
Total current assets............................................. 3,484,948 4,335,104 5,113,788
Equipment, net....................................................... 536,548 1,098,334 1,156,410
Excess of cost over net assets acquired, less accumulated
amortization of $77,528 and $191,774 as of December 31, 1994 and
1995, respectively, and $231,048 as of April 30, 1996............... 1,636,472 1,522,206 1,880,440
Other assets, net.................................................... 140,984 218,799 318,266
------------- ------------- -------------
$ 5,798,952 $ 7,174,443 $ 8,468,904
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit..................................................... $ 500,000 $ 2,879,813 $ 5,290
Current portion of long-term debt.................................. 76,198 709,336 791,125
Accounts payable................................................... 1,123,633 2,152,436 2,230,997
Advances from related party........................................ 1,000,000 1,000,000 --
Accrued expenses................................................... 325,425 179,615 176,223
------------- ------------- -------------
Total current liabilities........................................ 3,025,256 6,921,200 3,203,635
Long-term debt, less current portion................................. 2,233,289 201,281 192,061
Deferred income taxes................................................ 21,597 42,658 42,658
Stockholders' equity:
Common stock, $.01 par value:
10,000 shares authorized;
1,000 shares issued and outstanding 10 10 17
Additional paid-in capital......................................... 199,990 199,990 5,299,983
Retained earnings (deficit)........................................ 318,810 (190,696) (269,450)
------------- ------------- -------------
Total stockholders' equity....................................... 518,810 9,304 5,030,550
------------- ------------- -------------
Total liabilities and stockholders' equity....................... $ 5,798,952 $ 7,174,443 $ 8,468,904
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes.
F-50
<PAGE>
GOOD SAMARITAN SUPPLY SERVICES, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------
1993 1994 1995
------------- ------------- -------------- FOUR MONTHS
ENDED APRIL
30, 1996
-------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues............................................ $ 3,753,494 $ 9,956,025 $ 18,897,969 $ 6,824,668
Cost of goods sold.................................. 2,228,016 7,316,791 14,020,893 5,140,510
------------- ------------- -------------- -------------
Gross profit........................................ 1,525,478 2,639,234 4,877,076 1,684,158
Selling, general and administrative expenses........ 1,134,189 2,380,450 5,370,062 1,684,522
------------- ------------- -------------- -------------
Income (loss) from operations....................... 391,289 258,784 (492,986) (364)
Other (income) expense:
Interest income................................... (4,026) (6,256) (17,173) (18,491)
Interest expense.................................. 31,865 162,702 351,369 150,013
------------- ------------- -------------- -------------
27,839 156,446 334,196 131,522
------------- ------------- -------------- -------------
Income (loss) before provision for income taxes..... 363,450 102,338 (827,182) (131,886)
Provision (benefit) for income taxes................ 132,438 42,748 (317,676) (53,132)
------------- ------------- -------------- -------------
Net income (loss)................................... 231,012 59,590 (509,506) (78,754)
Retained earnings (deficit), beginning of period.... 28,208 259,220 318,810 (190,696)
------------- ------------- -------------- -------------
Retained earnings (deficit), end of period.......... $ 259,220 $ 318,810 $ (190,696) $ (269,450)
------------- ------------- -------------- -------------
------------- ------------- -------------- -------------
</TABLE>
See accompanying notes.
F-51
<PAGE>
GOOD SAMARITAN SUPPLY SERVICES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1993 1994 1995
----------- ------------ ------------ FOUR MONTHS
ENDED APRIL
30, 1996
-------------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)....................................... $ 231,012 $ 59,590 $ (509,506) $ (78,754)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation.......................................... 836 23,331 140,052 66,829
Amortization.......................................... 12,140 97,472 162,268 63,290
Provision for doubtful accounts....................... 96,909 150,919 400,680 44,426
Deferred income taxes................................. (49,746) (42,275) (84,217) (53,132)
Changes in operating assets and liabilities:
Accounts receivable................................... (123,993) (1,639,951) (565,150) 163,069
Due from related parties.............................. (64,267) (336,206) (725,087) (260,676)
Inventories........................................... 5,476 (55,494) 206,638 (49,612)
Prepaid expenses and other............................ (9,116) (24,153) (26,931) (66,907)
Other assets.......................................... -- -- (125,817) (68,263)
Accounts payable...................................... 76,062 789,893 1,028,803 71,982
Accrued expenses...................................... 70,984 253,091 (145,810) (3,392)
Refundable income taxes............................... -- (110,948) (338,302) --
----------- ------------ ------------ -------------
Net cash provided by (used in) operating activities..... 246,297 (834,731) (582,379) (171,140)
INVESTING ACTIVITIES
Purchases of equipment.................................. -- (252,356) (410,373) (124,905)
Acquisition of entity................................... -- (1,803,624) -- (452,728)
----------- ------------ ------------ -------------
Net cash used in investing activities................... -- (2,055,980) (410,373) (577,633)
FINANCING ACTIVITIES
Proceeds from the issuance of long-term debt............ -- 1,738,000 30,000 1,000,000
Payments on long-term debt.............................. -- (33,893) (1,708,174) (1,001,189)
Payments on capital lease obligations................... (547) (2,432) (12,161) (26,242)
Advances from related parties........................... (19,000) 600,000 -- (1,000,000)
Net proceeds from issuance of common stock.............. -- -- -- 5,600,000
Repurchase of common stock.............................. -- -- -- (500,000)
Net borrowings (payments) on line of credit............. -- 500,000 2,379,813 (2,874,523)
----------- ------------ ------------ -------------
Net cash provided by (used in) financing activities..... (19,547) 2,801,675 689,478 1,198,046
----------- ------------ ------------ -------------
Increase (decrease) in cash and cash equivalents........ 226,750 (89,036) (303,274) 449,273
Cash and cash equivalents, beginning of period.......... 184,590 411,340 322,304 19,030
----------- ------------ ------------ -------------
Cash and cash equivalents, end of period................ $ 411,340 $ 322,304 $ 19,030 $ 468,303
----------- ------------ ------------ -------------
----------- ------------ ------------ -------------
Supplemental disclosure of cash flow information and
noncash investing and financing activities:
Note payable to seller in connection with acquisition... $ -- $ 600,000 $ -- $ 100,000
Equipment acquired under capital leases................. 8,359 -- 291,465 --
Cash paid during the year for income taxes.............. 130,947 196,000 105,000 --
Cash paid during the year for interest.................. 14,752 131,204 357,233 154,489
</TABLE>
See accompanying notes.
F-52
<PAGE>
GOOD SAMARITAN SUPPLY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
THE FOUR MONTHS ENDED APRIL 30, 1996 (UNAUDITED)
1. DESCRIPTION OF BUSINESS
The Company provides pharmaceutical products, medical supplies, intravenous
therapies, and related products and consulting services to patients in long-term
care and assisted living facilities within the United States. The Company began
operations in October 1992 and is a subsidiary of The Evangelical Lutheran Good
Samaritan Foundation (the Foundation). The Foundation is a private nonprofit
organization located in Sioux Falls, South Dakota.
2. ACQUISITION
In June 1994, the Company acquired certain assets (principally equipment and
inventory) of a pharmacy located in White Bear Lake, Minnesota. The total cost
of the acquisition was $2,338,000. As a result of the acquisition, goodwill was
recorded in the amount of $1,611,000. This acquisition has been accounted for
using the purchase method of accounting; accordingly, the Company's financial
statements include the operating results of the acquired business from the
effective date of the acquisition.
Unaudited proforma data as though the Company had purchased the above
business at the beginning of the year ended December 31, 1994 are set forth
below:
<TABLE>
<S> <C>
Sales......................................................... $11,805,396
Net Income.................................................... 28,218
</TABLE>
In January 1996, the Company purchased substantially all of the assets of an
institutional pharmacy located in Colorado. The total purchase price of $534,400
consisted of a $434,400 cash payment and a $100,000 seller note.
In conjunction with the above acquisition as well as for additional working
capital purposes, the Company borrowed the $1,000,000 available under its
existing term loan facility (Note 6).
3. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The condensed financial statements at April 30, 1996 and for the four months
then ended are unaudited but include all adjustments (consisting only of normal
recurring adjustments) which the Company considers necessary for a fair
presentation of the financial position at such date and of the operating results
and cash flows for that period. Results of the 1996 period are not necessarily
indicative of results expected for the entire year. These condensed financial
statements do not include all of the disclosures normally provided in annual
financial statements.
ACCOUNTING ESTIMATES
Accounting estimates are an integral part of the financial statements
prepared by Company management and are based on management's current judgments.
These judgments are based on knowledge and experience about past and current
events and on assumptions about future events. The Company will, when determined
necessary, accrue for estimated liabilities when the financial impact is
probable and can be estimated by management. Actual results may differ from
those estimates.
CASH EQUIVALENTS
Cash equivalents, which include financial instruments with an original
maturity of three months or less, are carried at cost which approximates market.
F-53
<PAGE>
GOOD SAMARITAN SUPPLY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
THE FOUR MONTHS ENDED APRIL 30, 1996 (UNAUDITED)
3. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenue is recognized when the products or services are provided to the
Company's customers. As a significant portion of the Company's revenues are paid
through various departments of public aid (Medicaid) and Medicare programs and
are subject to adjustment by the programs, the Company monitors its receivables
and reports such revenue at the net realizable amounts expected to be received
from these programs.
INVENTORIES
Inventories, which consist principally of pharmaceuticals and medical
supplies, are stated at the lower of cost (first-in, first-out basis) or market.
The cost of goods sold recognized by the Company consists principally of cost of
products and medical supplies.
EQUIPMENT
Equipment, including capitalized leases and leasehold improvements, is
stated at cost. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the assets (which range
from five to ten years) or the lease term as appropriate.
EXCESS OF COST OVER NET ASSETS ACQUIRED
Excess of cost over net assets acquired is being amortized using the
straight-line method over a period of 15 years. The Company has established a
policy whereby it will evaluate the recoverability of the excess of cost over
net assets acquired on a periodic basis utilizing undiscounted net cash flows of
the acquired entities. In management's opinion, no impairment of value of the
excess of cost over net assets acquired existed at December 31, 1995.
OTHER ASSETS
Other assets consist of noncompete agreements and organizational costs. The
noncompete agreements are being amortized over three years using the
straight-line method. Organizational costs are being amortized over five years
using the straight-line method.
INCOME TAXES
The Company accounts for income taxes under the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between the financial reporting and income tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include accounts receivable, amounts due
from related parties, accounts payable, accrued expenses, advances from a
related party, and debt. The fair values of all financial instruments were not
materially different from their carrying values.
F-54
<PAGE>
GOOD SAMARITAN SUPPLY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
THE FOUR MONTHS ENDED APRIL 30, 1996 (UNAUDITED)
4. EQUIPMENT
Equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1994 1995
----------- -------------
<S> <C> <C>
Equipment under capital lease..................................... $ 8,359 $ 291,465
Leasehold improvements............................................ -- 268,809
Furniture, fixtures, and equipment................................ 409,571 702,279
Construction-in-progress.......................................... 142,785 --
----------- -------------
560,715 1,262,553
Accumulated depreciation and amortization......................... (24,167) (164,219)
----------- -------------
$ 536,548 $ 1,098,334
----------- -------------
----------- -------------
</TABLE>
5. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1994 1995
----------- -----------
<S> <C> <C>
Noncompete agreements............................................... $ 100,000 $ 100,000
Organizational costs................................................ 70,369 70,369
Other assets........................................................ -- 125,817
----------- -----------
170,369 296,186
Less: Accumulated amortization of noncompete and organizational
costs.............................................................. (29,385) (77,407)
----------- -----------
$ 140,984 $ 218,799
----------- -----------
----------- -----------
</TABLE>
6. DEBT
In April 1995, the Company entered into a line of credit agreement with a
new lender which provides for aggregate borrowings totaling $3,100,000. The
agreement expires May 31, 1996 and borrowings bear interest at the prime rate
plus 0.25%. Proceeds from borrowings under this line of credit were used to
repay the then existing bank line of credit and installment note. At December
31, 1995, the Company had $2,879,813 outstanding under the line of credit.
In October 1995, the Company entered into a term loan agreement which
provides for borrowings aggregating $1,000,000. Borrowings under this agreement
bear interest at the prime rate plus .25% and are due in full in May 1996. At
December 31, 1995, no term loan borrowings have been made.
F-55
<PAGE>
GOOD SAMARITAN SUPPLY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
THE FOUR MONTHS ENDED APRIL 30, 1996 (UNAUDITED)
6. DEBT (CONTINUED)
Long-term debt and capitalized lease obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1994 1995
------------- -----------
<S> <C> <C>
Bank installment note, payable in monthly installments of $19,200,
including interest at the prime rate............................. $ 1,704,107 $ --
Note payable, interest at 7%, due in full on June 1, 1996......... 600,000 600,000
Capital lease obligations......................................... 5,380 284,686
Other............................................................. -- 25,931
------------- -----------
2,309,487 910,617
Less: Current portion............................................. 76,198 709,336
------------- -----------
$ 2,233,289 $ 201,281
------------- -----------
------------- -----------
</TABLE>
Future maturities of long-term debt and capitalized lease obligations are as
follows:
<TABLE>
<S> <C>
1996............................................................. $ 709,336
1997............................................................. 89,268
1998............................................................. 89,490
1999............................................................. 10,953
2000............................................................. 11,570
---------
$ 910,617
---------
---------
</TABLE>
Substantially all assets of the Company collateralize the above debt.
In June 1996, the Company entered into a new bank credit facility (Note 13).
7. RELATED PARTY TRANSACTIONS
During 1994, the Foundation, a related organization, advanced an additional
$600,000 to the Company. As of December 31, 1994 and 1995, the total amount
advanced from the Foundation to the Company was $1,000,000. The advances are due
on demand and bear interest at 8%. Total interest paid to the Foundation in
1993, 1994 and 1995 by the Company was $14,752, $54,365 and $77,765,
respectively. In addition, as of December 31, 1994 and 1995, accrued interest
payable was recorded in the amount of $17,929 and $20,164, respectively.
The Company sells to certain long-term care facilities which are operated by
the Evangelical Lutheran Good Samaritan Society (GSM), an affiliate of the
Foundation. Total sales to these facilities for the years ended December 31,
1993, 1994 and 1995 were approximately $3,520,000, $3,753,000 and $10,116,000,
respectively.
F-56
<PAGE>
GOOD SAMARITAN SUPPLY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
THE FOUR MONTHS ENDED APRIL 30, 1996 (UNAUDITED)
8. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------
1993 1994 1995
----------- --------- ------------
<S> <C> <C> <C>
Current:
Federal.............................................. $ 138,065 $ 65,835 $ (233,459)
State................................................ 44,119 19,188 --
----------- --------- ------------
182,184 85,023 (233,459)
Deferred............................................... (49,746) (42,275) (84,217)
----------- --------- ------------
$ 132,438 $ 42,748 $ (317,676)
----------- --------- ------------
----------- --------- ------------
</TABLE>
The difference between the financial statement provision for income taxes
and the statutory federal income tax rate of 34% is related principally to state
income taxes.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1994 1995
---------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts.................................... $ 90,634 $ 130,341
Net operating loss carryforward.................................... -- 28,291
Accrued liabilities................................................ 22,984 --
---------- -----------
Total deferred tax assets............................................ 113,618 158,632
Deferred tax liabilities:
Excess of tax depreciation over book............................... (21,597) (42,658)
---------- -----------
Net deferred taxes................................................... $ 92,021 $ 115,974
---------- -----------
---------- -----------
</TABLE>
9. DEFINED CONTRIBUTION PLAN
The Company has a 401(k) retirement savings plan which covers substantially
all full-time employees. Employees may contribute up to 15% (4% prior to August
1, 1995) of their salary. Company matching and profit sharing contributions are
discretionary and are determined by resolution of the Board of Directors. Prior
to August 1, 1995, the Company matched 0.25% of the employees' contribution, up
to 1%. The Company's expense related to this plan was $0, $3,263 and $35,567 in
1993, 1994 and 1995, respectively.
10. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain equipment and office space under noncancelable
operating and capital leases. These leases contain various terms and provide for
renewal at prevailing market rates. Costs incurred under these operating leases
are recorded as rent expense and were equal to $23,655, $111,716 and $339,494
for the years ended December 31, 1993, 1994 and 1995, respectively.
F-57
<PAGE>
GOOD SAMARITAN SUPPLY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
THE FOUR MONTHS ENDED APRIL 30, 1996 (UNAUDITED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum lease payments for noncancelable operating and capital leases
are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
------------- -----------
<S> <C> <C>
1996.............................................................. $ 331,370 $ 108,686
1997.............................................................. 301,358 105,925
1998.............................................................. 304,162 97,242
1999.............................................................. 126,514 13,585
2000.............................................................. 29,202 12,453
------------- -----------
$ 1,092,606 337,891
-------------
-------------
Less: Amounts representing interest............................... (53,205)
-----------
Capital lease obligations......................................... 284,686
Less: Current portion............................................. 83,403
-----------
$ 201,283
-----------
-----------
</TABLE>
Depreciation expense and accumulated depreciation and amortization include
amortization on capital lease obligations.
MANAGEMENT FEE
The Company currently pays a monthly management fee to GSM. GSM provides
accounting, financial, human resource, and administrative services to the
Company. This agreement expires in May 1995 but is automatically renewed unless
notice of nonrenewal is given by one of the parties. This agreement was
terminated effective January 1, 1996. Total management fees incurred pursuant to
this agreement were $72,000, $54,000 and $42,000 in 1993, 1994 and 1995,
respectively.
11. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk primarily consist of accounts receivable due from
Medicaid, Medicare, third-party insurance companies, and individuals in various
geographic locations. Credit risks with respect to these receivables are limited
due to the large number of patients comprising the Company's customer base.
12. STOCKHOLDERS' EQUITY
On April 30, 1996, the Company entered into a Joint Venture Agreement
whereby it sold 666.67 shares of common stock to American Medserve Corporation
(AMC), in exchange for $6,000,000. The $6,000,000 proceeds received from this
sale were used to repay the $1,000,000 outstanding under the term loan facility
plus accrued interest, substantially all borrowings under the line of credit and
term loan facility, and to repay the $1,000,000 advance from the Foundation. In
addition, $500,000 was utilized to repurchase 55.555 shares (the Shares) of the
Company's Common Stock. The Shares had been issued to the Foundation via a stock
dividend declared during April 1996.
13. SUBSEQUENT EVENTS
On May 30, 1996, the Company purchased substantially all of the assets of an
institutional pharmacy located in Nebraska. The total purchase price of
$3,663,000 consisted of $2,485,000 of cash payments and $1,178,000 of seller
notes payable. This acquisition was financed with additional borrowings under
the Company's line of credit facility.
F-58
<PAGE>
GOOD SAMARITAN SUPPLY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
THE FOUR MONTHS ENDED APRIL 30, 1996 (UNAUDITED)
13. SUBSEQUENT EVENTS (CONTINUED)
On June 21, 1996, the Company entered into a credit agreement with a bank,
which provides for maximum borrowings in the aggregate of $15,000,000,
consisting of a $5,000,000 revolving line of credit, a $5,000,000 revolving
acquisition loan facility, and a $5,000,000 term loan. The revolving line of
credit terminates on June 21, 2001. The revolving acquisition loan facility
converts to a term loan on the earlier of (a) June 21, 1998 and (b) the date on
which (i) the Company has obtained term loans in the aggregate of $5,000,000 and
(ii) the aggregate principal amount under the revolving acquisition loan
facility is $5,000,000, and thereafter matures on June 21, 2001. The term loan
matures on June 21, 2001. The credit agreement is collateralized by
substantially all of the assets of the Company and its subsidiaries. In
conjunction with the credit agreement, all issued and outstanding common stock
of the Company was pledged by its stockholders to secure the debt obligations.
The credit agreement also provides for a $500,000 letter of credit facility.
Initial borrowings under this agreement totaled $3,700,000 ($1,200,000 revolving
line of credit borrowings and $2,500,000 term loan borrowings). These borrowings
were used to repay all borrowings under the existing line of credit and for
working capital purposes.
In connection with the execution of the joint venture agreement, the
Company, the Foundation and AMC entered into a shareholders' agreement. Among
other things, the agreement contains a provision whereby the Foundation may
demand that AMC purchase any or all shares of Company stock held by the
Foundation in excess of 10% of total outstanding shares.
In addition, AMC has a call option whereby AMC may demand that the
Foundation sell any or all shares of Company Stock held by the Foundation in
excess of 10% of total outstanding shares.
AMC has the right, upon the occurrence of certain events as defined in the
joint venture agreement, to acquire an additional 10.1% of the Company's Common
Stock in exchange for $2,000,000. The purchase price for additional purchases of
stock pursuant to the put and call provisions shall be fair value, as defined in
the joint venture agreement.
F-59
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Johnson's Pharmacy and Medical Supply, Inc.
We have audited the accompanying statements of income and retained earnings,
and cash flows of Johnson's Pharmacy and Medical Supply, Inc. for the period
from April 1, 1995 to April 16, 1995. 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 audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Johnson's
Pharmacy and Medical Supply, Inc. for the period from April 1, 1995 to April 16,
1995, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
September 26, 1996
F-60
<PAGE>
JOHNSON'S PHARMACY AND MEDICAL SUPPLY, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
PERIOD FROM APRIL 1, 1995 TO APRIL 16, 1995
<TABLE>
<S> <C>
Revenues...................................................................... $ 89,800
Cost of goods sold............................................................ 49,785
-----------
Gross profit.................................................................. 40,015
Selling, general, and administrative expenses................................. 32,146
-----------
Net income.................................................................... 7,869
Retained earnings, beginning of period........................................ 680,926
Distributions to stockholders................................................. (915)
-----------
Retained earnings, end of period.............................................. $ 687,880
-----------
-----------
</TABLE>
See accompanying notes.
F-61
<PAGE>
JOHNSON'S PHARMACY AND MEDICAL SUPPLY, INC.
STATEMENT OF CASH FLOWS
PERIOD FROM APRIL 1, 1995 TO APRIL 16, 1995
<TABLE>
<S> <C>
Operating activities
Net income.................................................................. $ 7,869
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation.............................................................. 350
Allowance for doubtful accounts........................................... 500
Changes in operating assets and liabilities:
Accounts receivable..................................................... (22,730)
Inventories............................................................. 16,379
Accounts payable........................................................ 5,292
Accrued expenses........................................................ 13,659
-----------
Net cash provided by operating activities................................... 21,319
Financing activities
Distribution to stockholder................................................. (915)
-----------
Net cash used in financing activities....................................... (915)
-----------
Net increase in cash........................................................ 20,404
Cash at beginning of period................................................. 100,301
-----------
Cash at end of period....................................................... $ 120,705
-----------
-----------
</TABLE>
See accompanying notes.
F-62
<PAGE>
JOHNSON'S PHARMACY AND MEDICAL SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM APRIL 1, 1995 TO APRIL 16, 1995
1. DESCRIPTION OF BUSINESS
Johnson's Pharmacy and Medical Supply, Inc., (the Company), provides
pharmaceutical products, medical supplies, intravenous therapies, and related
products and services to patients in long-term care and assisted living
facilities in the state of Pennsylvania.
On April 17, 1995, the Company sold substantially all of its assets to Gatti
LTC Services, Inc., a majority owned subsidiary of AMC Regional Holdings, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING ESTIMATES
Accounting estimates are an integral part of the financial statements
prepared by Company management and are based on management's current judgments.
These judgments are based on knowledge and experience about past and current
events and on assumptions about future events. The Company will accrue for
estimated liabilities when the financial impact is probable and can be estimated
by management. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue is recognized when the products or services are provided to the
Company's customers and is generally based on the amount invoiced. As a
significant portion of the Company's revenues are paid through the Pennsylvania
Department of Public Aid (Medicaid) and Medicare programs and are subject to
adjustment by the programs, the Company monitors its receivables and reports
such revenue at the net realizable amounts to be received from these programs.
INVENTORIES
Inventories, which consist principally of pharmaceuticals and medical
supplies, are stated at the lower of cost (first in, first out basis) or market.
The cost of goods sold recognized by the Company consists principally of cost of
products and medical supplies.
EQUIPMENT DEPRECIATION
Equipment, consisting principally of office equipment, is stated at cost
less accumulated depreciation. Equipment is depreciated using accelerated
methods based on the estimated useful lives of the assets.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include accounts receivable, accounts
payable, and accrued expenses. The fair values of all financial instruments were
not materially different from their carrying values.
3. RELATED PARTY TRANSACTION
The Company leases office and facility space from the Company's sole
stockholder on a month-to-month basis. The Company accrued $1,050 to this
stockholder for the period from April 1, 1995 to April 16, 1995.
4. S CORPORATION ELECTION
The stockholder of the Company has elected to be taxed as an S corporation
under the provisions of the Internal Revenue Code. Accordingly, the Company is
not subject to federal or state income taxes as the income of the Company is
included in the taxable income of its stockholder.
F-63
<PAGE>
JOHNSON'S PHARMACY AND MEDICAL SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk primarily consist of accounts receivable due from
Medicaid, Medicare, third-party insurance companies, and individuals in various
geographic locations. Credit risks with respect to these receivables are limited
due to the large number of patients comprising the Company's customer base.
F-64
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Nihan & Martin, Inc.
We have audited the accompanying statements of income and retained earnings
and cash flows of Nihan & Martin, Inc. for the two years ended December 31, 1994
and for the period from January 1, 1995 to March 8, 1995. 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 financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Nihan &
Martin, Inc. for the two years ended December 31, 1994 and for the period from
January 1, 1995 to March 8, 1995 in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
April 4, 1996
F-65
<PAGE>
NIHAN & MARTIN, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
YEAR ENDED DECEMBER 31 1995 TO MARCH
------------------------------ 8,
1993 1994 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues........................................................ $ 10,880,959 $ 12,139,092 $ 2,193,826
Cost of goods sold.............................................. 6,517,589 7,146,271 1,327,180
-------------- -------------- --------------
Gross profit.................................................... 4,363,370 4,992,821 866,646
Selling, general, and administrative expenses................... 3,155,684 3,449,311 829,709
-------------- -------------- --------------
Income from operations.......................................... 1,207,686 1,543,510 36,937
Other income (expense):
Interest income............................................... 1,868 3,289 75
Interest expense.............................................. (46,799) (44,992) (6,831)
-------------- -------------- --------------
(44,931) (41,703) (6,756)
-------------- -------------- --------------
Income before income taxes...................................... 1,162,755 1,501,807 30,181
State income taxes.............................................. 16,237 17,894 450
-------------- -------------- --------------
Net income...................................................... 1,146,518 1,483,913 29,731
Retained earnings, beginning of period.......................... 1,101,195 1,489,171 2,202,616
Distributions to stockholders................................... (758,542) (770,468) (160,159)
-------------- -------------- --------------
Retained earnings, end of period................................ $ 1,489,171 $ 2,202,616 $ 2,072,188
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes.
F-66
<PAGE>
NIHAN & MARTIN, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31 JANUARY 1,
---------------------------- 1995 TO MARCH
1993 1994 8, 1995
------------- ------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income......................................................... $ 1,146,518 $ 1,483,913 $ 29,731
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization.................................... 80,516 96,217 30,003
Amortization of franchise fee.................................... 1,833 1,833 239
Loss on sale of equipment........................................ -- 601 --
Changes in assets and liabilities:
Trade receivables.............................................. (172,463) (427,258) 118,966
Employee advances.............................................. 640 (1,167) 1,467
Prepaid expenses............................................... (20,000) (15,400) 30,450
Inventories.................................................... (72,968) (92,088) (16,932)
Deferred compensation.......................................... (47,146) (257,843) (205,749)
Other assets................................................... (30,000) 30,000 --
Accounts payable and accrued expenses.......................... 145,025 48,292 (212,691)
Income taxes payable........................................... (13,105) 2,339 450
------------- ------------- --------------
Net cash provided by (used in) operating activities................ 1,018,850 869,439 (224,066)
INVESTING ACTIVITIES
Collection of receivable from stockholder.......................... 3,255 -- --
Proceeds from sale of equipment.................................... -- 4,500 --
Purchases of equipment............................................. (165,734) (104,608) (7,698)
------------- ------------- --------------
Net cash used in investing activities.............................. (162,479) (100,108) (7,698)
FINANCING ACTIVITIES
Proceeds from revolving line of credit, net........................ -- -- 222,387
Proceeds from notes payable to stockholders........................ -- 163,440 --
Principal payments on notes payable to stockholders................ (49,658) (159,477) (7,914)
Proceeds from long-term debt....................................... 60,000 -- --
Principal payments on long-term debt............................... (87,082) (144,458) (15,249)
Cash dividends paid................................................ (758,542) (770,468) (160,159)
------------- ------------- --------------
Net cash used in financing activities.............................. (835,282) (910,963) 39,065
------------- ------------- --------------
Net increase (decrease) in cash.................................... 21,089 141,632 (192,699)
Cash and cash equivalents:
Beginning........................................................ 447,208 468,297 326,665
------------- ------------- --------------
Ending........................................................... $ 468,297 $ 326,665 $ 133,966
------------- ------------- --------------
------------- ------------- --------------
Supplemental disclosure of cash flow information:
Cash payments for:
Interest....................................................... $ 47,070 $ 44,371 $ 6,831
State income taxes............................................. 29,342 15,555 --
</TABLE>
See accompanying notes.
F-67
<PAGE>
NIHAN & MARTIN, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994 AND THE PERIOD FROM
JANUARY 1, 1995 TO MARCH 8, 1995
1. DESCRIPTION OF BUSINESS
Nihan & Martin, Inc. (the Company) provides pharmaceutical products, medical
supplies, intravenous therapies, and related products and consulting services to
patients in long-term care and assisted living facilities throughout the State
of Illinois.
On March 9, 1995, the Company sold substantially all of its assets and
liabilities to AMC Regional Holdings, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
Cash equivalents, which include financial instruments with an original
maturity of three months or less, are carried at cost which approximates market.
ACCOUNTING ESTIMATES
Accounting estimates are an integral part of the financial statements
prepared by Company management and are based on management's current judgments.
These judgments are based on knowledge and experience about past and current
events and on assumptions about future events. The Company will, when determined
necessary, accrue for estimated liabilities when the financial impact is
probable and can be estimated by management. Actual results may differ from
those estimates.
REVENUE RECOGNITION
Revenue is recognized when the products or services are provided to the
Company's customers. As a significant portion of the Company's revenues are paid
through the Illinois Department of Public Aid (Medicaid) and Medicare programs
and are subject to adjustment by the programs, the Company monitors its
receivables and reports such revenue at the net realizable amounts expected to
be received from these programs.
INVENTORIES
Inventories, which consist principally of pharmaceuticals and medical
supplies, are stated at the lower of cost (first-in, first-out basis) or market.
The cost of goods sold recognized by the Company consists principally of cost of
products and medical supplies.
EQUIPMENT DEPRECIATION
Equipment, consisting principally of office and transportation equipment, is
stated at cost less accumulated depreciation and amortization. Equipment is
depreciated or amortized using either straight-line or accelerated methods based
on the estimated useful lives of the assets.
FRANCHISE FEES AMORTIZATION
Franchise fees are being amortized over a period of ten years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include accounts receivable, accounts
payable, accrued expenses, and debt. The fair values of all financial
instruments were not materially different from their carrying values.
ADVERTISING COSTS
Advertising costs ($93,792, $71,781 and $10,499 for the years ended December
31, 1993 and 1994 and for the period from January 1, 1995 to March 8, 1995,
respectively) are expensed as incurred.
F-68
<PAGE>
NIHAN & MARTIN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994 AND THE PERIOD FROM
JANUARY 1, 1995 TO MARCH 8, 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The stockholders of the Company have elected to be taxed as an S corporation
under the provisions of the Internal Revenue Code effective February 1, 1991.
Accordingly, the Company is not generally subject to income taxes as the income
of the Company is included in the taxable income of its stockholders. Therefore,
the financial statements for periods covered by this election will not include a
provision for corporate income taxes, except for certain state taxes.
3. FRANCHISE AGREEMENT
A portion of the Company's operations are based on a franchise agreement
with a pharmaceutical equipment company. In addition to an initial franchise
fee, the Company is required to pay the franchisor a monthly royalty fee based
on a percentage of net sales. These royalty fees totaled $133,338, $132,110, and
$21,665 for the years ended December 31, 1993 and 1994 and for the period from
January 1, 1995 to March 8, 1995, respectively.
4. LEASES AND RENTAL EXPENSE
OPERATING LEASES
The Company leases certain equipment under noncancelable operating leases.
The leases expire at various dates through February 1999 and certain leases
contain renewal options.
Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
- -------------------------------------------------
<S> <C>
1995............................................. $ 116,273
1996............................................. 116,273
1997............................................. 117,678
1998............................................. 77,758
1999............................................. 12,600
---------
$ 440,582
---------
---------
</TABLE>
Rent expense amounted to $108,000, $118,400, and $22,518 for the years ended
December 31, 1993 and 1994 and for the period from January 1, 1995 to March 8,
1995, respectively.
5. EMPLOYMENT AGREEMENTS
The Company had deferred compensation agreements with a former officer and a
current officer of the Company. On December 31, 1994, the former officer
received a lump sum payment of $240,000 as settlement of all future obligations
under the agreement. The remaining agreement with the current officer requires
payments of $24,000 annually to the officer or his beneficiary or surviving
spouse through August 2000. The Company has recorded a liability of $205,749
which represents the estimated present value (using a discount rate of 10%) of
the benefits payable under the remaining agreement as of December 31, 1994. This
liability was paid in full during the period ended March 8, 1995. The expense
under the agreements was $78,000 and $49,000 for the years ended December 31,
1994 and 1993, respectively. No expense was recorded during the period ended
March 8, 1995.
The Company has also entered into an employment contract with a current
employee. The agreement provides a guaranteed minimum annual salary of $20,000
through June, 1996. The Company has recorded a liability and a related prepaid
expense for $20,000 which represents the balance of the agreement to be paid as
of December 31, 1994.
F-69
<PAGE>
NIHAN & MARTIN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994 AND THE PERIOD FROM
JANUARY 1, 1995 TO MARCH 8, 1995
5. EMPLOYMENT AGREEMENTS (CONTINUED)
The agreement also provides for payments of $1,250 a month through June 1996
in consideration for the employee's agreement not to compete. These payments are
recorded as expense when due.
6. EMPLOYEE BENEFITS PLAN
The Company has an employee benefit plan (Plan) which covers substantially
all of its full-time employees (as defined in the Plan). Employees can elect to
make pretax contributions of a percentage of their annual compensation, not to
exceed IRS limitations. Company contributions are at the discretion of the
Company's Board of Directors. Company contributions of $90,000, $75,000, and
$10,804 were made to the Plan for the years ended December 31, 1993 and 1994 and
for the period from January 1, 1995 to March 8, 1995.
7. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk primarily consist of accounts receivable due from
Medicaid, Medicare, third-party insurance companies, and individuals in various
geographic locations. Credit risks with respect to these receivables are limited
due to the large number of patients comprising the Company's customer base.
F-70
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Pharmed Holdings, Inc. (formerly Pharmed, Inc.)
We have audited the accompanying balance sheets of Pharmed, Inc. as of
December 31, 1994 and 1995, and the related statements of operations,
stockholders' equity, and cash flows for the two years ended December 31, 1995.
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 financial statements referred to above present fairly,
in all material respects, the financial position of Pharmed, Inc. as of December
31, 1994 and 1995, and the results of its operations and its cash flows for the
two years ended December 31, 1995, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
July 5, 1996
F-71
<PAGE>
PHARMED, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1994 1995
------------- ------------- MAY 8,
1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash............................................................... $ 51,353 $ 60,264 $ 10,461
Accounts receivable, less allowance of $186,567 and $338,024 as of
December 31, 1994 and 1995 and $388,024 at May 8, 1996............ 1,393,457 609,201 699,340
Due from related parties........................................... 250,023 351,961 351,961
Inventories........................................................ 238,869 288,345 317,424
------------- ------------- -------------
Total current assets............................................. 1,933,702 1,309,771 1,379,186
Equipment, net....................................................... 110,167 66,677 67,400
Excess of cost over net assets acquired.............................. -- -- 122,907
------------- ------------- -------------
Total assets..................................................... $ 2,043,869 $ 1,376,448 $ 1,569,493
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 114,196 $ 118,794 $ 62,604
Accrued expenses................................................... 42,910 61,017 46,182
Due to related parties............................................. 681,727 99,414 286,935
Amount due to seller............................................... -- -- 90,000
------------- ------------- -------------
Total current liabilities........................................ 838,833 279,225 485,721
Stockholders' equity:
Common stock, no par value: 10,000 shares authorized; 1,000 shares
issued and outstanding............................................ 10,000 10,000 10,000
Retained earnings.................................................. 1,195,036 1,087,223 1,073,772
------------- ------------- -------------
1,205,036 1,097,223 1,083,772
------------- ------------- -------------
Total liabilities and stockholders' equity........................... $ 2,043,869 $ 1,376,448 $ 1,569,493
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes.
F-72
<PAGE>
PHARMED, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------
1994 1995
------------- ------------- PERIOD FROM
JANUARY 1,
1996
TO MAY 8, 1996
--------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues........................................................... $ 4,880,344 $ 3,920,572 $ 1,625,064
Cost of goods sold................................................. 3,123,661 2,157,716 1,152,931
------------- ------------- --------------
Gross profit....................................................... 1,756,683 1,762,856 472,133
Selling, general, and administrative expenses...................... 1,381,482 1,604,382 485,584
------------- ------------- --------------
Income (loss) from operations...................................... 375,201 158,474 (13,451)
Other expense:
Interest......................................................... 1,367 -- --
Other, net....................................................... -- 13,947 --
------------- ------------- --------------
Net income (loss).................................................. $ 373,834 $ 144,527 $ (13,451)
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
See accompanying notes.
F-73
<PAGE>
PHARMED, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE TWO YEARS ENDED DECEMBER 31, 1995 AND THE PERIOD
FROM JANUARY 1, 1996 TO MAY 8, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
-------------------- RETAINED STOCKHOLDERS'
SHARES COST EARNINGS EQUITY
--------- --------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993................................... 1,000 $ 10,000 $ 887,231 $ 897,231
Distributions.................................................. -- -- (66,029) (66,029)
Net income..................................................... -- -- 373,834 373,834
--------- --------- ------------- -------------
Balance at December 31, 1994................................... 1,000 10,000 1,195,036 1,205,036
Distributions.................................................. -- -- (252,340) (252,340)
Net income..................................................... -- -- 144,527 144,527
--------- --------- ------------- -------------
Balance at December 31, 1995................................... 1,000 $ 10,000 1,087,223 1,097,223
Net loss for the period (unaudited)............................ -- -- (13,451) (13,451)
--------- --------- ------------- -------------
Balance at May 8, 1996 (unaudited)............................. 1,000 $ 10,000 $ 1,073,772 $ 1,083,772
--------- --------- ------------- -------------
--------- --------- ------------- -------------
</TABLE>
See accompanying notes.
F-74
<PAGE>
PHARMED, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------
1994 1995
-------------- ------------ PERIOD FROM
JANUARY 1,
1996
TO MAY 8, 1996
--------------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................................................. $ 373,834 $ 144,527 $ (13,451)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................... 45,334 41,736 17,100
Allowance for doubtful accounts.................................. 82,776 151,457 50,000
Loss on sale of property and equipment........................... -- 13,947 --
Changes in operating assets and liabilities:.....................
Accounts receivable............................................ (1,139,807) 632,799 (140,139)
Inventories.................................................... (59,784) (49,476) 52,033
Prepaid expenses and other..................................... 4,157 -- --
Other assets................................................... 2,252 -- (100)
Accrued expenses............................................... 12,351 18,107 (14,835)
Accounts payable............................................... (7,925) 4,598 (56,190)
-------------- ------------ --------------
Net cash (used in) provided by operating activities................ (686,812) 957,695 (105,582)
-------------- ------------ --------------
INVESTING ACTIVITIES
Purchases of equipment............................................. (23,457) (15,943) (742)
Acquisition of an institutional pharmacy........................... -- -- (131,000)
Proceeds from sale of equipment.................................... -- 3,750 --
-------------- ------------ --------------
Net cash used in investing activities.............................. (23,457) (12,193) (131,742)
-------------- ------------ --------------
FINANCING ACTIVITIES
Distributions to stockholder....................................... (66,029) (252,340) --
Due to and from related parties, net............................... 588,366 (684,251) 187,521
-------------- ------------ --------------
Net cash provided by (used in) financing activities................ 522,337 (936,591) 187,521
-------------- ------------ --------------
Net (decrease) increase in cash.................................... (187,932) 8,911 (49,803)
Cash at beginning of period........................................ 239,285 51,353 60,264
-------------- ------------ --------------
Cash at end of period.............................................. $ 51,353 $ 60,264 $ 10,461
-------------- ------------ --------------
-------------- ------------ --------------
Supplemental disclosure of cash flow information and noncash
investing and financing activities
Cash paid during the period for interest........................... $ 1,367 $ -- $ --
Amount due to seller in conjunction with an acquisition of an
institutional pharmacy............................................ $ -- $ -- $ 90,000
</TABLE>
See accompanying notes.
F-75
<PAGE>
PHARMED, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE TWO YEARS ENDED DECEMBER 31, 1995 AND UNAUDITED
FOR THE PERIOD FROM JANUARY 1, 1996 TO MAY 8, 1996
1. DESCRIPTION OF BUSINESS
Pharmed, Inc. (the Company) provides pharmaceutical products, medical
supplies, intravenous and respiratory therapies, and related products and
consulting services to patients in long-term care and assisted living facilities
throughout the State of Louisiana.
On May 8, 1996, the Company sold substantially all of its assets and
liabilities to Sterling Healthcare Services, Inc., a majority-owned subsidiary
of AMC Regional Holdings, Inc.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The condensed financial statements at May 8, 1996 and for the period then
ended are unaudited but include all adjustments (consisting only of normal
recurring adjustments) which the Company considers necessary for a fair
presentation of the financial position at such date and of the operating results
and cash flows for that period. Results of the 1996 period are not necessarily
indicative of results expected for the entire year. These condensed financial
statements do not include all of the disclosures normally provided in annual
financial statements.
ACCOUNTING ESTIMATES
Accounting estimates are an integral part of the financial statements
prepared by Company management and are based on management's current judgments.
These judgments are based on knowledge and experience about past and current
events and on assumptions about future events. The Company will, when determined
necessary, accrue for estimated liabilities when the financial impact is
probable and can be estimated by management. Actual results could differ from
those estimates.
REVENUE RECOGNITION
Revenue is recognized when the products or services are provided to the
Company's customers and is generally based on the amounts invoiced. As a
significant portion of the Company's revenues are paid through the Louisiana
Department of Public Aid (Medicaid) and Medicare programs and are subject to
adjustment by the programs, the Company monitors its receivables and reports
such revenue at the net realizable amounts expected to be received from these
programs. At December 31, 1994 and 1995, net accounts receivable subject to
adjustment under these programs amounted to approximately $376,000 and $305,000,
respectively.
INVENTORIES
Inventories, which consist principally of pharmaceuticals and medical
supplies, are stated at the lower of cost (first-in, first-out basis) or market.
The cost of goods sold recognized by the Company consists principally of cost of
products and medical supplies.
EQUIPMENT
Equipment is stated at cost less accumulated depreciation and amortization.
Equipment is being depreciated or amortized using either straight-line or
accelerated methods based on the estimated useful lives of the assets.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include accounts receivable, accounts
payable, accrued expenses, and amounts due to and from related parties. The fair
values of all financial instruments were not materially different from their
carrying values.
F-76
<PAGE>
PHARMED, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE TWO YEARS ENDED DECEMBER 31, 1995 AND UNAUDITED
FOR THE PERIOD FROM JANUARY 1, 1996 TO MAY 8, 1996
3. EQUIPMENT
Equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1994 1995
------------ ------------
<S> <C> <C>
Transportation equipment.......................................... $ 226,876 $ 99,559
Furniture, fixtures and equipment................................. 213,127 120,018
------------ ------------
440,003 219,577
Accumulated depreciation and amortization......................... (329,836) (152,900)
------------ ------------
$ 110,167 $ 66,677
------------ ------------
------------ ------------
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Compensation and benefits.............................................. $ 42,910 $ 60,150
Other.................................................................. -- 867
--------- ---------
$ 42,910 $ 61,017
--------- ---------
--------- ---------
</TABLE>
5. RELATED PARTY TRANSACTIONS
The Company routinely engaged in advances and borrowings with related
entities of which the stockholder of the Company is the sole stockholder. Such
amounts are due on demand and noninterest bearing, and are recorded in amounts
due to and from related parties.
The Company's sole stockholder routinely engaged in transactions of a
personal nature with the Company unrelated to the operations of the
institutional pharmacy. Cash advanced to the stockholder for these purposes has
been reflected as amounts due from related parties on the Company's balance
sheets.
The Company routinely purchases inventory at cost from related entities. The
Company also sells such inventories at cost to these entities. The purchases
from related entities were $859,963 for the year ended December 31, 1994, and
sales to these entities were $115,037 and $111,824 for the years ended December
31, 1994 and 1995, respectively.
The Company leases certain office space on a month to month basis from a
related entity of which the Company's stockholder is the sole owner. Rent
expense under this agreement was $48,000 for each of the years ended December
31, 1994 and 1995.
Amounts due from affiliated entities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1994 1995
----------- -----------
<S> <C> <C>
Pharmed of Baton Rouge, Inc......................................... $ 250,023 $ 350,023
JV Properties....................................................... -- 1,938
----------- -----------
$ 250,023 $ 351,961
----------- -----------
----------- -----------
</TABLE>
F-77
<PAGE>
PHARMED, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE TWO YEARS ENDED DECEMBER 31, 1995 AND UNAUDITED
FOR THE PERIOD FROM JANUARY 1, 1996 TO MAY 8, 1996
5. RELATED PARTY TRANSACTIONS (CONTINUED)
Amounts due to affiliated entities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1994 1995
----------- ---------
<S> <C> <C>
Eagle Medical Supply, Inc............................................ $ 401,727 $ --
Universal Pharmacy of Parkland....................................... -- 60,000
Universal Pharmacy of Dixon, Inc..................................... 280,000 39,414
----------- ---------
$ 681,727 $ 99,414
----------- ---------
----------- ---------
</TABLE>
The Company has pledged substantially all of its assets as security for
borrowings by related entities under various debt agreements.
6. S CORPORATION ELECTION
The stockholder of the Company has elected to be taxed as an S corporation
under the provisions of the Internal Revenue Code. Accordingly, the Company is
not subject to federal or state income taxes as the income of the Company is
included in the taxable income of its stockholder.
7. COMMITMENTS AND CONTINGENCIES
The Company leases certain property and equipment under various
noncancelable operating leases. These leases contain various terms and provide
for renewal at prevailing market rates.
Future minimum lease payments for noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31:
- -------------------------------------------------------------
<S> <C>
1996......................................................... $ 37,368
1997......................................................... 37,368
1998......................................................... 22,110
1999......................................................... 15,120
2000......................................................... 10,697
-----------
$ 122,663
-----------
-----------
</TABLE>
Rent expense amounted to approximately $80,932 and $77,787 for the years
ended December 31, 1994 and 1995, respectively.
8. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk primarily consist of accounts receivable due from
Medicaid and Medicare, third-party insurance companies, and individuals in
various geographic locations. Credit risks with respect to these receivables are
limited due to the large number of patients comprising the Company's customer
base.
9. SUBSEQUENT EVENTS
During January 1996, the Company purchased assets of an institutional
pharmacy in Alexandria, Louisiana, in exchange for cash of $221,000. $120,000 of
the purchase price is payable in monthly installments of $10,000 through
January, 1997. Payments subsequent to July, 1996 are contingent upon certain
conditions, as defined in the purchase agreement. Goodwill recorded in
conjunction with this purchase is included in excess of cost over net assets
acquired on the Company's unaudited balance sheet and is being amortized using
the straight line method over a period of 20 years.
F-78
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Royal Care of America, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Royal Care
of America, Inc. and Subsidiaries (the Company) formerly Foster Medical Supply,
Inc., as of December 31, 1994 and 1995, the consolidated statement of operations
and accumulated capital and the consolidated statement of cash flows for the
years ended December 31, 1994 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. The
consolidated financial statements of Royal Care of America, Inc. and
Subsidiaries for the year ended December 31, 1993, were audited by other
auditors, whose report dated August 12, 1994, expressed an unqualified opinion
on those statements.
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
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 Royal Care
of America, Inc. and Subsidiaries as of December 31, 1994 and 1995 and
consolidated results of its operations and cash flows for the years ended
December 31, 1994 and 1995, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Albany, New York
August 30, 1996
F-79
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Royal Care of America, Inc.
In our opinion, the consolidated statements of operations and changes in
accumulated capital and of cash flows for the year ended December 31, 1993
present fairly, in all material respects, the results of operations and cash
flows of Royal Care of America, Inc. and its subsidiaries for the year ended
December 31, 1993, in conformity with generally accepted accounting principles.
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 audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of the Company
for any period subsequent to December 31, 1993.
PRICE WATERHOUSE LLP
Boston, Massachusetts
August 12, 1994
F-80
<PAGE>
ROYAL CARE OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- --------- JUNE 30,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS
Cash, includes restricted cash of $2,060, $2,127 and $2,127................. $ 5,203 $ 2,393 $ 2,193
Accounts receivable, net of allowance for uncollectibles of $1,195, $1,166
and $1,543................................................................. 3,783 4,028 4,718
Inventory................................................................... 600 647 965
Prepaid expenses and other receivables...................................... 16 153 20
--------- --------- -----------
Total current assets...................................................... 9,602 7,221 7,896
--------- --------- -----------
PROPERTY AND EQUIPMENT, net................................................... 699 624 575
OTHER NONCURRENT ASSETS
Goodwill, net............................................................... 1,143 1,339 1,199
Deferred organization and financing costs, net.............................. 24 16 11
Other....................................................................... 13 20 20
--------- --------- -----------
Total other noncurrent assets............................................. 1,180 1,375 1,230
--------- --------- -----------
Total assets.............................................................. $ 11,481 $ 9,220 $ 9,701
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND ACCUMULATED CAPITAL
CURRENT LIABILITIES
Current portion of long-term debt, principally due to related parties....... $ 1,112 $ 2,067 $ 2,576
Accounts payable............................................................ 1,584 1,304 987
Accrued expenses............................................................ 600 859 1,133
Due to unaffiliated company................................................. 2,060 2,127 2,127
--------- --------- -----------
Total current liabilities................................................. 5,356 6,357 6,823
LONG-TERM DEBT, net of current portion, principally due to related parties.... 3,829 2,717 2,717
--------- --------- -----------
Total liabilities......................................................... 9,185 9,074 9,540
--------- --------- -----------
COMMITMENTS AND CONTINGENCIES (Note 8)
Accumulated capital....................................................... 2,296 146 161
--------- --------- -----------
Total liabilities and accumulated capital................................. $ 11,481 $ 9,220 $ 9,701
--------- --------- -----------
--------- --------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-81
<PAGE>
ROYAL CARE OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES IN ACCUMULATED CAPITAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1993 1994 1995
--------- --------- --------- FOR THE
SIX MONTHS ENDED
JUNE 30, 1996
-----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales................................................... $ 19,699 $ 18,923 $ 15,727 $ 7,532
Consulting fees............................................. -- -- 89 68
--------- --------- --------- -------
Revenues.................................................. 19,699 18,923 15,816 7,600
Cost of sales............................................. 10,038 10,453 10,059 4,563
--------- --------- --------- -------
Gross profit............................................ 9,661 8,470 5,757 3,037
Selling, general and administrative expenses................ 8,154 9,747 7,382 3,174
--------- --------- --------- -------
Income (loss) from operations............................... 1,507 (1,277) (1,625) (137)
--------- --------- --------- -------
Other (expense) income:
Interest expense.......................................... (869) (784) (555) (260)
Interest income -- 55 11 81
Other..................................................... -- 520 19 331
--------- --------- --------- -------
(869) (209) (525) 152
--------- --------- --------- -------
Income (loss) before taxes.................................. 638 (1,486) (2,150) 15
Provision for income taxes.................................. 279 -- -- --
--------- --------- --------- -------
Net income (loss)........................................... 359 (1,486) (2,150) 15
Accumulated capital, beginning of period.................... 642 5 2,296 146
Contribution (to) by Foster Medical Supply, Inc............. (996) 3,777 -- --
--------- --------- --------- -------
Accumulated capital, end of period.......................... $ 5 $ 2,296 $ 146 $ 161
--------- --------- --------- -------
--------- --------- --------- -------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-82
<PAGE>
ROYAL CARE OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- --------- FOR THE
SIX MONTHS ENDED
JUNE 30, 1996
-----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................................... $ 359 $ (1,486) $ (2,150) $ 15
Adjustments to reconcile net income (loss) to cash provided
by (used in) operating activities:
Provision for doubtful accounts.......................... 416 1,154 1,543 377
Depreciation and amortization............................ 318 646 497 273
Gain on sale of equipment................................ -- (254) -- --
Deferred compensation.................................... -- 4 19 --
(Increase) decrease in assets:
Accounts receivable.................................... 1,390 (1,437) (1,788) (1,067)
Inventory.............................................. (403) 136 (14) (318)
Other assets........................................... 33 46 (144) 133
Increase (decrease) in liabilities:
Accounts payable....................................... 515 887 (279) (317)
Accrued expenses....................................... (188) (137) 240 274
Due to unaffiliated business........................... -- 2,017 67 --
--------- --------- --------- -------
Net cash provided by (used in) operating
activities.......................................... 2,440 1,576 (2,009) (630)
--------- --------- --------- -------
Cash flows from investing activities:
Proceeds from sale of property and equipment............... -- 545 -- --
Purchase of property and equipment......................... (208) (197) (85) (79)
Acquisition of business.................................... (175) -- (459) --
--------- --------- --------- -------
Net cash (used in) provided by investing
activities.......................................... (383) 348 (544) (79)
--------- --------- --------- -------
Cash flows from financing activities:
Proceeds from issuance of debt............................. -- -- -- 700
Principal payments of long-term debt....................... (430) (1,298) (257) (191)
Investment by (to) Foster Medical Supply, Inc.............. (996) 3,777 -- --
--------- --------- --------- -------
Net cash (used in) provided by financing
activities.......................................... (1,426) 2,479 (257) 509
--------- --------- --------- -------
Increase (decrease) in cash.................................. 631 4,403 (2,810) (200)
Cash, beginning of period.................................... 169 800 5,203 2,393
--------- --------- --------- -------
Cash, end of period.......................................... $ 800 $ 5,203 $ 2,393 $ 2,193
--------- --------- --------- -------
--------- --------- --------- -------
Cash paid during the period for:
Interest................................................... $ 786 $ 744 $ 595 $ 81
Income taxes............................................... $ -- $ 20 $ 10 $ --
</TABLE>
Noncash transactions:
During 1993 and 1994, Royal Care of America, Inc. and Subsidiaries acquired
vehicles and equipment in the amount of $251 and $193, respectively, through
capital leases.
During 1995, Royal Care of America, Inc. and Subsidiaries acquired two
businesses for cash payments of $459 and a note payable of $100. Of the purchase
price, $34 was allocated to inventory, $73 was allocated to property, plant and
equipment, $50 was allocated to a non-compete agreement and the balance was
recorded as goodwill.
The accompanying notes are an integral part of the consolidated financial
statements.
F-83
<PAGE>
ROYAL CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
1. BASES OF PRESENTATION AND REPORTING ENTITY
Royal Care of America, Inc. and Subsidiaries (the "Company"), located in
Malta, New York, is a distributor of pharmaceuticals to nursing homes, adult
care homes and other institutions located in upstate New York. The Company is
also engaged in the sale of products for adult medical-nutritional needs,
hi-tech wound care and urological ostomy supplies to patients primarily in
upstate New York and also in Michigan, Florida, Connecticut, Pennsylvania and
Ohio. On August 5, 1996, the Company sold the majority of its assets and
transferred its liabilities, except for the restricted cash, Mezzanine debt and
amounts due to unaffiliated company, to Royal Care Holdings, Inc. ("RCH"), an
indirect subsidiary of American Medserve Corporation ("AMC"). The purchase price
consisted of $7.8 million of cash and a $2 million convertible promissory note
of AMC. RCH may also pay the Company certain contingent amounts based upon
earnings of RCH for the six month period ending December 31, 1996. In addition,
the purchase price may be increased or decreased by a net worth adjustment based
on the closing balance sheet of the Company as of August 5, 1996.
Prior to September 1994, the Company was a division of Foster Medical
Supply, Inc. ("FMS"). In September 1994, FMS sold certain assets and transferred
certain liabilities of its medical supply distribution business (the "base
business"), to an unaffiliated corporation (see Note 8), and the Company became
the sole remaining business of FMS and FMS was renamed Royal Care of America,
Inc. The Company is currently involved in a dispute related to the base business
sale transaction (see Note 8) and has placed approximately $2,100 in an escrow
account and established a corresponding liability to account for this dispute.
Included in the accompanying 1994 consolidated statement of operations and
changes in accumulated capital is $3,777 which primarily represents the gain on
the sale of the base business that was contributed by FMS to the Company.
The consolidated statements of operations and changes in accumulated capital
and cash flows for the years ended December 31, 1994 and 1993 have been prepared
to present the historical results of operations and cash flows of the Company,
excluding the results of operations and cash flows of the base business as it
operated within FMS.
The consolidated statements of operations and changes in accumulated capital
include all direct selling, general and administrative expenses, interest
expense and intangible asset amortization. For the periods prior to September 1,
1994, selling, general and administrative and interest expenses not directly
attributable to either the base business or the Company have been allocated to
the Company on the proportion of cost of sales during 1993. These charges cover
the costs of product distribution, finance and administrative support,
management information systems, facilities and corporate expense. For these
services, the Company was allocated the following costs:
<TABLE>
<CAPTION>
1993 1994
--------- ---------
<S> <C> <C>
Selling, general and administrative......................................... $ 1,339 $ 617
Interest expense............................................................ 183 202
</TABLE>
These represent approximately 8.7% of the related indirect expenses for the
periods ended December 31, 1993 and 1994. Management believes this allocation
method is reasonable based on the Company's use of such facilities, services and
financing. However, the results of operations presented may not be indicative of
the results that would have been achieved had the Company operated as a
non-affiliated entity.
In September 1994, the Company entered into a purchase and distribution
agreement, for all medical supplies, with the acquiror of the base business (see
Note 8). The agreement is for cost plus
F-84
<PAGE>
ROYAL CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
1. BASES OF PRESENTATION AND REPORTING ENTITY (CONTINUED)
18%, which includes distribution costs. All costs under this agreement are
included in cost of sales in the accompanying financial statements. Distribution
costs incurred prior to September 1994 are included in the allocated indirect
selling, general and administrative expenses above.
During 1995, the Company entered into a joint venture to provide
psychogerontology services to patients in long-term care facilities.
The accompanying unaudited consolidated financial statements, reflect, in
the opinion of management, all adjustments, consisting of only normal and
recurring adjustments, necessary for a fair presentation of the consolidated
financial position at June 30, 1996, and the consolidated results of operations
for the six month period ended June 30, 1996. The results of operations for the
six month period ended June 30, 1996 are not necessarily indicative of the
results to be expected for the full year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Royal Care of
America, Inc., Pharmacy Associates, Inc. and Royal Care Management Services.
Significant intercompany accounts and transactions have been eliminated in the
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. Estimates also affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those results.
NET SALES:
Revenues are recognized when goods are shipped or services are provided. A
significant portion of the Company's revenue is derived through arrangements
with Medicare and Medicaid. As such, the Company is dependent on these payors to
carry out its operating activities.
INVENTORIES:
Inventories consist principally of pharmaceuticals purchased for resale, and
are stated at lower of cost or market. Cost is determined by using the first-in,
first-out method. The Company purchases the majority of its items for resale
from two suppliers. Prior to the sale of the base business, the Company
purchased the majority of its medical supply inventory from the base business at
cost.
PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost. Depreciation is computed on a
straight-line basis over the estimated useful lives of the assets, primarily
from 3 to 5 years. Gains and losses resulting from the disposition of property
and equipment are recognized in the period in which the transaction occurs.
INTANGIBLE ASSETS:
Goodwill and agreements not to compete associated with the acquisition of
the business are being amortized on a straight-line basis over five to ten
years.
F-85
<PAGE>
ROYAL CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED ORGANIZATION AND FINANCING COSTS:
Costs associated with securing financing and organization of the business
have been deferred. These costs are being amortized on a straight-line basis
over 5 years. Accumulated amortization was $20 and $29 as of December 31, 1994
and 1995. Amortization expense was $11, $39 and $9 for the years ended December
31, 1993, 1994, and 1995.
INCOME TAXES:
The Company has adopted the liability method of accounting for income taxes,
as set forth in Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" (SFAS 109). SFAS 109 prescribes an asset and liability
approach that requires the recognition of deferred taxes for the difference
between the financial statement and tax bases of assets and liabilities
utilizing current tax rates. The effect of any future change in tax rates is
recognized in the period in which the change occurs. Deferred tax assets are
recognized, net of any valuation allowance, for deductible temporary differences
and operating loss and credit carryforwards.
3. FIXED ASSETS
The components of fixed assets as of December 31, 1994 and 1995 are
summarized below:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Furniture and equipment.................................................. $ 333 $ 455
Leasehold improvements................................................... 112 149
Vehicles................................................................. 59 55
Furniture and equipment under capital lease.............................. 316 316
Vehicles under capital lease............................................. 204 172
--------- ---------
1,024 1,147
Accumulated depreciation and amortization (including accumulated
amortization on leased property of $169 and $279 as of December 31, 1994
and 1995, respectively)................................................. 325 523
--------- ---------
$ 699 $ 624
--------- ---------
--------- ---------
</TABLE>
Depreciation and amortization expense relating to fixed assets was $181,
$204 and $233 for the years ended December 31, 1993, 1994, and 1995.
4. ACQUISITIONS
In 1995, the Company acquired the assets of K&K Pharmacy. The purchase price
was $400 which included $50 for a covenant not to compete. The acquisition was
paid for in cash and notes. Long-term debt includes $100 relating to the
acquisition at December 31, 1995. The fair value of the assets acquired was
$123.
In December 1995, the Company acquired the assets of another pharmacy in
Buffalo, New York. The purchase price was $159 and fair value of assets received
was $34.
In 1992, the Company acquired the outstanding stock of Pharmacy Associates
of Glens Falls and in 1993 acquired certain assets of Kinney Drugs, Inc.
F-86
<PAGE>
ROYAL CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
4. ACQUISITIONS (CONTINUED)
The difference between the fair value of assets purchased and acquisition
price of the above acquisitions has been recorded as goodwill. The following
table summarizes the amounts included in goodwill at December 31, 1994 and 1995:
<TABLE>
<CAPTION>
COVENANT BALANCE AT
EXCESS NOT TO ACCUMULATED DECEMBER 31,
PURCHASE COMPETE AMORTIZATION 1995
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
K&K........................................ $ 277 $ 50 $ (72) $ 255
Buffalo.................................... 125 -- -- 125
Pharmacy Associates and Kinney Drugs,
Inc....................................... 1,000 750 (791) 959
----------- ----- ------ -------------
$ 1,402 $ 800 $ (863) $ 1,339
----------- ----- ------ -------------
----------- ----- ------ -------------
<CAPTION>
COVENANT BALANCE AT
EXCESS NOT TO ACCUMULATED DECEMBER 31,
PURCHASE COMPETE AMORTIZATION 1994
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Pharmacy Associates........................ $ 1,000 $ 750 $ (607) $ 1,143
----------- ----- ------ -------------
----------- ----- ------ -------------
</TABLE>
In 1994, the Company reduced the Pharmacy Associates excess purchase price
to its estimated fair value, which resulted in $350 of additional amortization
expense. In addition, effective January 1, 1994, the Company reduced its
amortization period for the Pharmacy Associates excess purchase price from
twenty years to seven years, to reflect the estimated life of the economic value
of that asset. Amortization expense was $51, $480 and $256 for the years ended
December 31, 1993, 1994, and 1995.
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Note payable, Mezzanine debt (see Note 7), bearing interest at 14%. Interest payments are due
quarterly, principal is due and payable in 8 equal semiannual payments commencing May 31,
1995, with final payment on November 30, 1998. The required payments of $850 were not made
during 1995. The lenders have waived the event of default................................... $ 3,400 $ 3,400
Capital leases on various vehicle and equipment, collateralized by the related assets,
bearing various market rates of interest, maturing in various years through 2000............ 361 236
Covenant not to compete agreement for Pharmacy Associates acquisition. Annual payments of $75
payable through 2003........................................................................ 600 525
Note payable to former owner of K&K Associates, without interest, payable January 1996....... -- 100
Note payable to former owners of Pharmacy Associates without interest, discounted at 7.5%,
payable in monthly installments of $8 through September 30, 2002............................ 580 523
--------- ---------
4,941 4,784
Less current portion......................................................................... 1,112 2,067
--------- ---------
$ 3,829 $ 2,717
--------- ---------
--------- ---------
</TABLE>
F-87
<PAGE>
ROYAL CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
5. LONG-TERM DEBT (CONTINUED)
The Mezzanine debt requires certain financial ratios to be met. At December
31, 1995, the Company was not in compliance with maintaining a specified minimum
tangible capital base and cash flow ratio. The debt holders have waived these
events of default. The Mezzanine debt was paid in August 1996 in conjunction
with the sale of the assets of the Company (see Note 1).
The aggregate amounts of long-term debt and capital lease obligations
maturing in each of the next five years are as follows:
<TABLE>
<CAPTION>
LONG-TERM CAPITAL
DEBT LEASES
----------- -----------
<S> <C> <C>
1996..................................................................... $ 1,937 $ 153
1997..................................................................... 992 93
1998..................................................................... 997 17
1999..................................................................... 152 2
2000..................................................................... 158 2
Thereafter............................................................... 312 --
----------- -----
$ 4,548 267
-----------
-----------
Less amount representing interest........................................ 31
-----
Present value of capital leases.......................................... $ 236
-----
-----
</TABLE>
6. INCOME TAXES
The components of income taxes are:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Current........................................................... $ 465 $ -- $ --
Deferred.......................................................... (186) -- --
--------- --------- ---------
Total......................................................... $ 279 $ -- $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
The difference between the federal statutory tax rate and the Company's
effective tax rate is primarily attributable to the maintenance of a full
valuation allowance against net deferred tax assets in 1994 and 1995, and to the
effect of state taxes and to certain non-deductible expenses in 1993.
The temporary difference giving rise to a significant portion of the net
deferred tax asset position at December 31, 1994 and 1995 is the net operating
loss carryover.
The Company has recorded a full valuation allowance against its net deferred
tax assets totaling approximately $3,206 at December 31, 1995, an increase in
the valuation allowance of approximately $748 from December 31, 1994.
At December 31, 1995 the Company has federal net operating loss carryovers
for income tax purposes of approximately $7,100. These loss carryovers will
begin to expire in 2007. The future benefit, if any, of the Company's net
deferred tax assets, including its net operating loss carryovers, will remain
with Royal Care of America, Inc.
7. RELATED PARTY TRANSACTIONS
The Mezzanine debt of $3,400 is due to two of the Company's stockholders.
Accrued expenses includes interest of $40 at December 31, 1994 and 1995.
Interest expense of $595, $583 and $476 is included in the consolidated
statements of operations for the years ended December 31, 1993, 1994 and 1995.
F-88
<PAGE>
ROYAL CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
8. COMMITMENTS AND CONTINGENCIES
CONTINGENT LIABILITY:
In August 1994, the Company sold its medical supply distribution base
business to an unaffiliated corporation. As a result of this sale, there is a
disputed balance due to this unaffiliated corporation. The Company has
established an escrow account and a corresponding liability of approximately
$2,100 as of December 31, 1995. The Company's management estimates that the
outcome of this dispute will not result in an additional liability.
The Company has a purchase commitment with the unaffiliated corporation
discussed above. The Company is committed to purchase all medical supplies for
resale at cost plus 18%, which includes distribution, through 1997. The
commitment can be rescinded with six months notice or two months notice with
cause.
LITIGATION:
The Company is a defendant in various legal actions in the normal course of
business. In the opinion of the Company's management (based in part on the
advice of outside counsel), the resolutions of these actions will have no
material effect on the Company's results of operations or financial position.
OPERATING LEASES:
The Company leases certain facilities and equipment under noncancelable
operating leases, including expense allocable to the Company in 1994 and 1993,
which expire in varying years through 1999. Taxes, insurance and maintenance
expenses related to the leased property are paid by the Company. Total rent
expense under noncancelable operating leases, including rent expense allocated
to the Company during 1993 and 1994 (see Note 1), was $242, $248 and $181 in
1993, 1994, and 1995, respectively. Future minimum lease commitments under
noncancelable operating leases at December 31, 1995 are approximately as
follows:
<TABLE>
<S> <C>
1996................................................................. $ 223
1997................................................................. 232
1998................................................................. 190
1999................................................................. 117
---------
$ 762
---------
---------
</TABLE>
9. 401(K) PLAN
The Company's 401(k) plan covers substantially all employees who meet
minimum age and service requirements. Company contributions to the plan may be
made at the discretion of the Board of Directors. The Company made no
contributions to the plan in 1993, 1994 and 1995. In December 1995, the Company
decided to terminate the plan and will distribute plan assets to participants.
10. CONCENTRATION OF CREDIT RISK
The Company grants credit, without collateral, in the normal course of
business, to nursing homes, private and governmental institutions, and health
care agencies. Amounts due from Medicare and Medicaid amounted to approximately
45% of accounts receivable at December 31, 1995. The Company performs ongoing
credit evaluations of its customers and maintains allowances for potential
credit losses which, when realized, have been within the range of management's
expectations. Management does not believe significant credit risk exists at
December 31, 1995.
F-89
<PAGE>
ROYAL CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
10. CONCENTRATION OF CREDIT RISK (CONTINUED)
The Company maintains an escrow account at a financial institution. Accounts
at the institution are insured by the Federal Deposit Insurance Corporation up
to $100. Uninsured balances amounted to $2,027 at December 31, 1995.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist principally of accounts
receivable, accounts payable and debt, for which the carrying amount
approximates fair value. Fair values were estimated based on current rates
offered to the Company for debt with similar terms and maturities.
F-90
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Sterling Healthcare Services, Inc. (formerly Sterling Acquisition Partners,
Inc.)
We have audited the accompanying statements of income, stockholders' equity,
and cash flows of Sterling Acquisition Partners, Inc. for the two years ended
December 31, 1994 and for the period from January 1, 1995 to July 31, 1995.
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 financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Sterling
Acquisition Partners, Inc. for the two years ended December 31, 1994 and for the
period from January 1, 1995 to July 31, 1995, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
April 26, 1996
F-91
<PAGE>
STERLING ACQUISITION PARTNERS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM
DECEMBER 31 JANUARY 1,
---------------------------- 1995 TO
1993 1994 JULY 31, 1995
------------- ------------- -------------
<S> <C> <C> <C>
Revenues............................................................. $ 5,842,590 $ 6,917,001 $ 4,502,498
Cost of goods sold................................................... 3,580,245 4,118,778 2,687,770
------------- ------------- -------------
Gross profit......................................................... 2,262,345 2,798,223 1,814,728
Selling, general, and administrative expenses........................ 1,803,409 2,216,119 1,362,170
------------- ------------- -------------
Income from operations............................................... 458,936 582,104 452,558
Other (expense) income:
Interest expense................................................... (23,645) (56,506) (43,419)
Other, net......................................................... 115,703 71,557 42,326
------------- ------------- -------------
Net income......................................................... $ 550,994 $ 597,155 $ 451,465
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes.
F-92
<PAGE>
STERLING ACQUISITION PARTNERS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE TWO YEARS ENDED DECEMBER 31, 1993 AND 1994
AND FOR THE PERIOD FROM JANUARY 1, 1995 TO JULY 31, 1995
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES PAR VALUE CAPITAL EARNINGS EQUITY
--------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992....................... 1,000 $ 1,000 $ 99,000 $ 517,874 $ 617,874
Distributions...................................... -- -- -- (700,000) (700,000)
Net income......................................... -- -- -- 550,994 550,994
--------- ----------- ----------- ------------- -------------
Balance at December 31, 1993....................... 1,000 1,000 99,000 368,868 468,868
Distributions...................................... -- -- -- (270,000) (270,000)
Net income......................................... -- -- -- 597,155 597,155
--------- ----------- ----------- ------------- -------------
Balance at December 31, 1994....................... 1,000 1,000 99,000 696,023 796,023
Distributions...................................... -- -- -- (30,000) (30,000)
Net income......................................... -- -- -- 451,465 451,465
--------- ----------- ----------- ------------- -------------
Balance at July 31, 1995........................... 1,000 $ 1,000 $ 99,000 $ 1,117,488 $ 1,217,488
--------- ----------- ----------- ------------- -------------
--------- ----------- ----------- ------------- -------------
</TABLE>
See accompanying notes.
F-93
<PAGE>
STERLING ACQUISITION PARTNERS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
YEAR ENDED DECEMBER 31 1995
--------------------------- TO JULY 31,
1993 1994 1995
------------ ------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.......................................................... $ 550,994 $ 597,155 $ 451,465
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization..................................... 145,895 76,392 36,828
Allowance for doubtful accounts................................... 12,500 1,500 34,000
Loss on sale of property and equipment............................ -- 1,542 --
Changes in operating assets and liabilities:
Accounts receivable............................................. (121,618) (156,719) (122,036)
Inventories..................................................... (16,269) (42,123) (46,166)
Prepaid expenses and other...................................... (12,762) (13,750) (8,589)
Other assets.................................................... 1,210 2,871 377
Accrued expenses................................................ 18,356 61,877 701
Accounts payable and other...................................... 119,757 205,768 162,330
------------ ------------- --------------
Net cash provided by operating activities........................... 698,063 734,513 508,910
INVESTING ACTIVITIES
Purchases of property and equipment................................. (95,944) (92,057) (46,410)
Proceeds from sale of assets........................................ -- 18,746 --
------------ ------------- --------------
Net cash used in investing activities............................... (95,944) (73,311) (46,410)
FINANCING ACTIVITIES
Proceeds from long-term debt, net................................... (70,149) 46,679 (48,614)
Proceeds from notes payable to stockholders......................... -- 70,000 --
Distributions to stockholders....................................... (790,000) (330,000) (30,000)
Advances to related entity.......................................... (57,095) (447,881) (383,886)
------------ ------------- --------------
Net cash used in financing activities............................... (917,244) (661,202) (462,500)
------------ ------------- --------------
Net decrease in cash................................................ (315,125) -- --
Cash at beginning of period......................................... 315,440 315 315
------------ ------------- --------------
Cash at end of period............................................... $ 315 $ 315 $ 315
------------ ------------- --------------
------------ ------------- --------------
Supplemental disclosure of cash flow information and noncash
investing and financing activities
Acquisition of customer listing in exchange for forgiveness of a
note receivable.................................................... $ -- $ -- $ 116,622
Cash paid during the year for interest.............................. 22,645 45,536 37,253
</TABLE>
See accompanying notes.
F-94
<PAGE>
STERLING ACQUISITION PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994
AND THE PERIOD FROM JANUARY 1, 1995 TO JULY 31, 1995
1. DESCRIPTION OF BUSINESS
Sterling Acquisition Partners, Inc., dba Sterling Healthcare Services (the
Company), provides pharmaceutical products, medical supplies, intravenous
therapies, and related products, and consulting services to patients in
long-term care and assisted living facilities throughout the state of Louisiana.
On August 3, 1995, the Company sold substantially all of its assets and
liabilities to AMC Regional Holdings, Inc. No significant operations occurred
subsequent to July 31, 1995 and prior to the August 3, 1995 sale.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING ESTIMATES
Accounting estimates are an integral part of the financial statements
prepared by Company management and are based on management's current judgments.
These judgments are based on knowledge and experience about past and current
events and on assumptions about future events. The Company will, when determined
necessary, accrue for estimated liabilities when the financial impact is
probable and can be estimated by management. Actual results may differ from
those estimates.
REVENUE RECOGNITION
Revenue is recognized when the products or services are provided to the
Company's customers. As a significant portion of the Company's revenues are paid
through the Louisiana Department of Public Aid (Medicaid) and Medicare programs
and are subject to adjustment by the programs, the Company monitors its
receivables and reports such revenue at the net realizable amounts to be
received from these programs.
INVENTORIES
Inventories, which consist principally of pharmaceuticals and medical
supplies, are stated at the lower of cost (first in, first out basis) or market.
The cost of goods sold recognized by the Company consists principally of cost of
products and medical supplies.
EQUIPMENT DEPRECIATION
Equipment, consisting principally of office and transportation equipment, is
stated at cost less accumulated depreciation and amortization. Equipment is
depreciated or amortized using either straight-line or accelerated methods based
on the estimated useful lives of the assets.
INTANGIBLE ASSETS AMORTIZATION
Intangible assets consist primarily of customer listings (see Note 3) and
pharmacy service agreements which are amortized over five- and three-year terms,
respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include accounts receivable, accounts
payable, distributions payable, accrued expenses, notes receivable from a
related entity, notes payable to stockholders, and debt. The fair values of all
financial instruments were not materially different from their carrying values.
3. RELATED PARTY TRANSACTIONS
The Company routinely provides operating advances to a related entity with
substantially the same ownership as that of the Company. Effective December 31,
1994, the net amounts of these
F-95
<PAGE>
STERLING ACQUISITION PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994
AND THE PERIOD FROM JANUARY 1, 1995 TO JULY 31, 1995
3. RELATED PARTY TRANSACTIONS (CONTINUED)
operating advances was converted to a demand note receivable bearing interest at
8% per annum. The note receivable is personally guaranteed on a pro rata basis
by the stockholders of this related entity. Other income for the period from
January 1, 1995 to July 31, 1995, includes approximately $28,000 of interest
related to this note receivable.
The Company has notes payable to stockholders representing amounts due on
demand bearing interest at 8% per annum. Interest expense in relation to these
notes was $4,000 and $8,343 for the years ended December 31, 1993 and 1994, and
$14,059 for the period from January 1, 1995 to July 31, 1995.
On June 1, 1995, the Company purchased a customer listing (see Note 2) from
a related entity in exchange for a note receivable of $116,622, which had been
recorded on the Company's financial statements.
The Company compensates its Board of Directors who are also stockholders of
the Company for attendance at meetings. Such fees are paid in amounts that are
at the discretion of Company management. These fees amounted to $45,000 and
$160,000 for the years ended December 31, 1993 and 1994, and $0 for the period
from January 1, 1995 to July 31, 1995.
The Company subleases office space to a related entity with substantially
the same ownership as that of the Company. Sublease income amounted to $8,607
and $19,129 for the years ended December 31, 1993 and 1994, and $12,750 for the
period from January 1, 1995 to July 31, 1995, and is netted against rent
expense.
4. S CORPORATION ELECTION
The stockholders of the Company have elected to be taxed as an S corporation
under the provisions of the Internal Revenue Code effective April 1, 1992.
Accordingly, the Company is not subject to federal or state income taxes as the
income of the Company is included in the taxable income of its stockholders.
The Internal Revenue Service (IRS) commenced an examination of the Company's
federal income tax return for the year ended March 31, 1992. The Company
received the final results of this examination and accrued, during the year
ended December 31, 1994, $32,300 in additional taxes and approximately $6,600 in
interest in relation to this examination.
5. COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment under noncancelable operating leases.
These leases contain various terms and provide for renewal at prevailing market
rates.
Future minimum lease payments for noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- -------------------------------------------------------------
<S> <C>
1996......................................................... $ 82,362
1997......................................................... 64,432
1998......................................................... 44,670
1999......................................................... --
2000......................................................... --
-----------
$ 191,464
-----------
-----------
</TABLE>
F-96
<PAGE>
STERLING ACQUISITION PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994
AND THE PERIOD FROM JANUARY 1, 1995 TO JULY 31, 1995
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rent expense amounted to approximately $97,000, $99,000, and $59,000 for the
years ended December 31, 1993 and 1994, and for the period from January 1, 1995
to July 31, 1995, respectively.
6. EMPLOYEE BENEFIT PLAN
The Company has an employee benefit plan (Plan) which covers substantially
all of its full-time employees. Employees can elect to make pretax contributions
of a percentage of their annual compensation not to exceed IRS limitations.
Matching and annual contributions are at the discretion of the Company's Board
of Directors. The expense of the Company related to the Plan was approximately
$18,294 and $13,741 for the years ended December 31, 1993 and 1994, and $0 for
the period from January 1, 1995 to July 31, 1995.
7. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk primarily consist of accounts receivable due from
Medicaid, Medicare, third-party insurance companies, and individuals in various
geographic locations. Credit risks with respect to these receivables are limited
due to the large number of patients comprising the Company's customer base.
8. STOCKHOLDERS' EQUITY
The Company has authorized the issuance of 100,000 shares of no-par-value
preferred stock. No shares are issued and outstanding.
F-97
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Williamson Drug Company, Inc.
Harrisonburg, Virginia
We have audited the accompanying balance sheets of Williamson's
Pharmacy-Institutional Division (a division of Williamson Drug Company, Inc.) as
of June 30, 1993, June 30, 1994 and August 10, 1994, and the related statements
of income and divisional equity and cash flows for the four months ended June
30, 1993, the year ended June 30, 1994 and the period from July 1, 1994 through
August 10, 1994. 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 opinions.
In our report dated October 11, 1994, we expressed a qualified opinion on
the financial statements for the year ended June 30, 1994 because we did not
observe the physical inventory taken as of June 30, 1993, and we had not
performed adequate alternative tests of inventory. We have now performed
additional tests of inventory and satisfied ourselves to the recorded inventory
value. Accordingly, our present opinion on the financial statements for the year
ended June 30, 1994 as presented herein, is different from that expressed in our
previous report.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Williamson's
Pharmacy-Institutional Division as of June 30, 1993, June 30, 1994 and August
10, 1994, and the results of its operations and its cash flows for the four
months ended June 30, 1993, the year ended June 30, 1994 and the period from
July 1, 1994 through August 10, 1994, in conformity with generally accepted
accounting principles.
S.B. HOOVER & COMPANY, L.L.P.
Harrisonburg, Virginia
July 18, 1996
F-98
<PAGE>
WILLIAMSON'S PHARMACY-INSTITUTIONAL DIVISION
(A DIVISION OF WILLIAMSON DRUG COMPANY, INC.)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
AUGUST 10, JUNE 30, JUNE 30,
1994 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents.......................................... $ 100,004 $ -- $ --
Trade receivables (Net of allowance)............................... 291,050 324,101 282,184
Medicaid receivables (Net of allowance)............................ 280,639 259,356 247,281
Accounts receivable -- Related parties............................. 20,809 28,506 9,936
Income tax receivable.............................................. -- -- 8,805
Inventories........................................................ 256,079 198,264 171,532
Prepaid expenses................................................... 18,335 25,842 24,437
Deferred income taxes.............................................. 40,317 26,616 10,221
------------- ------------- -------------
Total Current Assets............................................. 1,007,233 862,685 754,396
------------- ------------- -------------
Property and Equipment
Office equipment................................................... 103,352 101,712 94,932
Nursing home equipment............................................. 222,271 222,271 211,234
Automotive equipment............................................... 22,276 22,276 50,152
Leasehold improvements............................................. 9,649 9,649 4,361
------------- ------------- -------------
357,548 355,908 360,679
Less accumulated depreciation...................................... 197,416 191,886 178,533
------------- ------------- -------------
Net Property and Equipment......................................... 160,132 164,022 182,146
------------- ------------- -------------
Intangible and Other Assets.......................................... 28,519 30,961 91,739
------------- ------------- -------------
Total Assets..................................................... $ 1,195,884 $ 1,057,668 $ 1,028,281
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND DIVISIONAL EQUITY
Current Liabilities
Bank overdrafts.................................................... $ -- $ 96,512 $ 9,750
Accounts payable................................................... 244,773 184,708 141,549
Accrued expenses................................................... 39,826 81,529 50,357
Short-term debt.................................................... 450,000 243,000 286,500
Current portion of long-term debt.................................. 11,328 11,328 27,522
Income taxes payable to taxing authorities......................... 51,208 49,458 --
Income taxes payable -- related parties............................ 42,062 42,062 --
------------- ------------- -------------
Total Current Liabilities........................................ 839,197 708,597 515,678
------------- ------------- -------------
Long-Term Liabilities
Deferred income taxes.............................................. 22,668 15,830 16,117
Long-term debt..................................................... 4,164 4,164 39,782
------------- ------------- -------------
Total Long-Term Liabilities...................................... 26,832 19,994 55,899
------------- ------------- -------------
Total Liabilities................................................ 866,029 728,591 571,577
------------- ------------- -------------
Divisional Equity.................................................... 329,855 329,077 456,704
------------- ------------- -------------
Total Liabilities and Divisional Equity.......................... $ 1,195,884 $ 1,057,668 $ 1,028,281
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-99
<PAGE>
WILLIAMSON'S PHARMACY-INSTITUTIONAL DIVISION
(A DIVISION OF WILLIAMSON DRUG COMPANY, INC.)
STATEMENTS OF INCOME AND DIVISIONAL EQUITY
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1994
THROUGH FOUR MONTHS
AUGUST 10, YEAR ENDED ENDED
1994 JUNE 30, 1994 JUNE 30, 1993
-------------- ------------- -------------
<S> <C> <C> <C>
Revenues........................................................... $ 506,887 $ 4,278,233 $ 1,249,071
Cost of Goods Sold................................................. 291,160 2,431,147 693,188
-------------- ------------- -------------
Gross Profit..................................................... 215,727 1,847,086 555,883
Selling, General and Administrative Expenses....................... 219,455 1,617,259 520,936
-------------- ------------- -------------
Income (Loss) from Operations.................................... (3,728) 229,827 34,947
Other Income (Expenses)
Miscellaneous income............................................. 2,262 18,172 --
Interest expense................................................. (2,869) (29,428) (8,260)
-------------- ------------- -------------
Total Other Income (Expenses).................................... (607) (11,256) (8,260)
-------------- ------------- -------------
Income (Loss) before Income Tax.................................. (4,335) 218,571 26,687
Income Tax Benefit (Expense)....................................... 5,113 (86,231) (6,589)
-------------- ------------- -------------
Net Income....................................................... 778 132,340 20,098
Divisional Equity, Beginning Balance............................... 329,077 456,704 461,972
Assets Used or Liabilities Incurred for the Benefit of Williamson's
Pharmacy -- Retail Division....................................... -- (259,967) (25,366)
-------------- ------------- -------------
Divisional Equity, Ending Balance................................ $ 329,855 $ 329,077 $ 456,704
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-100
<PAGE>
WILLIAMSON'S PHARMACY-INSTITUTIONAL DIVISION
(A DIVISION OF WILLIAMSON DRUG COMPANY, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1994
THROUGH YEAR FOUR MONTHS
AUGUST 10, ENDED ENDED
1994 JUNE 30, 1994 JUNE 30, 1993
-------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income........................................................... $ 778 $ 132,340 $ 20,098
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation....................................................... 5,531 56,371 17,898
Amortization....................................................... 2,444 37,888 13,106
Deferred income taxes.............................................. (6,863) (16,682) --
Other assets....................................................... -- (1,400) --
Loss on disposal of property and equipment......................... -- (745) 924
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable....................... 19,465 (72,562) 35,690
Decrease (increase) in prepaid expenses.......................... 7,504 (1,407) (11,121)
Increase in inventories.......................................... (57,815) (26,732) (2,907)
Decrease (increase) in income tax refund......................... -- 8,805 (592)
(Decrease) increase in bank overdrafts........................... (96,512) 86,762 (69,790)
Increase in accounts payable..................................... 60,065 43,161 17,918
Increase in income taxes payable................................. 1,750 91,520 --
(Decrease) increase in accrued expenses.......................... (41,703) 31,172 938
-------------- ------------- -------------
Net Cash Provided by (Used in) Operating Activities................ (105,356) 368,491 22,162
Cash Flows from Investing Activities:
Purchases of property and equipment................................ (1,640) (45,381) (32,535)
Proceeds from disposals of property and equipment.................. -- 7,879 --
-------------- ------------- -------------
Net Cash Used in Investing Activities.............................. (1,640) (37,502) (32,535)
Cash Flows from Financing Activities:
Net increase (decrease) in short-term debt......................... 207,000 (43,500) 48,000
Repayment of long-term debt........................................ -- (27,522) (12,261)
Assets used or liabilities incurred for the benefit of Williamson's
Pharmacy -- Retail Division....................................... -- (259,967) (25,366)
-------------- ------------- -------------
Net Cash Provided by (Used in) Financing Activities................ 207,000 (330,989) 10,373
-------------- ------------- -------------
Net Increase in Cash and Cash Equivalents.......................... 100,004 -- --
Cash and Cash Equivalents, Beginning of Period......................... -- -- --
-------------- ------------- -------------
Cash and Cash Equivalents, End of Period............................. $ 100,004 $ -- $ --
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-101
<PAGE>
WILLIAMSON'S PHARMACY-INSTITUTIONAL DIVISION
(A DIVISION OF WILLIAMSON DRUG COMPANY, INC.)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND NATURE OF BUSINESS:
Williamson Drug Company, Inc. (the Company) was incorporated on July 1,
1955, and as of July 1, 1993, operated a retail pharmacy in Harrisonburg,
Virginia (Retail Division) and a pharmacy to provide services for extended care
facilities located within an approximately 100 mile radius of Harrisonburg
(Institutional Division). As of July 1, 1993, the Company also owned 100% of two
inactive subsidiaries, which held no assets or liabilities. The Company grants
credit to customers within its service area.
On November 1, 1993, the Company transferred certain assets and liabilities
from its Retail Division to one of the inactive subsidiaries, and the subsidiary
concurrently purchased the assets and assumed the liabilities of Hughes
Pharmacy, Inc. Until August 11, 1995, Williamson Drug Company, Inc. held 100% of
the voting common stock of the new corporation, WilliamsonHughes Pharmacy and
Home Health (WilliamsonHughes).
These financial statements include only the assets, liabilities, results of
operations and cash flows for the Institutional Division of the Company from
March 1, 1993 through August 10, 1994. The Company's investment in
WilliamsonHughes Pharmacy and Home Health and any balances shared with
WilliamsonHughes are allocated to that company and excluded from these financial
statements. The results of operations of the retail division prior to November
1, 1993 are also excluded from these financial statements.
NOTE 2 -- SUBSEQUENT EVENTS:
On August 11, 1994, the Company allocated any remaining joint assets and
liabilities to WilliamsonHughes, and distributed its common shares in
WilliamsonHughes to the Company's sole stockholder. Concurrent with the transfer
of the investment in WilliamsonHughes, the Company's sole stockholder sold 90%
of his common shares (totaling 21.6 shares) of Williamson Drug Company, Inc. to
AMC Regional Holdings, Inc., a fully-owned subsidiary of American Medserve
Corporation.
On April 14, 1995, the Company executed an asset purchase agreement with
Extended Care Associates, Inc. (ECA) of Lynchburg, Virginia, effective as of the
close of business on April 15, 1995. The purchase includes substantially all of
the operating assets of Extended Care Associates, Inc. ECA provides pharmacy
services to extended care facilities located in Lynchburg and the surrounding
area within an approximately 40 mile radius. The former operations of ECA are
continuing at the Lynchburg facility as a branch of the Company. The Company may
be required to make additional payments beginning in 1996 and ending in 2000,
aggregating up to $1,000,000 based on increases in operating income of the
Company for the five year period ending June 30, 2000. Concurrent with the
execution of the asset purchase agreement, the Company entered into management
agreements with the shareholders of Extended Care Associates, Inc. These
agreements provide for employment of these two executives for a period of five
years subject to certain termination provisions. The management agreement also
contains a noncompetition provision for a period of up to ten years. The Company
also entered into a five-year lease in May 1995 for pharmacy facilities and
office space in Lynchburg with the executives.
During the year ended June 30, 1995, the Company opened a branch operation
in Charlottesville, Virginia. Also, during 1996, the Company opened a branch
operation in Richmond, Virginia.
On April 1, 1996, the Company executed an asset purchase agreement and an
employment agreement with PRN, Inc., T/A Pharmacy Resource Network (PRN) of
Portsmouth, Virginia and the stockholder of PRN, effective as of the close of
business on April 30, 1996. The purchase includes substantially all of the
operating assets of PRN, Inc. The employment agreement starts on May 1,
F-102
<PAGE>
WILLIAMSON'S PHARMACY-INSTITUTIONAL DIVISION
(A DIVISION OF WILLIAMSON DRUG COMPANY, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SUBSEQUENT EVENTS: (CONTINUED)
1996 and continues for a period of five years, subject to certain termination
provisions. The agreement also contains a noncompetition agreement for a period
up to five years. Also executed on April 30, 1996, was a promissory note to the
order of PRN, Inc. for $99,951, due and payable on July 15, 1996. In connection
with the PRN purchase, the Company entered into a lease for 31 months for
pharmacy facilities and office space in Portsmouth, Virginia.
The Company also executed another asset purchase agreement on June 28, 1996,
with Woodbine Pharmacy, Inc. (Woodbine) of Manassas, Virginia. The purchase
includes substantially all of the operating assets of Woodbine.
Contemporaneously with the asset purchase agreement, the Company entered into an
employment agreement with the shareholder of Woodbine. This agreement states the
shareholder will be employed in the capacity of pharmacist manager for a period
of five years, subject to certain termination provisions. The agreement also
includes a noncompetition clause for a period of up to five years.
NOTE 3 -- SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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.
CASH EQUIVALENTS
For purposes of the statements of cash flows, the Institutional Division
considers all short-term debt securities purchased with a maturity of three
months or less to be cash equivalents.
INVENTORY VALUATION
Inventory consists of products held for resale and is valued at the lower of
cost (first-in, first-out method) or market.
DEPRECIATION
Depreciation expense is calculated using the straight-line method for all
assets. The depreciation methods are designed to amortize the cost of the assets
over their estimated useful lives. The estimated useful lives of major classes
of depreciable assets are as follows:
<TABLE>
<CAPTION>
ASSET YEARS
- --------------------------------------------------------------------------------------- ---------
<S> <C>
Office equipment....................................................................... 5-10
Nursing home equipment................................................................. 5-10
Automotive equipment................................................................... 3-5
Leasehold improvements................................................................. 7-31
</TABLE>
BAD DEBTS AND CONTRACTUAL ADJUSTMENTS
An allowance for contractual adjustments for Medicaid accounts receivable is
deducted from the related receivable. Medicaid accounts receivable are initially
recorded at the normal rates for private pay patients; an adjustment is
subsequently recorded for the difference between the private pay rates and the
rates allowed by Medicaid.
INTANGIBLE ASSETS
Intangible assets subject to amortization include purchased service
contracts and a non-competition agreement entered into during 1993. These costs
are being amortized on a straight-line basis over three years.
F-103
<PAGE>
WILLIAMSON'S PHARMACY-INSTITUTIONAL DIVISION
(A DIVISION OF WILLIAMSON DRUG COMPANY, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INCOME TAXES
Provisions for income taxes are based on amounts reported in the statements
of income and include deferred taxes on temporary differences in the recognition
of income and expense for tax and financial statement purposes. Deferred income
taxes are computed on the liability method as prescribed in Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
NOTE 4 -- ALLOWANCES FOR BAD DEBTS AND CONTRACTUAL ADJUSTMENTS:
Trade receivables are presented in the balance sheet net of allowances for
bad debts of $30,921 at August 10, 1994, $30,751 at June 30, 1994 and $14,258 at
June 30, 1993.
Medicaid receivables are presented in the balance sheet net of allowances
for contractual adjustments of $120,274 at August 10, 1994, $106,627 at June 30,
1994 and $93,807 at June 30, 1993.
NOTE 5 -- INCOME TAXES:
The components of the net deferred tax asset recognized in the Institutional
Division's balance sheets are as follows:
<TABLE>
<CAPTION>
AUGUST 10, JUNE 30, JUNE 30,
1994 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Deferred tax liability.................................. $ 22,668 $ 18,755 $ 17,592
Deferred tax asset...................................... (40,317) (29,788) (12,204)
Deferred tax asset valuation allowance.................. -- 247 508
---------- ---------- ----------
Net Deferred Tax (Asset) Liability.................. $ (17,649) $ (10,786) $ 5,896
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The deferred income tax liability is attributable to temporary differences
arising from the Institutional Division's use of accelerated depreciation
methods for calculating taxable income. The use of different depreciation
methods results in differences between the tax bases and the reported carrying
values of depreciable property and equipment. The deferred income tax asset is
primarily attributable to temporary differences arising from the recognition of
certain accrued expenses for financial reporting purposes that the Institutional
Division could not yet deduct in arriving at its taxable income.
The components of income tax expense attributable to continuing operations
are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1994
THROUGH FOUR MONTHS
AUGUST 10, YEAR ENDED ENDED
1994 JUNE 30, 1994 JUNE 30, 1993
-------------- ------------- -------------
<S> <C> <C> <C>
Current income tax expense
Federal....................................... $ 1,385 $ 86,084 $ 4,915
State......................................... 365 16,829 1,674
Deferred income tax benefit..................... (6,863) (16,682) --
------- ------------- -------------
Income Tax (Benefit) Expense.................. $ (5,113) $ 86,231 $ 6,589
------- ------------- -------------
------- ------------- -------------
</TABLE>
Income taxes for the period beginning March 1, 1993 and ended June 30, 1993,
have been computed using the annual effective tax rate for the year ended June
30, 1993.
F-104
<PAGE>
WILLIAMSON'S PHARMACY-INSTITUTIONAL DIVISION
(A DIVISION OF WILLIAMSON DRUG COMPANY, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- INCOME TAXES: (CONTINUED)
The following schedule reconciles the provision for income taxes reported in
the financial statements to taxes that would be obtained by applying regular
federal statutory tax rates to income before taxes. The reconciliation is shown
net of the effects of changes in the valuation allowance for the deferred tax
asset.
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1994
THROUGH FOUR MONTHS
AUGUST 10, YEAR ENDED ENDED
1994 JUNE 30, 1994 JUNE 30, 1993
-------------- ------------- -------------
<S> <C> <C> <C>
Expected federal income benefit using regular
statutory rates................................ $ (1,474) $ 68,493 $ 4,003
State income tax benefit, net of federal income
tax effects.................................... (172) 8,898 1,361
Net nondeductible items......................... 355 1,260 182
Other........................................... (3,822) 7,580 1,043
------- ------------- -------------
Income Tax (Benefit) Expense.................. $ (5,113) $ 86,231 $ 6,589
------- ------------- -------------
------- ------------- -------------
</TABLE>
As of August 10, 1994, the Institutional Division has available for
carryforward to future tax years contributions of $4,401, which carryforwards
expire in 1998. The Institutional Division has capital loss carryforwards of
$831 which expire in 1998.
The Institutional Division joins with WilliamsonHughes in the filing of a
consolidated corporate income tax return. The effects of income taxes disclosed
above pertain only to the Institutional Division. The Company allocates current
and deferred income taxes and the related expense to corporations in the
affiliated group based on the relative taxable income and remaining temporary
differences it determines are attributable to each affiliate.
NOTE 6 -- SHORT-TERM DEBT:
At August 10, 1994, the Company has a line of credit with a maximum limit of
$600,000. Borrowings are payable on demand and interest is payable monthly at
prime plus 1 1/2%. The line of credit is secured by all assets of the Company
and various assets of the sole stockholder. The loan agreement limits the
Company's ability to purchase new assets, make advances to stockholder, incur
additional debt or pay dividends without the prior consent of the Bank. In
connection with sale of stock as described in note 2, the line of credit was
paid off with proceeds from a note payable to American Medserve Corporation. The
Company's total amount outstanding on the line of credit and the amount
allocated to the Institutional Division is as follows:
<TABLE>
<CAPTION>
AUGUST 10, JUNE 30, JUNE 30,
1994 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Total amount outstanding............................... $ 600,000 $ 393,000 $ 469,000
Allocated to Institutional Division.................... 450,000 243,000 286,500
</TABLE>
NOTE 7 -- LONG-TERM DEBT:
Long-term debt consists of notes payable to Stewart R. Masters. The notes
bear interest at the First Union National Bank's prime rate plus 1%. These notes
mature October 20, 1995. Scheduled maturities for the notes payable are $8,328
in the year ended June 30, 1995, and $4,164 on October 20, 1995.
NOTE 8 -- RENTAL AGREEMENTS:
The Institutional Division entered into a five-year lease effective January
6, 1992, for its pharmacy facilities at $3,450 per month. The Institutional
Division entered into a three-year lease effective
F-105
<PAGE>
WILLIAMSON'S PHARMACY-INSTITUTIONAL DIVISION
(A DIVISION OF WILLIAMSON DRUG COMPANY, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- RENTAL AGREEMENTS: (CONTINUED)
December 1, 1992, for pharmacy space in Winchester, Virginia at $500 per month.
In June 1994, the Institutional Division entered into a nine month lease
effective September 1, 1994, for an additional pharmacy facility in
Charlottesville, Virginia at $1,500 per month. The Institutional Division also
leased several vehicles under two to three-year leases which originated in 1991,
1992, and 1993, and provide for total monthly payments of $5,032. In addition,
the Institutional Division entered into a five-year lease effective November 27,
1991, for a computer system and software at $1,095 per month. Rental expenses
for noncancellable leases were as follows:
<TABLE>
<S> <C>
July 1, 1994 through August 10, 1994.............................. $ 18,190
July 1, 1993 through June 30, 1994................................ 96,522
March 1, 1993 through June 30, 1993............................... 30,421
</TABLE>
The future minimum lease payments are as follows:
<TABLE>
<CAPTION>
EQUIPMENT FACILITIES TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
August 11, 1994 to June 30, 1995....................... $ 45,274 $ 50,000 $ 95,274
July 1, 1995 to June 30, 1996.......................... 32,282 43,900 76,182
July 1, 1996 to June 30, 1997.......................... 10,651 20,700 31,351
----------- ----------- -----------
Total.............................................. $ 88,207 $ 114,600 $ 202,807
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
NOTE 9 -- ALLOCATION OF ADMINISTRATIVE EXPENSES AND RELATED PARTY TRANSACTIONS:
The Retail Division, and subsequently WilliamsonHughes, shared in certain
administrative expenses with the Institutional Division. Allocated
administrative expenses include primarily salaries and wages, associated
employee benefits, insurance and interest expense. Before the formation of
WilliamsonHughes, the Company allocated administrative expenses based on the
level of total revenue of each division. Upon the formation of WilliamsonHughes,
the Company began estimating, on a monthly basis, the portion of administrative
expenses attributable to WilliamsonHughes and billed the subsidiary to reimburse
the expenses.
The Company also provides administrative services for the Broadway Drug
Center (the Center), which is owned by the sole stockholder of the Company. The
Institutional Division billed the Center $1,000 each month for management fees.
Total administrative expenses allocated and management fees billed are as
follows:
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1994
THROUGH FOUR MONTHS
AUGUST 10, YEAR ENDED THROUGH
1994 JUNE 30, 1994 JUNE 30, 1993
-------------- ------------- -------------
<S> <C> <C> <C>
Retail Division................................. $ -- $ 13,229 $ 12,853
WilliamsonHughes................................ 5,354 45,646 --
Broadway Drug Center............................ 1,000 12,000 4,000
</TABLE>
Accounts receivable from WilliamsonHughes and Broadway Drug Center are as
follows:
<TABLE>
<CAPTION>
AUGUST 10,
1994 JUNE 30, 1994 JUNE 30, 1993
-------------- ------------- -------------
<S> <C> <C> <C>
WilliamsonHughes................................ $ 18,189 $ 28,569 $ --
Broadway Drug Center............................ 2,620 -- 14,132
</TABLE>
F-106
<PAGE>
WILLIAMSON'S PHARMACY-INSTITUTIONAL DIVISION
(A DIVISION OF WILLIAMSON DRUG COMPANY, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- INTANGIBLE ASSETS:
During the year ended June 30, 1993, the Institutional Division purchased
institutional service contracts held by Commonwealth Care, an institutional
pharmacy business located in Winchester, Virginia, and a non-compete agreement
with the owner and operator of Commonwealth Care. The initial price was subject
to adjustment for a period of 36 months in the event any of the institutional
beds being serviced under the service contract were lost for whatever reason and
not replaced during the 36 month period subsequent to the date of the initial
purchase. In the year ended June 30, 1994, due to the loss of institutional
beds, the intangible asset was adjusted by $24,290. These assets are reported as
other assets on the balance sheet net of accumulated amortization.
F-107
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Williamson Drug Company, Inc.
Harrisonburg, Virginia
We have audited the accompanying balance sheet of Williamson Drug Company,
Inc. as of June 30, 1995, and the related statements of income, changes in
stockholders' equity and cash flows for the period beginning August 11, 1994 and
ending June 30, 1995. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Williamson Drug Company,
Inc. as of June 30, 1995, and the results of its operations and its cash flows
for the period then ended, in conformity with generally accepted accounting
principles.
S.B. HOOVER & COMPANY
Harrisonburg, Virginia
September 15, 1995
F-108
<PAGE>
WILLIAMSON DRUG COMPANY, INC.
BALANCE SHEET
JUNE 30, 1995
ASSETS
<TABLE>
<S> <C>
Current Assets
Cash and cash equivalents.................................................... $ 35,330
Trade receivables (Less allowance of $62,737)................................ 524,910
Medicaid receivable (Less allowance of $164,837)............................. 481,195
Accounts receivable -- related parties....................................... 72,819
Inventories.................................................................. 292,521
Prepaid expenses............................................................. 10,340
State income tax refund receivable........................................... 10,729
Deferred income taxes........................................................ 55,124
----------
Total Current Assets....................................................... 1,482,968
----------
Property and Equipment
Office equipment............................................................. 147,097
Nursing home equipment....................................................... 306,650
Automotive equipment......................................................... 23,081
Leasehold improvements....................................................... 18,148
----------
494,976
Less accumulated depreciation................................................ 251,705
----------
Net Property and Equipment................................................... 243,271
----------
Intangible and Other Assets.................................................... 2,838,047
----------
Total Assets............................................................... $4,564,286
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable............................................................. $ 249,080
Accrued interest -- related party............................................ 48,744
Accrued management fees -- related party..................................... 78,905
Other accrued expenses....................................................... 84,834
Short-term debt -- related party............................................. 1,172,748
Current maturities of long-term debt......................................... 4,164
Income taxes payable -- related parties...................................... 55,339
----------
Total Current Liabilities.................................................. 1,693,814
Long-Term Liabilities
Deferred income taxes........................................................ 30,477
----------
Total Liabilities.......................................................... 1,724,291
----------
Stockholders' Equity
Common stock ($100 par value, 30.07 shares issued, 5,000 shares
authorized)................................................................. 3,007
Paid-in capital.............................................................. 2,422,533
Retained earnings............................................................ 414,455
----------
Total Stockholders' Equity................................................. 2,839,995
----------
Total Liabilities and Stockholders' Equity................................. $4,564,286
----------
----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-109
<PAGE>
WILLIAMSON DRUG COMPANY, INC.
STATEMENT OF INCOME
FOR THE PERIOD BEGINNING AUGUST 11, 1994 AND ENDING JUNE 30, 1995
<TABLE>
<S> <C>
Revenues....................................................................... $4,566,490
Cost of Goods Sold............................................................. 2,650,072
----------
Gross Profit................................................................. 1,916,418
Selling, General and Administrative Expenses................................... 1,649,756
----------
Income from Operations....................................................... 266,662
Other Income (Expenses)
Miscellaneous income......................................................... 34,991
Interest expense............................................................. (49,240)
Management fees.............................................................. (78,905)
----------
Total Other Income (Expenses)................................................ (93,154)
----------
Income before Income Tax..................................................... 173,508
Income Tax Expense........................................................... 83,908
----------
Net Income................................................................... $ 89,600
----------
----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-110
<PAGE>
WILLIAMSON DRUG COMPANY, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD BEGINNING AUGUST 11, 1994 AND ENDING JUNE 30, 1995
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- --------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at the Beginning of the Period as
Previously Reported............................... 24.00 $ 2,400 $ 2,600 $ 324,855 $ 329,855
Adjustment to Reflect Sale of Majority Interest and
Adjustment to Fair Values of Net Assets (Note
1)................................................ -- -- 1,900,540 -- 1,900,540
--------- --------- ------------- ----------- -------------
Balance at the Beginning of the Period as
Restated.......................................... 24.00 2,400 1,903,140 324,855 2,230,395
Common Stock Issued and Paid-in Capital in
Connection with the Purchase of the Assets of
Extended Care Associates, Inc. (Note 2)........... 6.07 607 519,393 -- 520,000
Net Income......................................... -- -- -- 89,600 89,600
--------- --------- ------------- ----------- -------------
Balance at the End of Period....................... 30.07 $ 3,007 $ 2,422,533 $ 414,455 $ 2,839,995
--------- --------- ------------- ----------- -------------
--------- --------- ------------- ----------- -------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-111
<PAGE>
WILLIAMSON DRUG COMPANY, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD BEGINNING AUGUST 11, 1994 AND ENDING JUNE 30, 1995
<TABLE>
<S> <C>
Cash Flows from Operating Activities:
Net income................................................................... $ 89,600
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation............................................................... 54,289
Amortization............................................................... 68,538
Deferred income taxes...................................................... 18,436
Changes in operating assets and liabilities, net of effects of acquisition
of the assets of Extended Care Associates, Inc.:
Increase in trade accounts receivable.................................... (133,274)
Increase in Medicaid receivables......................................... (92,568)
Increase in accounts receivable - related parties........................ (52,010)
Decrease in inventories.................................................. 19,836
Decrease in prepaid expenses............................................. 11,124
Increase in other assets................................................. (21,074)
Increase in accounts payable............................................. 47,307
Increase in accrued expenses............................................. 67,227
Decrease in income taxes payable......................................... (48,660)
-----------
Net Cash Provided by Operating Activities.............................. 28,771
Cash Flows from Investing Activities:
Acquisition of the assets of Extended Care Associates, Inc................... (1,238,295)
Purchase of property and equipment........................................... (43,822)
-----------
Net Cash Used in Investing Activities.................................. (1,282,117)
Cash Flows from Financing Activities
Short-term borrowings from related party..................................... 720,000
Capital investment by parent company......................................... 480,000
Reduction of long-term debt.................................................. (11,328)
-----------
Net Cash Provided by Financing Activities.............................. 1,188,672
Net Decrease in Cash and Cash Equivalents.............................. (64,674)
Cash and Cash Equivalents, Beginning of Period................................. 100,004
-----------
Cash and Cash Equivalents, End of Period....................................... $ 35,330
-----------
-----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-112
<PAGE>
WILLIAMSON DRUG COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND NATURE OF BUSINESS:
Williamson Drug Company, Inc. (the Company) was incorporated on July 1,
1955. Prior to November 1, 1993, the Company operated a retail pharmacy in
Harrisonburg, Virginia (Retail Division) and a pharmacy to provide services for
extended care facilities within an approximately 100 mile radius of Harrisonburg
(Institutional Division). The Company grants credit to customers within its
service area.
On November 1, 1993, the Company transferred certain assets and liabilities
from its Retail Division to an inactive subsidiary, and the subsidiary
concurrently purchased the assets and assumed the liabilities of Hughes
Pharmacy, Inc. From November 1, 1993 through August 10, 1994, the Company held
100% of the voting common stock of the new corporation, WilliamsonHughes
Pharmacy and Home Health (WilliamsonHughes).
On August 11, 1994, the Company allocated any remaining joint assets and
liabilities to WilliamsonHughes, and distributed its common shares in
WilliamsonHughes to the Company's sole stockholder. Concurrent with the transfer
of the investment in WilliamsonHughes, the Company's sole stockholder sold 90%
of his common shares (totaling 21.6 shares) of Williamson Drug Company, Inc. to
AMC Regional Holdings, Inc., a fully-owned subsidiary of American Medserve
Corporation (AMC).
The accompanying financial statements include the accounts of the Company
after adjustment of the assets and liabilities to their estimated fair values to
reflect allocation of the cost of the acquisition incurred by AMC, commonly
referred to as "push-down accounting." Reflected below is a summary of
adjustments to the previously recorded book values of identifiable net assets.
<TABLE>
<S> <C>
Increase (Decrease) in:
Trade receivables -- net of allowance.......................... $ (30,000)
Medicaid receivable -- net of allowance........................ (20,000)
Net deferred tax asset......................................... 25,434
Increase in Accounts Payable and Accrued Liabilities........... (17,000)
</TABLE>
The balance of the purchase price was recorded as the excess of purchase
price over fair value of net assets acquired and is presented as goodwill in
these financial statements. The amount of goodwill recorded in these financial
statements is based on the value imputed from the sales price for 90% of the
stock. Goodwill recorded as a result of this transaction totals $1,942,106 and
is being amortized over 40 years using the straight-line method.
AMC may be required to make additional payments beginning in 1995 and ending
in 1999 aggregating up to $3,000,000 contingent upon increases in operating
income for the five year period ending June 30, 1999.
The Company has entered into a management agreement with the former sole
stockholder of the Company effective August 11, 1994, for a period of five
years. The agreement provides for employment as Chief Executive Officer and
contains noncompetition and other employment provisions.
NOTE 2 -- ACQUISITION OF THE ASSETS OF EXTENDED CARE ASSOCIATES, INC.:
On April 14, 1995, the Company executed an asset purchase agreement with
Extended Care Associates, Inc. (ECA) of Lynchburg, Virginia, effective as of the
close of business on April 15, 1995. The purchase includes substantially all of
the operating assets of Extended Care Associates, Inc. ECA provides pharmacy
services to extended care facilities located in Lynchburg and the surrounding
area within an approximately 40 mile radius. The former operations of ECA are
continuing at the Lynchburg facility as a branch of the Company.
F-113
<PAGE>
WILLIAMSON DRUG COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- ACQUISITION OF THE ASSETS OF EXTENDED CARE ASSOCIATES,
INC.: (CONTINUED)
The initial purchase price included $1,200,000 in cash and 3% of the
outstanding common stock of the Company. The initial purchase price has been
allocated to the identifiable assets acquired based on their estimated fair
values which approximate the net book values of these assets. Intangible assets
include $100,000 allocated to a noncompetition agreement. The total cost in
excess of the identifiable net assets acquired of $814,886 is presented as
goodwill which is being amortized on a straight-line basis over 40 years.
The Company may be required to make additional payments beginning in 1996
and ending in 2000, aggregating up to $1,000,000 based on increases in operating
income of the Company for the five year period ending June 30, 2000.
Concurrent with the execution of the asset purchase agreement, the Company
entered into management agreements with the shareholders of Extended Care
Associates, Inc. These agreements provide for employment of these two executives
for a period of five years subject to certain termination provisions. The
management agreement also contains a noncompetition provision for a period of up
to ten years. The cost of the intangible asset allocated to the noncompetition
is being amortized over a ten year period using the straight-line method.
NOTE 3 -- SIGNIFICANT ACCOUNTING POLICIES:
Significant accounting policies of the Company are as follows:
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
short-term debt securities purchased with a maturity of three months or less to
be cash equivalents.
INVENTORY VALUATION
Inventory consists of products held for resale and is valued at the lower of
cost (first-in, first-out method) or market.
DEPRECIATION
Depreciation expense is calculated using the straight-line method for all
assets. The depreciation methods are designed to amortize the cost of the assets
over their estimated useful lives. The estimated useful lives of major classes
of depreciable assets are as follows:
<TABLE>
<CAPTION>
ASSET YEARS
- --------------------------------------------------------------------------------------- ---------
<S> <C>
Office equipment....................................................................... 5-10
Nursing home equipment................................................................. 5-10
Automotive equipment................................................................... 3-5
Leasehold improvements................................................................. 7-31
</TABLE>
BAD DEBTS AND CONTRACTUAL ADJUSTMENTS
An allowance for contractual adjustments for Medicaid accounts receivable is
deducted from the related receivable. Medicaid accounts receivable are initially
recorded at the normal rates for private pay patients; an adjustment is
subsequently recorded for the difference between the private pay rates and the
rates allowed by Medicaid.
INTANGIBLE ASSETS
Goodwill is being amortized over 40 years using the straight-line method.
The noncompetition agreements are being amortized using the straight-line method
over the period of the agreements. Other intangibles are amortized over the
estimated useful life using the straight-line method.
F-114
<PAGE>
WILLIAMSON DRUG COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INCOME TAXES
Provisions for income taxes are based on amounts reported in the statement
of income and include deferred taxes on temporary differences in the recognition
of income and expense for tax and financial statement purposes. Deferred income
taxes are computed on the liability method as prescribed in Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
RECLASSIFICATIONS
Certain accounts in the statement of income have been classified differently
from previously issued financial statements.
NOTE 4 -- INTANGIBLE AND OTHER ASSETS:
Goodwill related to the sale of stock to American Medserve Corporation is
described in Note 1. Intangible assets related to purchase of assets from
Extended Care Associates, Inc. are described in Note 2. Other intangible assets
include purchase service contracts and a noncompetition agreement entered into
in 1993 and costs incurred with opening of a branch in Charlottesville, Virginia
during 1995.
<TABLE>
<CAPTION>
ACCUMULATED
GROSS ASSET AMORTIZATION NET ASSET
------------- ------------ -------------
<S> <C> <C> <C>
Goodwill American Medserve Corporation...................... $ 1,942,106 $ 42,484 $ 1,899,622
Goodwill Extended Care Associates........................... 814,886 4,244 810,642
Noncompetition agreement -- Extended Care Associates........ 100,000 2,083 97,917
Other Intangible Assets..................................... 114,735 86,269 28,466
------------- ------------ -------------
Total Intangible Assets................................... $ 2,971,727 $ 135,080 2,836,647
------------- ------------
------------- ------------
Other Assets -- Lease deposits.............................. 1,400
-------------
Total Intangible and Other Assets......................... $ 2,838,047
-------------
-------------
</TABLE>
NOTE 5 -- INCOME TAXES:
The deferred income tax liability is attributable to temporary differences
arising from the Company's use of accelerated depreciation methods for
calculating taxable income and to its capitalization for financial statement
purposes of certain branch office start-up costs, which were expensed for tax
purposes. The use of different depreciation methods results in differences
between the tax bases and the reported carrying values of depreciable property
and equipment. The deferred income tax asset is primarily attributable to
temporary differences arising from the recognition of certain accrued expenses
for financial reporting purposes that the Company could not yet deduct in
arriving at its taxable income.
The components of income tax expense attributable to continuing operations
are as follows:
<TABLE>
<S> <C>
Current income tax expense
Federal......................................................... $ 55,339
State........................................................... 10,133
Deferred income tax expense....................................... 18,436
---------
Income Tax Expense.............................................. $ 83,908
---------
---------
</TABLE>
F-115
<PAGE>
WILLIAMSON DRUG COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- INCOME TAXES: (CONTINUED)
The following schedule reconciles the provision for income taxes reported in
the financial statements to taxes that would be obtained by applying regular
federal statutory tax rates to income before taxes.
<TABLE>
<S> <C>
Expected federal income taxes using regular statutory rates....... $ 58,993
State income tax, net of federal income tax effects............... 6,871
Net nondeductible items (primarily amortization of goodwill)...... 18,044
---------
Income Tax Expense............................................ $ 83,908
---------
---------
</TABLE>
The Company joins with American Medserve Corporation and its other
subsidiaries in the filing of a consolidated corporate income tax return. The
effects of income taxes disclosed above pertain only to the Company. Income
taxes payable - related party reported on the balance sheet is payable to AMC
Regional Holdings, Inc. (the Company's parent).
The Company pays current income taxes to its parent based on a computation
of its separate company tax liability. Any benefit to the consolidated group of
lower bracket amounts is to be shared equally among all members of the
consolidated group. Deferred income taxes for the consolidated group are
allocated to all the corporations in the affiliated group based on the remaining
temporary differences attributable to each affiliate.
NOTE 6 -- SHORT-TERM DEBT -- RELATED PARTY:
In connection with the purchase of the Company's stock on August 11, 1994,
as described in Note 1, the Company incurred loans payable to American Medserve
Corporation (AMC) of $452,748. In April 1995, the Company incurred additional
debt of $720,000 payable to AMC to partially finance the purchase of the assets
of Extended Care Associates, Inc. described in Note 2. These loans have no
scheduled repayment terms and no payments of principal or interest have been
made as of June 30, 1995. Interest has been accrued on a monthly basis during
the period at variable rates ranging from 8% to 9%.
NOTE 7 -- LONG-TERM DEBT:
Long-term debt consists of a note payable to Stewart R. Masters. The note
bears interest at the First Union National Bank's prime rate plus 1%. The note
calls for semiannual principal payments of $4,164 and matures October 20, 1995.
NOTE 8 -- RENTAL AGREEMENTS:
Williamson Drug Company, Inc. entered into a five-year lease effective
January 6, 1992, for its pharmacy facilities at $3,450 per month. The Company
entered into a three-year lease effective December 1, 1992, for pharmacy space
in Winchester, Virginia at $500 per month. In 1994, the Company entered into a
lease for an additional pharmacy facility in Charlottesville, Virginia at $1,500
per month. In May 1995, the Company also entered into a five-year lease for
office space in Lynchburg, Virginia at $2,450 per month with GO Enterprises,
L.L.C. (a related party). The Company also leased several vehicles under two to
three-year leases which originated in 1993 and 1994, and provide for total
monthly payments of $2,280. In addition, the Company entered into a five-year
lease effective November 27, 1991, for a computer system and software at $1,095
per month. The Company also leases various other equipment under four to
five-year leases which originated in 1994 and 1995, and require total monthly
payments of $1,972. Rental expenses for noncancellable leases were $105,090 for
the period ending June 30, 1995.
F-116
<PAGE>
WILLIAMSON DRUG COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- RENTAL AGREEMENTS: (CONTINUED)
The future minimum lease payments are as follows:
<TABLE>
<CAPTION>
YEAR ENDED EQUIPMENT FACILITIES TOTAL
- ------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
June 30, 1996.......................................... $ 55,452 $ 73,300 $ 128,752
June 30, 1997.......................................... 34,315 50,100 84,415
June 30, 1998.......................................... 22,409 29,400 51,809
June 30, 1999.......................................... 20,652 29,400 50,052
June 30, 2000.......................................... 17,210 24,500 41,710
----------- ----------- -----------
Total.............................................. $ 150,038 $ 206,700 $ 356,738
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
NOTE 9 -- ALLOCATION OF ADMINISTRATIVE EXPENSES AND OTHER RELATED PARTY
TRANSACTIONS:
During the period ended June 30, 1995, a portion of the selling, general and
administrative expenses incurred by AMC Regional Holdings, Inc. were allocated
to the Company. These charges of $78,905 are presented as management fees
expense in the statement of income and are included in accrued current
liabilities in the balance sheet as of June 30, 1995.
During the period ended June 30, 1995, WilliamsonHughes shared in certain
administrative expenses with the Company. Allocated administrative expenses
which consist primarily of salaries and wages, associated employee benefits and
insurance. The Company estimates, on a monthly basis, the portion of
administrative expenses attributable to WilliamsonHughes and bills
WilliamsonHughes to reimburse the expenses. During the period ended June 30,
1995, the Company billed
WilliamsonHughes for total allocated administrative expenses of $54,971.
The Company also provides administrative services for the Broadway Drug
Center (the Center), which is owned by the Chief Executive Officer of the
Company. For the period ended June 30, 1995, the Company billed the Center
$10,000 for management fees and $17,830 for various transfers of medication.
The Company also has accounts receivable from American Medserve Corporation
resulting from cash transfers between the Company and AMC.
Related party accounts receivable at June 30, 1995, are as follows:
<TABLE>
<S> <C>
WilliamsonHughes.................................................. $ 14,712
Broadway Drug Center.............................................. 4,107
American Medserve Corporation..................................... 54,000
---------
Total......................................................... $ 72,819
---------
---------
</TABLE>
F-117
<PAGE>
WILLIAMSON DRUG COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- SUPPLEMENTAL CASH FLOW DISCLOSURES:
As explained in Note 2, the Company acquired the operating assets of
Extended Care Associates, Inc. in April 1995. The cash flows associated with
this purchase are as follows:
<TABLE>
<S> <C>
Working capital................................................ $ 292,303
Equipment and leasehold improvements........................... 93,606
Intangible assets.............................................. 914,886
Less stock issued by Williamson Drug Company, Inc.............. (40,000)
Less accrued professional fees................................. (22,500)
----------
Cash Paid to Acquire Assets of Extended Care Associates,
Inc......................................................... $1,238,295
----------
----------
Cash Paid During the Period for:
Interest..................................................... $ 807
Income taxes, net of refunds received........................ 114,132
</TABLE>
F-118
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE 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 OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY COMMON STOCK BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING SUCH AN OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCE, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 7
Company Background............................. 14
Use of Proceeds................................ 16
Dividend Policy................................ 17
Capitalization................................. 18
Dilution....................................... 19
Unaudited Pro Forma Consolidated Financial
Statements.................................... 20
Selected Consolidated Financial Information and
Operating Data................................ 28
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 31
Business....................................... 41
Management..................................... 56
Certain Transactions........................... 64
Principal Stockholders......................... 70
Description of Capital Stock................... 71
Shares Eligible for Future Sale................ 73
Underwriting................................... 74
Legal Matters.................................. 75
Experts........................................ 75
Additional Information......................... 76
Index to Financial Statements.................. F-1
</TABLE>
------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
5,357,000 SHARES
[LOGO]
AMERICAN MEDSERVE
CORPORATION
COMMON STOCK
---------------------
PROSPECTUS
, 1996
---------------------
WILLIAM BLAIR & COMPANY
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
EQUITABLE SECURITIES CORPORATION
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Estimated expenses in connection with the issuance and distribution of the
securities being registered, other than underwriting compensation, are as
follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............ $ 31,865
National Association of Securities Dealers, Inc. filing fee.... 9,741
Nasdaq National Market entry fee............................... 46,643
Blue Sky fees and expenses..................................... 10,000
Legal fees and expenses........................................ 250,000
Accountants' fees and expenses................................. 1,483,688
Printing and engraving expenses................................ 205,000
Transfer Agent and Registrar fees and expenses................. 8,000
Miscellaneous.................................................. 55,063
----------
Total...................................................... $2,100,000
----------
----------
</TABLE>
The Company will bear all of the foregoing fees and expenses.
The foregoing, except for the Securities and Exchange Commission
registration fee, the National Association of Securities Dealers, Inc. filing
fee and the Nasdaq National Market entry fee, are estimates.
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Registrant's Amended and Restated Certificate of Incorporation and
Amended and Restated By-laws provide that the Registrant shall, subject to
certain limitations, indemnify its directors and officers against expenses
(including attorneys' fees, judgments, fines and certain settlements) actually
and reasonably incurred by them in connection with any suit or proceeding to
which they are a party so long as they acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to a criminal action or proceeding, so long as
they had no reasonable cause to believe their conduct to have been unlawful.
Section 102 of the Delaware General Corporation Law permits a Delaware
corporation to include in its certificate of incorporation a provision
eliminating or limiting a director's liability to a corporation or its
stockholders for monetary damages for breaches of fiduciary duty. The enabling
statute provides, however, that liability for breaches of the duty of loyalty,
acts or omissions not in good faith or involving intentional misconduct, or
knowing violation of the law, and the unlawful purchase or redemption of stock
or payment of unlawful dividends or the receipt of improper personal benefits
cannot be eliminated or limited in this manner. The Registrant's Amended and
Restated Certificate of Incorporation includes a provision which eliminates, to
the fullest extent permitted, director liability for monetary damages for
breaches of fiduciary duty.
Pursuant to the Underwriting Agreement as set forth in Exhibit 1.1., the
directors and officers of the Registrant are indemnified against certain civil
liabilities that they may incur under the Securities Act of 1933, as amended, in
connection with this Registration Statement and the related Prospectus.
The Registrant has purchased directors and officers liability insurance,
which provides coverage against certain liabilities.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the three years preceding the filing of this Registration Statement, the
Company sold the following securities that were not registered under the Act:
On August 2, 1994, the Registrant issued 7,867.1 shares of Class B
common stock (547,944 shares of Common Stock as reclassified) to Timothy L.
Burfield (889.7 of which Class B shares (61,966 shares of Common Stock) were
subsequently forfeited) for an aggregate consideration of $69,437.50.
Exemption from registration is claimed pursuant to Section 4(2) of the
Securities Act of 1933, no public sale having been involved.
On August 2, 1994, the Registrant issued 56,500 shares of Class A common
stock (3,935,238 shares of Common Stock as reclassified) to Golder, Thoma,
Cressey, Rauner Fund IV, L.P. for consideration of $5,650,000. Golder,
Thoma, Cressey, Rauner Fund IV, L.P contributed an additional aggregate of
$16,850,000 to the capital of the Registrant on March 9, 1995, April 13,
1995, May 8, 1995, August 3, 1995, January 15, 1996, April 15, 1996, April
30, 1996 and May 8, 1996. Exemption from registration is claimed pursuant to
Section 4(2) of the Securities Act of 1933, no public sale having been
involved.
On August 5, 1996, the Registrant issued a convertible promissory note,
convertible into shares of Common Stock of the Registrant in the principal
amount of $2,000,000 to Royal Care of America, Inc. ("Royal Care") as
partial payment for the acquisition of certain assets of Royal Care.
Exemption from registration is claimed pursuant to Section 4(2) of the
Securities Act of 1933, no public sale having been involved.
On August 23, 1996, the Registrant issued shares of Class B common stock
(Common Stock as reclassified) to the following persons in the following
amounts in exchange for their shares in certain of the Company's
subsidiaries: William J. and Mary Jane Gatti (4,252.48 Class B
shares/296,186 shares of Common Stock); Nelson L. Showalter (640.71 Class B
shares/44,625 shares of Common Stock); Frank R. Gelafio (1,327.98 Class B
shares/92,494 shares of Common Stock); Lee R. Youngberg (1,327.98 Class B
shares/92,494 shares of Common Stock); Ronald E. Keith (450.21 Class B
shares/31,357 shares of Common Stock); James Pietryga (112.76 Class B
shares/7,854 shares of Common Stock); Bruce Gerlich (98.84 Class B
shares/6,884 shares of Common Stock); Mitch Overstreet (98.84 Class B
shares/6,884 shares of Common Stock); Sterling Acquisition Partners, Inc.
(1,686.56 Class B shares/117,470 shares of Common Stock); Pharmed, Inc.
(1,146.96 Class B shares/79,886 shares of Common Stock); and Pharmed of
Baton Rouge, Inc. (264.85 Class B shares/18,447 shares of Common Stock).
Exemption from registration is claimed pursuant to Section 4(2) of the
Securities Act of 1933, no public sale having been involved.
On September 5, 1996, the Registrant issued shares of Class B common
stock (Common Stock as reclassified) for a purchase price of $98.46 per
Class B share ($1.41 per share of Common Stock) to the following persons in
the following amounts, each of whom paid 10% of the purchase price for their
shares in cash and 90% in the form of interest-bearing demand notes: Timothy
L. Burfield (340 Class B shares/23,681 shares of Common Stock); Charles R.
Wallace (1,496.45 Class B shares/104,228 shares of Common Stock); Michael B.
Freedman (1,156.08 Class B shares/80,522 shares of Common Stock); J. Jeffrey
Gephart (750.72 Class B shares/52,288 shares of Common Stock); Thomas C.
Loftus (100 Class B shares/6,965 shares of Common Stock); George E. Pepe
(100 Class B shares/6,965 shares of Common Stock); Charles C. Halberg
(170.18 Class B shares/11,853 shares of Common Stock); Mark A. Jerstad
(170.18 Class B shares/11,853 shares of Common Stock); and James H.S. Cooper
(170.18 Class B shares/11,853 shares of Common Stock). Exemption from
registration is claimed pursuant to Section 4(2) of the Securities Act of
1933, no public sale having been involved.
II-2
<PAGE>
On October 15, 1996, the Registrant issued 482.7 shares of Class B
Common Stock (33,620 shares of Common Stock as reclassified) to Joseph F.
Dellantonio as partial payment for the acquisition of certain assets of
Joseph F. Dellantonio, Inc. Exemption from registration is claimed pursuant
to Section 4(2) of the Securities Act of 1933, no public sale having been
involved.
No underwriters were involved in any of the foregoing sales of securities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits -- See Index to Exhibits.
(b) Financial Statement Schedule.
Schedule VIII -- Valuation of Qualifying Accounts
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions specified in Item 14 of this Registration
Statement, 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 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 Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Naperville,
Illinois, on the 7th day of November, 1996.
AMERICAN MEDSERVE CORPORATION
By: ______/s/_TIMOTHY L. BURFIELD_____
Timothy L. Burfield
CHIEF EXECUTIVE OFFICER, PRESIDENT
AND DIRECTOR
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities indicated on November 7, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------------- ------------------------------------------------------------
<C> <S>
/s/ TIMOTHY L. BURFIELD
---------------------------------------- President and Chief Executive Officer and Director
Timothy L. Burfield (Principal Executive Officer)
/s/ CHARLES R. WALLACE
---------------------------------------- Vice President-Finance and Chief Financial Officer
Charles R. Wallace (Principal Financial and Accounting Officer)
*
---------------------------------------- Chairman of the Board
Bryan C. Cressey
*
---------------------------------------- Director
James H.S. Cooper
*
---------------------------------------- Director
Charles C. Halberg
*
---------------------------------------- Director
Mark A. Jerstad
*
---------------------------------------- Director
Lee M. Mitchell
*/s/ CHARLES R. WALLACE
---------------------------------------
Charles R. Wallace, as
attorney-in-fact
</TABLE>
II-4
<PAGE>
The Board of Directors
American Medserve Corporation
We have audited the consolidated financial statements of American Medserve
Corporation as of June 30, 1995 and December 31, 1995 and for the year and six
months then ended, and have issued our report thereon dated April 25, 1996,
except for Notes 11 and 14 as to which the date is November , 1996 (included
elsewhere in this Registration Statement). Our audits also included the
financial statement schedule listed in Item 16(b) of this Registration
Statement. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Chicago, Illinois
April 25, 1996
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion
of the Common Stock reclassification described in Note 14 of the audited
financial statements.
ERNST & YOUNG LLP
Chicago, Illinois
November 8, 1996
S-1
<PAGE>
SCHEDULE VIII
AMERICAN MEDSERVE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
----------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER
BEGININNG COSTS AND ACCOUNTS -- DEDUCTIONS -- BALANCE AT END
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD
- ---------------------------------------------- ----------- ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Period ended December 31, 1995:
Allowance for Doubtful Accounts............. $ 362 $ 37 $ 74(1) $ -- $ 473
Period ended June 30, 1995:
Allowance for Doubtful Accounts............. $ -- $ 35 $ 327(1) $ -- $ 362
</TABLE>
- ------------------------
(1) Represents allowance for doubtful accounts reflected in acquisition
accounting.
S-2
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTIONS
- --------- ----------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
3.1++ Form of Amended and Restated Certificate of Incorporation
3.2++ Amended and Restated By-laws
4.1 Specimen Common Stock Certificate
5.1 Opinion of Gardner, Carton & Douglas
10.1L Form of 1996 Stock Incentive Plan
10.2++ Stock Option Plan for Directors and Executive and Key Employees of Gatti LTC Services, Inc.
10.3++ Stock Option Plan for Directors and Executive and Key Employees of Williamson Drug Company Incorporated
10.4++ Stock Option Plan for Directors and Executive and Key Employees of Nihan & Martin, Inc.
10.5++ Stock Option Plan for Directors and Executive and Key Employees of Dixon Pharmacy, Inc.
10.6++ Form of Subsidiary Non-Qualified Stock Option Agreement
10.7++ Form of Subsidiary Participation Agreement
10.8 Senior Management Agreement, made as of December 3, 1993, between the Company and Timothy L. Burfield
10.9++ Senior Management Agreement, made as of September 5, 1996, between the Company and Michael B. Freedman
10.10++ Senior Management Agreement, made as of September 5, 1996, between the Company and Charles R. Wallace
10.11++ Senior Management Agreement, made as of September 5, 1996, between the Company and J. Jeffrey Gephart
10.12++ Director Stock Agreement, made as of September 5, 1996, between the Company and James H. S. Cooper
10.13++ Director Stock Agreement, made as of September 5, 1996, between the Company and Charles C. Halberg
10.14++ Director Stock Agreement, made as of September 5, 1996, between the Company and Mark A. Jerstad
10.15++ Amended and Restated Stockholders Agreement, dated as of August 23, 1996, by and among the Company,
Golder, Thoma, Cressey, Rauner Fund IV, L.P. (the "GTCR Fund"), Timothy L. Burfield, Michael B. Freedman,
Charles R. Wallace, J. Jeffrey Gephart, James H. S. Cooper, Charles C. Halberg, Mark A. Jerstad, William
J. and Mary Jane Gatti, Nelson L. Showalter, Frank R. Gelafio, Lee R. Youngberg, Ronald E. Keith, James
Pietryga, Bruce Gerlich, Mitch Overstreet, Sterling Acquisition Partners, Inc., Pharmed, Inc., Pharmed of
Baton Rouge, Inc., Joseph Dellantonio, Thomas C. Loftus and George E. Pepe.
10.16++ Registration Agreement, dated as of August 23, 1996, by and among the GTCR Fund, Timothy L. Burfield,
Michael B. Freedman, Charles R. Wallace, J. Jeffrey Gephart, James H. S. Cooper, Charles C. Halberg, Mark
A. Jerstad, William J. and Mary Jane Gatti, Nelson L. Showalter, Frank R. Gelafio, Lee R. Youngberg,
Ronald E. Keith, James Pietryga, Bruce Gerlich, Mitch Overstreet, Sterling Acquisition Partners, Inc.,
Pharmed, Inc., Pharmed of Baton Rouge, Inc., Joseph Dellantonio, Thomas C. Loftus and George E. Pepe.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTIONS
- --------- ----------------------------------------------------------------------------------------------------------
<C> <S>
10.17L Agreement made and entered into as of October 9, 1996 by and between the Company and the GTCR Fund.
10.18++ Amendment No. 1 to the Equity Purchase Agreement, made and entered into as of August 15, 1996, by and
between the Company and the GTCR Fund
10.19++ Agreement, dated as of August 15, 1996, between the Company and the GTCR Fund relating to the Additional
GTCR Shares
10.20++ Shareholders Agreement, dated as of April 30, 1996, by and among Good Samaritan Supply Services, Inc., The
Evangelical Lutheran Good Samaritan Foundation and the Company
10.21++ Non-Competition and Marketing Assistance Agreement, made as of April 30, 1996, by and among the Company,
Good Samaritan Supply Services, Inc., The Evangelical Lutheran Good Samaritan Foundation and The
Evangelical Lutheran Good Samaritan Society
10.22++ Letter Agreement, dated February 21, 1996, as amended, between the Company and Equitable Securities
Corporation
10.23++ Credit Agreement, dated as of March 15, 1996, among AMC Regional Holdings, Inc., the Institutions from
time to time party thereto as Lenders and The First National Bank of Chicago, as Agent (the "Credit
Agreement"). The Company agrees to furnish supplementally to the Commission a copy of any omitted
schedule or exhibit to the Credit Agreement upon request by the Commission
10.24++ Credit Agreement, dated as of June 21, 1996, among Good Samaritan Supply Services, Inc., the Institutions
from time to time party thereto as Lenders and LaSalle National Bank, as Agent. The Company agrees to
furnish supplementally to the Commission a copy of any omitted schedule or exhibit to the Credit
Agreement upon request by the Commission
10.25++ Termination Agreement, dated as of August 15, 1996, between the Company and GTCR IV, L.P.
10.26++ Reimbursement and Conversion Agreement between the Company and the GTCR Fund dated August 2, 1996.
11.1 Statement re: computation of per share earnings
21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young, LLP
23.2+ Consent of S.B. Hoover & Company, L.L.P.
23.3+ Consent of Lindgren, Callihan, Van Osdol & Co., Ltd.
23.4+ Consent of Coopers & Lybrand L.L.P.
23.5+ Consent of Price Waterhouse LLP
23.6 Consent of Gardner, Carton & Douglas (included in Exhibit 5.1)
24.1+ Powers of Attorney
24.2L Power of Attorney for Lee M. Mitchell
27.1+ Financial Data Schedule
</TABLE>
- ------------------------
+Filed on September 10, 1996 as part of the Registration Statement.
++Filed on October 8, 1996 as part of Amendment No. 1 to the Registration
Statement.
LFiled on October 24, 1996 as part of Amendment No. 2 to the Registration
Statement.
<PAGE>
EXHIBIT 1.1
AMERICAN MEDSERVE CORPORATION
5,357,000 Shares Common Stock*
UNDERWRITING AGREEMENT
November ___, 1996
William Blair & Company, L.L.C.
Donaldson, Lufkin & Jenrette Securities
Corporation
Equitable Securities Corporation
As Representatives of the Several
Underwriters Named in Schedule A
c/o William Blair & Company, L.L.C.
222 West Adams Street
Chicago, Illinois 60606
Ladies and Gentlemen:
SECTION 1. INTRODUCTORY. American Medserve Corporation ("COMPANY") a
Delaware corporation, has an authorized capital stock consisting of 1,000,000
shares of Preferred Stock, $.01 par value, none of which were outstanding as of
November ___, 1996 and 30,000,000 shares of Common Stock ("COMMON STOCK"), $.01
par value, of which 5,559,625 shares were outstanding as of such date. The
Company proposes to issue and sell 5,357,000 shares of its authorized but
unissued Common Stock ("FIRM SHARES") to the several underwriters named in
Schedule A as it may be amended by the Pricing Agreement hereinafter defined
("UNDERWRITERS"), who are acting severally and not jointly. In addition, the
Company proposes to grant to the Underwriters an option to purchase up to
803,550 additional shares of Common Stock ("OPTION SHARES") as provided in
Section 4 hereof. The Firm Shares and, to the extent such option is exercised,
the Option Shares, are hereinafter collectively referred to as the "SHARES."
You have advised the Company that the Underwriters propose to make a
public offering of their respective portions of the Shares as soon as you
deem advisable after the registration statement hereinafter referred to
becomes effective, if it has not yet become effective, and the Pricing
Agreement hereinafter defined has been executed and delivered.
Prior to the purchase and public offering of the Shares by the several
Underwriters, the Company and the Representatives, acting on behalf of the
several Underwriters, shall enter into an agreement substantially in the form
of Exhibit A hereto (the "PRICING
- ---------------------------
*Plus an option to acquire up to 803,550 additional shares to cover
overallotments.
<PAGE>
AGREEMENT"). The Pricing Agreement may take the form of an exchange of any
standard form of written telecommunication between the Company and the
Representatives and shall specify such applicable information as is indicated
in Exhibit A hereto. The offering of the Shares will be governed by this
Agreement, as supplemented by the Pricing Agreement. From and after the date
of the execution and delivery of the Pricing Agreement, this Agreement shall
be deemed to incorporate the Pricing Agreement.
The Company hereby confirms its agreement with the Underwriters as follows:
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to the several Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-11667)
and a related preliminary prospectus with respect to the Shares have
been prepared and filed with the Securities and Exchange Commission
("COMMISSION") by the Company in conformity in all material respects
with the requirements of the Securities Act of 1933, as amended, and the
rules and regulations of the Commission thereunder (collectively, the
"1933 ACT;" all references herein to specific rules are rules
promulgated under the 1933 Act); and the Company has so prepared and has
filed such amendments thereto, if any, and such amended preliminary
prospectuses as may have been required to the date hereof. If the
Company has elected not to rely upon Rule 430A, the Company has prepared
and will promptly file an amendment to the registration statement and an
amended prospectus. If the Company has elected to rely upon Rule 430A,
it will prepare and file a prospectus pursuant to Rule 424(b) that
discloses the information previously omitted from the prospectus in
reliance upon Rule 430A. There have been or will promptly be delivered
to you four signed copies of such registration statement and amendments,
four copies of each exhibit filed therewith, and conformed copies of
such registration statement and amendments (but without exhibits) and of
the related preliminary prospectus or prospectuses and final forms of
prospectus for each of the Underwriters.
Such registration statement (as amended, if applicable) at the
time it becomes effective and the prospectus constituting a part thereof
(including the information, if any, deemed to be part thereof pursuant
to Rule 430A(b) and/or Rule 434), as from time to time amended or
supplemented, are hereinafter referred to as the "REGISTRATION
STATEMENT," and the "PROSPECTUS," respectively, except that if any
revised prospectus shall be provided to the Underwriters by the Company
for use in connection with the offering of the Shares which differs from
the Prospectus on file at the Commission at the time the Registration
Statement became or becomes effective (whether or not such revised
prospectus is required to be filed by the Company pursuant to Rule
424(b)), the term Prospectus shall refer to such revised prospectus from
and after the time it was provided to the Underwriters for such use. If
the Company elects to rely on Rule 434 of the 1933 Act, all references
to "Prospectus" shall be deemed to include, without limitation, the form
of prospectus and the term sheet, taken together, provided to the
Underwriters by the Company in accordance with Rule 434 of the 1933 Act
("RULE 434 PROSPECTUS"). Any registration statement (including any
amendment or supplement thereto or information which is deemed part
thereof) filed by the Company under Rule 462(b) ("RULE 462(b)
REGISTRATION
-2-
<PAGE>
STATEMENT") shall be deemed to be part of the "Registration Statement"
as defined herein, and any prospectus (including any amendment or
supplement thereto or information which is deemed part thereof) included
in such registration statement shall be deemed to be part of the
"Prospectus," as defined herein, as appropriate. The Securities
Exchange Act of 1934, as amended, and the rules and regulations of the
Commission thereunder are hereinafter collectively referred to as the
"EXCHANGE ACT."
(b) The Commission has not issued any order preventing or
suspending the use of any preliminary prospectus, and each preliminary
prospectus has conformed in all material respects with the requirements
of the 1933 Act and, as of its date, has not included any untrue
statement of a material fact or omitted to state a material fact
necessary to make the statements therein not misleading; and when the
Registration Statement became or becomes effective, and at all times
subsequent thereto, up to the First Closing Date or the Second Closing
Date hereinafter defined, as the case may be, the Registration
Statement, including the information deemed to be part of the
Registration Statement at the time of effectiveness pursuant to Rule
430A(b), if applicable, and the Prospectus and any amendments or
supplements thereto, contained or will contain all statements that are
required to be stated therein in accordance with the 1933 Act and in all
material respects conformed or will in all material respects conform to
the requirements of the 1933 Act, and neither the Registration Statement
nor the Prospectus, nor any amendment or supplement thereto, included or
will include any untrue statement of a material fact or omitted or will
omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading; PROVIDED, HOWEVER, that
the Company makes no representation or warranty as to information
contained in or omitted from any preliminary prospectus, the
Registration Statement, the Prospectus or any such amendment or
supplement in reliance upon and in conformity with written information
furnished to the Company by or on behalf of any Underwriter through the
Representatives specifically for use in the preparation thereof.
(c) The Company and its subsidiaries (as defined in the 1933
Act) have been duly incorporated and are validly existing as
corporations in good standing under the laws of their respective places
of incorporation, with corporate power and authority to own their
properties and conduct their business as described in the Prospectus;
the Company and each of its subsidiaries are duly qualified to do
business as foreign corporations under the corporation law of, and are
in good standing as such in, each jurisdiction in which they own or
lease substantial properties, have an office, or in which substantial
business is conducted and such qualification is required except in any
such case where the failure to so qualify or be in good standing would
not have a material adverse effect upon the Company and its subsidiaries
taken as a whole; and no proceeding of which the Company has knowledge
has been instituted in any such jurisdiction, revoking, limiting or
curtailing, or seeking to revoke, limit or curtail, such power and
authority or qualification.
(d) Except as disclosed in the Registration Statement, the
Company owns directly or indirectly all of the issued and outstanding
capital stock of each of its subsidiaries, free and clear of any claims,
liens, encumbrances or security interests,
-3-
<PAGE>
and all of such capital stock has been duly authorized and validly
issued and is fully paid and nonassessable.
(e) The issued and outstanding shares of capital stock of the
Company as set forth in the Prospectus have been duly authorized and
validly issued, are fully paid and nonassessable, and conform to the
description thereof contained in the Prospectus.
(f) The Shares have been duly authorized and when issued,
delivered and paid for pursuant to this Agreement, will be validly
issued, fully paid and nonassessable, and will conform to the
description thereof contained in the Prospectus.
(g) The making and performance by the Company of this
Agreement and the Pricing Agreement have been duly authorized by all
necessary corporate action and will not violate any provision of the
Company's charter or bylaws and will not result in the breach, or be in
contravention, of any provision of any agreement, franchise, license,
indenture, mortgage, deed of trust, or other instrument to which the
Company or any subsidiary is a party or by which the Company, any
subsidiary or the property of any of them may be bound or affected, or
any order, rule or regulation applicable to the Company or any
subsidiary of any court or regulatory body, administrative agency or
other governmental body having jurisdiction over the Company or any
subsidiary or any of their respective properties, or any order of any
court or governmental agency or authority entered in any proceeding to
which the Company or any subsidiary was or is now a party or by which it
is bound, except for violations, breaches or contraventions (other than
those related to any provisions of the Company's charter or bylaws)
which would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole. No consent, approval, authorization or
other order of any court, regulatory body, administrative agency or
other governmental body is required for the execution and delivery of
this Agreement or the Pricing Agreement or the consummation of the
transactions contemplated herein or therein, except for compliance with
the 1933 Act and blue sky laws applicable to the public offering of the
Shares by the several Underwriters and clearance of such offering with
the National Association of Securities Dealers, Inc. ("NASD"). This
Agreement has been duly executed and delivered by the Company.
(h) Each of the accountants who have expressed their opinions
with respect to the financial statements and schedules in the
Registration Statement are independent accountants as required by the
1933 Act.
(i) The consolidated financial statements and schedules of
the Company included in the Registration Statement present fairly the
consolidated financial position of the Company as of the respective
dates of such financial statements, and the consolidated results of
operations and cash flows of the Company for the respective periods
covered thereby, all in conformity with generally accepted accounting
principles consistently applied throughout the periods involved, except
as disclosed in the Prospectus. The financial information set forth in
the Prospectus under "Selected Consolidated Financial Information and
Operating Data" presents fairly on the basis stated in the Prospectus,
the information set forth therein.
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<PAGE>
The financial statements of G.H.S.C., Inc. and the Contract
Services Division of Louis F. Gatti, Inc., Dixon Pharmacy, Inc.,
Extended Care Associates, Inc., Good Samaritan Supply Services, Inc.,
Nihan & Martin, Inc., Pharmed, Inc., Royal Care of America, Inc.,
Sterling Acquisition Partners, Inc., Williamson Pharmacy - Institutional
Division, Williamson Drug Company, Inc. and Johnson Pharmacy and Medical
Supply, Inc. (each, a "COMPLETED ACQUISITION" and, collectively, the
"COMPLETED ACQUISITIONS") included in the Registration Statement present
fairly the financial position of each Completed Acquisition, as
applicable, as of the respective date of such financial statements, and
the results of operations and cash flows of each Completed Acquisition,
as applicable, for the respective periods covered thereby, all in
conformity with generally accepted accounting principles consistently
applied throughout the periods involved, except as disclosed in the
Prospectus.
The pro forma financial statements and other pro forma
information included in the Prospectus present fairly the information
shown therein, have been prepared in accordance with generally accepted
accounting principles and the Commission's rules and guidelines with
respect to pro forma financial statements and other pro forma
information, have been properly compiled on the pro forma basis
described therein, and, in the opinion of the Company, the assumptions
used in the preparation thereof are reasonable and the adjustments used
therein are appropriate under the circumstances.
(j) Neither the Company nor any subsidiary is in violation of
its charter or in default under any consent decree, or in default with
respect to any material provision of any lease, loan agreement,
franchise, license, permit or other contract obligation to which it is a
party; and there does not exist any state of facts which constitutes an
event of default as defined in such documents or which, with notice or
lapse of time or both, would constitute such an event of default, in
each case, except for defaults which neither singly nor in the aggregate
are material to the Company and its subsidiaries taken as a whole.
(k) There are no material legal or governmental proceedings
pending, or to the Company's knowledge, threatened to which the Company
or any subsidiary is or may be a party or of which material property
owned or leased by the Company or any subsidiary is or may be the
subject, or related to environmental or discrimination matters which are
not disclosed in the Prospectus, or which question the validity of this
Agreement or the Pricing Agreement or any action taken or to be taken
pursuant hereto or thereto.
(l) There are no holders of securities of the Company having
rights to registration thereof or preemptive rights to purchase Common
Stock except as disclosed in the Prospectus. Holders of registration
rights have waived such rights with respect to the offering being made
by the Prospectus.
(m) The Company and each of its subsidiaries have good and
marketable title to all the properties and assets reflected as owned in
the financial statements hereinabove described (or elsewhere in the
Prospectus), subject to no lien, mortgage, pledge, charge or encumbrance
of any kind except those, if any, reflected in such
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<PAGE>
financial statements (or elsewhere in the Prospectus) or which are not
material to the Company and its subsidiaries taken as a whole. The
Company and each of its subsidiaries hold their respective leased
properties which are material to the Company and its subsidiaries taken
as a whole under valid and binding leases.
(n) The Company has not taken and will not take, directly or
indirectly, any action designed to or which has constituted or which
might reasonably be expected to cause or result, under the Exchange Act
or otherwise, in stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Shares.
(o) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus, and except as
contemplated by the Prospectus, the Company and its subsidiaries, taken
as a whole, have not incurred any material liabilities or obligations,
direct or contingent, nor entered into any material transactions not in
the ordinary course of business and there has not been any material
adverse change in their condition (financial or otherwise) or results of
operations nor any material change in their capital stock, short-term
debt or long-term debt.
(p) The Company agrees not to offer, sell, contract to sell
or otherwise dispose of any Common Stock or securities convertible into
Common Stock (except for the issuance of the Additional GTCR Shares and
Common Stock issued pursuant to currently outstanding options, upon
conversion of the Royal Care Note, pursuant to the Good Samaritan
Shareholders Agreement and in connection with possible future
acquisitions) for a period of 180 days after this Agreement becomes
effective without the prior written consent of William Blair & Company,
L.L.C. In addition, the Company's executive officers, directors and
other stockholders, holding in the aggregate all of the Company's
currently outstanding shares of Common Stock, have agreed not to offer,
sell, contract to sell or otherwise dispose of any Common Stock for a
period of 180 days after this Agreement becomes effective without the
prior written consent of William Blair & Company, L.L.C.
(q) There is no material document of a character required to
be described in the Registration Statement or the Prospectus or to be
filed as an exhibit to the Registration Statement which is not described
or filed as required.
(r) The Company, together with its subsidiaries, owns and
possesses all rights, title and interest in and to, or has duly licensed
from third parties, all patents, patent rights, trade secrets,
inventions, know-how, trademarks, trade names, copyrights, service marks
and other proprietary rights ("TRADE RIGHTS") material to the business
of the Company and each of its subsidiaries taken as a whole. Neither
the Company nor any of its subsidiaries has received any notice of
infringement, misappropriation or conflict from any third party as to
such material Trade Rights which has not been resolved or disposed of
and neither the Company nor any of its subsidiaries has infringed,
misappropriated or otherwise conflicted with material Trade Rights of
any third parties, which infringement, misappropriation or conflict
-6-
<PAGE>
would have a material adverse effect upon the condition (financial or
otherwise) or results of operations of the Company and its subsidiaries
taken as a whole.
(s) The conduct of the business of the Company and each of
its subsidiaries is in compliance in all respects with applicable
federal, state, local and foreign laws and regulations, except where the
failure to be in compliance would not have a material adverse effect
upon the condition (financial or otherwise) or results of operations of
the Company and its subsidiaries taken as a whole. Each of the Company
and its subsidiaries has the requisite provider number or other
authorization to bill the Medicare program and the respective Medicaid
program in the state or states in which such entity operates. There is
no action pending or, to the Company's knowledge, threatened which could
result in a revocation of any such provider number or authorization or
result in the Company's or any subsidiary's exclusion from the Medicare
or any state Medicaid programs. To the Company's best knowledge, the
Company's and each subsidiary's business practices do not violate any
applicable provisions of federal or state laws governing Medicare or any
state Medicaid programs, including, without limitation, Sections
1320a-7a and 1320a-7b of Title 42 of the United States Code and no
individual with an ownership or control interest, as defined in 42
U.S.C. Section 1320a-3(a)(3), in the Company or any subsidiary, or who
is an officer, director or managing employee as defined in 42 U.S.C.
Section 1320a-5(b), of the Company or any subsidiary is a person
described in 42 U.S.C. Section 1320a-7(b)(8)(B). To the Company's best
knowledge, the Company's and each subsidiary's business practices do not
violate any federal or state laws regarding physician ownership of (or
financial relationship with) and referral to entities providing
healthcare related goods or services, or laws requiring disclosure of
financial interests held by physicians in entities to which they may
refer patients for the provision of health care related goods or
services.
(t) The property, assets and operations of the Company and
the subsidiaries comply in all material respects with all applicable
federal, state and local laws, rules, orders, decrees, judgments,
injunctions, licenses, permits or regulations relating to environmental
matters (the "ENVIRONMENTAL LAWS"), except to the extent that the lack
of compliances with such Environmental Laws would not, singularly or in
the aggregate, have a material adverse effect upon the condition
(financial or otherwise) or results of operations of the Company and its
subsidiaries taken as a whole. To the Company's best knowledge, none of
the Company's or any subsidiary's property, assets or operations is the
subject of any ongoing or proposed remedial action in order to respond
to a release of any substance regulated by or form the basis of
liability under any Environmental Laws (a "HAZARDOUS MATERIAL") into the
environment or is in contravention of any federal, state, local or
foreign law, order or regulation. Neither the Company nor any
subsidiary has received any notice or claim, nor are there any pending
or, to the Company's best knowledge, threatened or reasonably
anticipated lawsuits against it with respect to violations of an
Environmental Law or in condition with the release of any Hazardous
Material into the environment. To the Company's best knowledge, neither
the Company nor any subsidiary has any material contingent liability in
connection with any release of Hazardous Material into the environment.
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<PAGE>
(u) All offers and sales of the Company's capital stock prior
to the date hereof were at all relevant times exempt from the
registration requirements of the 1933 Act and were duly registered with
or the subject of an available exemption from the registration
requirements of the applicable state securities or blue sky laws.
(v) The Company has filed all necessary federal and state
income and franchise tax returns and has paid all taxes shown as due
thereon, and there is no tax deficiency that has been, or to the
knowledge of the Company might be, asserted against the Company or any
of its properties or assets that would or could be expected to have a
material adverse affect upon the condition (financial or otherwise) or
results of operations of the Company and its subsidiaries taken as a
whole.
(w) The Company has filed a registration statement pursuant
to Section 12(g) of the Exchange Act to register the Common Stock
thereunder, has filed an application to list the Shares on the Nasdaq
National Market, and has received notification that the listing has been
approved, subject to notice of issuance or sale of the Shares, as the
case may be.
(x) The Company is not, and does not intend to conduct its
business in a manner in which it would become, an "investment company"
as defined in Section 3(a) of the Investment Company Act of 1940, as
amended ("INVESTMENT COMPANY ACT").
(y) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter
92-198, AN ACT RELATING TO DISCLOSURE OF DOING BUSINESS WITH CUBA, and
the Company further agrees that if it commences engaging in business
with the government of Cuba or with any person or affiliate located in
Cuba after the date the Registration Statement becomes or has become
effective with the Commission or with the Florida Department of Banking
and Finance (the "Department"), whichever date is later, or if the
information reported in the Prospectus, if any, concerning the Company's
business with Cuba or with any person or affiliate located in Cuba
changes in any material way, the Company will provide the Department
notice of such business or change, as appropriate, in a form acceptable
to the Department.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE UNDERWRITERS. The
Representatives, on behalf of the several Underwriters, represent and warrant to
the Company that the information set forth (a) on the cover page of the
Prospectus with respect to price, underwriting discount and terms of the
offering and (b) under "Underwriting" in the Prospectus was furnished to the
Company by and on behalf of the Underwriters for use in connection with the
preparation of the Registration Statement and is correct and complete in all
material respects.
SECTION 4. PURCHASE, SALE AND DELIVERY OF SHARES. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriters named in Schedule A hereto, and the Underwriters agree, severally
and not jointly, to purchase the Firm Shares from the Company at the price per
share set forth in the Pricing Agreement.
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<PAGE>
The obligation of each Underwriter to the Company shall be to purchase from
the Company that number of full shares set forth opposite the name of such
Underwriter in Schedule A hereto. The initial public offering price and the
purchase price shall be set forth in the Pricing Agreement.
At 9:00 A.M., Chicago Time, on the fourth business day, if permitted under
Rule 15c6-1 under the Exchange Act, (or the third business day if required under
Rule 15c6-1 under the Exchange Act or unless postponed in accordance with the
provisions of Section 12) following the date the Registration Statement becomes
effective (or, if the Company has elected to rely upon Rule 430A, the fourth
business day, if permitted under Rule 15c6-1 under the Exchange Act, (or the
third business day if required under Rule 15c6-1 under the Exchange Act) after
execution of the Pricing Agreement), or such other time not later than ten
business days after such date as shall be agreed upon by the Representatives and
the Company, the Company will deliver to you at the offices of counsel for the
Underwriters or through the facilities of The Depository Trust Company for the
accounts of the several Underwriters, certificates representing the Firm Shares
to be sold by it against payment of the purchase price therefor by delivery of
federal or other immediately available funds, by wire transfer or otherwise, to
the Company. Such time of delivery and payment is herein referred to as the
"First Closing Date." The certificates for the Firm Shares so to be delivered
will be in such denominations and registered in such names as you request by
notice to the Company prior to 10:00 A.M., Chicago Time, on the second full
business day preceding the First Closing Date, and will be made available at the
Company's expense for checking and packaging by the Representatives at 10:00
A.M., Chicago Time, on the business day preceding the First Closing Date.
Payment for the Firm Shares so to be delivered shall be made at the time and in
the manner described above at the offices of counsel for the Underwriters.
In addition, on the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company hereby grants an option to the several Underwriters to purchase,
severally and not jointly, up to an aggregate of 803,550 Option Shares, at the
same purchase price per share to be paid for the Firm Shares, for use solely in
covering any overallotments made by the Underwriters in the sale and
distribution of the Firm Shares. The option granted hereunder may be exercised
at any time (but not more than once) within 30 days after the date of the
initial public offering upon notice by you to the Company setting forth the
aggregate number of Option Shares as to which the Underwriters are exercising
the option, the names and denominations in which the certificates for such
shares are to be registered and the time and place at which such certificates
will be delivered. Such time of delivery (which may not be earlier than the
First Closing Date), being herein referred to as the "Second Closing Date,"
shall be determined by you, but if at any time other than the First Closing
Date, shall not be earlier than three nor later than 10 full business days after
delivery of such notice of exercise. The number of Option Shares to be
purchased by each Underwriter shall be determined by multiplying the number of
Option Shares to be sold by a fraction, the numerator of which is the number of
Firm Shares to be purchased by such Underwriter as set forth opposite its name
in Schedule A and the denominator of which is the total number of Firm Shares
(subject to such adjustments to eliminate any fractional share purchases as you
in your absolute discretion may make). Certificates for the Option Shares will
be made available at the Company's expense for checking and packaging at 10:00
A.M., Chicago Time, on the first full business
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<PAGE>
day preceding the Second Closing Date. The manner of payment for and
delivery of the Option Shares shall be the same as for the Firm Shares as
specified in the preceding paragraph.
You have advised the Company that each Underwriter has authorized you to
accept delivery of its Shares, to make payment and to receipt therefor. You,
individually and not as the Representatives of the Underwriters, may make
payment for any Shares to be purchased by any Underwriter whose funds shall not
have been received by you by the First Closing Date or the Second Closing Date,
as the case may be, for the account of such Underwriter, but any such payment
shall not relieve such Underwriter from any obligation hereunder.
SECTION 5. COVENANTS OF THE COMPANY. The Company covenants and agrees
that:
(a) The Company will advise you promptly of the issuance by
the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the institution of any proceedings for that
purpose, or of any notification of the suspension of qualification of
the Shares for sale in any jurisdiction or the initiation or threatening
of any proceedings for that purpose, and will also advise you promptly
of any request of the Commission for amendment or supplement of the
Registration Statement, of any preliminary prospectus or of the
Prospectus, or for additional information.
(b) The Company will give you notice of its intention to file
or prepare any amendment to the Registration Statement (including any
post-effective amendment) or any Rule 462(b) Registration Statement or
any amendment or supplement to the Prospectus (including any revised
prospectus which the Company proposes for use by the Underwriters in
connection with the offering of the Shares which differs from the
prospectus on file at the Commission at the time the Registration
Statement became or becomes effective, whether or not such revised
prospectus is required to be filed pursuant to Rule 424(b) and any term
sheet as contemplated by Rule 434) and will furnish you with copies of
any such amendment or supplement a reasonable amount of time prior to
such proposed filing or use, as the case may be, and will not file any
such amendment or supplement or use any such prospectus to which you or
counsel for the Underwriters shall reasonably object.
(c) If the Company elects to rely on Rule 434 of the 1933
Act, the Company will prepare a term sheet that complies with the
requirements of Rule 434. If the Company elects not to rely on Rule
434, the Company will provide the Underwriters with copies of the form
of prospectus, in such numbers as the Underwriters may reasonably
request, and file with the Commission such prospectus in accordance with
Rule 424(b) of the 1933 Act by the close of business in New York City on
the second business day immediately succeeding the date of the Pricing
Agreement. If the Company elects to rely on Rule 434, the Company will
provide the Underwriters with copies of the form of Rule 434 Prospectus,
in such numbers as the Underwriters may reasonably request, by the close
of business in New York on the business day immediately succeeding the
date of the Pricing Agreement.
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<PAGE>
(d) If at any time when a prospectus relating to the Shares
is required to be delivered under the 1933 Act any event occurs as a
result of which the Prospectus, including any amendments or supplements,
would include an untrue statement of a material fact, or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading, or if it is necessary at any time to amend
the Prospectus, including any amendments or supplements thereto and
including any revised prospectus which the Company proposes for use by
the Underwriters in connection with the offering of the Shares which
differs from the prospectus on file with the Commission at the time of
effectiveness of the Registration Statement, whether or not such revised
prospectus is required to be filed pursuant to Rule 424(b) to comply
with the 1933 Act, the Company promptly will advise you thereof and will
promptly prepare and file with the Commission an amendment or supplement
which will correct such statement or omission or an amendment which will
effect such compliance; and, in case any Underwriter is required to
deliver a prospectus nine months or more after the effective date of the
Registration Statement, the Company upon request, but at the expense of
such Underwriter, will prepare promptly such prospectus or prospectuses
as may be necessary to permit compliance with the requirements of
Section 10(a)(3) of the 1933 Act.
(e) Neither the Company nor any of its subsidiaries will,
prior to the earlier of the Second Closing Date or termination or
expiration of the related option, incur any liability or obligation,
direct or contingent, or enter into any material transaction, other than
in the ordinary course of business, except as contemplated by the
Prospectus.
(f) Neither the Company nor any of its subsidiaries will
acquire any capital stock of the Company prior to the earlier of the
Second Closing Date or termination or expiration of the related option
nor will the Company declare or pay any dividend or make any other
distribution upon the Common Stock payable to stockholders of record on
a date prior to the earlier of the Second Closing Date or termination or
expiration of the related option, except in either case as contemplated
by the Prospectus.
(g) Not later than February 16, 1998 the Company will make
generally available to its security holders an earnings statement (which
need not be audited) covering a period of at least 12 months beginning
after the effective date of the Registration Statement, which will
satisfy the provisions of the last paragraph of Section 11(a) of the
1933 Act.
(h) During such period as a prospectus is required by law to
be delivered in connection with offers and sales of the Shares by an
Underwriter or dealer, the Company will furnish to you at its expense,
subject to the provisions of subsection (d) hereof, copies of the
Registration Statement, the Prospectus, each preliminary prospectus and
all amendments and supplements to any such documents in each case as
soon as available and in such quantities as you may reasonably request,
for the purposes contemplated by the 1933 Act.
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<PAGE>
(i) The Company will cooperate with the Underwriters in
qualifying or registering the Shares for sale under the blue sky laws of
such jurisdictions as you designate, and will continue such
qualifications in effect so long as reasonably required for the
distribution of the Shares. The Company shall not be required to
qualify as a foreign corporation or to file a general consent to service
of process in any such jurisdiction where it is not currently qualified
or where it would be subject to taxation as a foreign corporation.
(j) During the period of five years hereafter, the Company
will furnish you upon your written request with a copy (i) as soon as
practicable after the filing thereof, of each report filed by the
Company with the Commission, any securities exchange or the NASD; (ii)
as soon as practicable after the release thereof, of each material press
release in respect of the Company; and (iii) as soon as available, of
each report of the Company mailed to stockholders.
(k) The Company will use the net proceeds received by it from
the sale of the Shares being sold by it in the manner specified in the
Prospectus.
(l) If, at the time of effectiveness of the Registration
Statement, any information shall have been omitted therefrom in reliance
upon Rule 430A and/or Rule 434, then immediately following the execution
of the Pricing Agreement, the Company will prepare, and file or transmit
for filing with the Commission in accordance with such Rule 430A, Rule
424(b) and/or Rule 434, copies of an amended Prospectus, or, if required
by such Rule 430A and/or Rule 434, a post-effective amendment to the
Registration Statement (including an amended Prospectus), containing all
information so omitted. If required, the Company will prepare and file,
or transmit for filing, a Rule 462(b) Registration Statement not later
than the date of the execution of the Pricing Agreement. If a Rule
462(b) Registration Statement is filed, the Company shall make payment
of, or arrange for payment of, the additional registration fee owing to
the Commission required by Rule 111.
(m) The Company will comply with all registration, filing and
reporting requirements of the Exchange Act and the Nasdaq National
Market and will file with the Commission in a timely manner all reports
on Form SR required by Rule 463 and will furnish you copies of any such
reports as soon as practicable after the filing thereof.
SECTION 6. PAYMENT OF EXPENSES. Whether or not the transactions
contemplated hereunder are consummated or this Agreement becomes effective as
to all of its provisions or is terminated, the Company agrees to pay (i) all
costs, fees and expenses (other than legal fees and disbursements of counsel
for the Underwriters and the expenses incurred by the Underwriters) incurred
in connection with the performance of the Company's obligations hereunder,
including without limiting the generality of the foregoing, all fees and
expenses of legal counsel for the Company and of the Company's independent
accountants, all costs and expenses incurred in connection with the
preparation, printing, filing and distribution of the Registration Statement,
each preliminary prospectus and the Prospectus (including all exhibits and
financial statements) and all amendments and supplements provided for herein,
this Agreement, the Pricing Agreement and the Blue Sky Memorandum, (ii) all
costs, fees
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<PAGE>
and expenses (including legal fees not to exceed $10,000 and disbursements of
counsel for the Underwriters) incurred by the Underwriters in connection with
qualifying or registering all or any part of the Shares for offer and sale
under blue sky laws, including the preparation of a blue sky memorandum
relating to the Shares and clearance of such offering with the NASD; and
(iii) all fees and expenses of the Company's transfer agent, printing of the
certificates for the Shares and all transfer taxes, if any, with respect to
the sale and delivery of the Shares to the several Underwriters.
SECTION 7. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters to purchase and pay for the Firm
Shares on the First Closing Date and the Option Shares on the Second Closing
Date shall be subject to the accuracy of the representations and warranties
on the part of the Company herein set forth as of the date hereof and as of
the First Closing Date or the Second Closing Date, as the case may be, to the
accuracy of the statements of officers of the Company made pursuant to the
provisions hereof, to the performance by the Company of its obligations
hereunder, and to the following additional conditions:
(a) The Registration Statement shall have become effective
either prior to the execution of this Agreement or not later than 1:00
P.M., Chicago Time, on the first full business day after the date of
this Agreement, or such later time as shall have been consented to by
you but in no event later than 1:00 P.M., Chicago Time, on the third
full business day following the date hereof; and prior to the First
Closing Date or the Second Closing Date, as the case may be, no stop
order suspending the effectiveness of the Registration Statement shall
have been issued and no proceedings for that purpose shall have been
instituted or shall be pending or, to the knowledge of the Company or
you, shall be contemplated by the Commission. If the Company has
elected to rely upon Rule 430A and/or Rule 434, the information
concerning the initial public offering price of the Shares and
price-related information shall have been transmitted to the Commission
for filing pursuant to Rule 424(b) within the prescribed period and the
Company will provide evidence satisfactory to the Representatives of
such timely filing (or a post-effective amendment providing such
information shall have been filed and declared effective in accordance
with the requirements of Rules 430A and 424(b)). If a Rule 462(b)
Registration Statement is required, such Registration Statement shall
have been transmitted to the Commission for filing and become effective
within the prescribed time period and, prior to the First Closing Date,
the Company shall have provided evidence of such filing and
effectiveness in accordance with Rule 462(b).
(b) The Shares shall have been qualified for sale under the
blue sky laws of such states as shall have been specified by the
Representatives.
(c) The legality and sufficiency of the authorization,
issuance and sale of the Shares hereunder, the validity and form of the
certificates representing the Shares, the execution and delivery of this
Agreement and the Pricing Agreement, and all corporate proceedings and
other legal matters incident thereto, and the form of the Registration
Statement and the Prospectus (except financial statements) shall have
been approved by counsel for the Underwriters exercising reasonable
judgment.
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(d) You shall not have advised the Company that the
Registration Statement or the Prospectus or any amendment or supplement
thereto, contains an untrue statement of fact, which, in the opinion of
counsel for the Underwriters, is material or omits to state a fact
which, in the opinion of such counsel, is material and is required to be
stated therein or necessary to make the statements therein not
misleading.
(e) Subsequent to the execution and delivery of this
Agreement, there shall not have occurred any change, or any development
involving a prospective change, in or affecting particularly the
business or properties of the Company or its subsidiaries, whether or
not arising in the ordinary course of business, which, in the judgment
of the Representatives, makes it impractical or inadvisable to proceed
with the public offering or purchase of the Shares as contemplated
hereby.
(f) The Good Samaritan Consolidation (as defined in the
Registration Statement and Prospectus) shall have occurred.
(g) There shall have been furnished to you, as Representatives of
the Underwriters, on the First Closing Date or the Second Closing Date,
as the case may be, except as otherwise expressly provided below:
(i) An opinion of Gardner, Carton & Douglas, counsel for the
Company addressed to the Underwriters and dated the First Closing
Date or the Second Closing Date, as the case may be, to the effect
that:
(1) the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of
the State of Delaware with corporate power and authority to own
its properties and conduct its business as described in the
Prospectus; and the Company has been duly qualified to do
business as a foreign corporation under the corporation law of,
and is in good standing as such in, every jurisdiction where the
ownership or leasing of property, or the conduct of its
business requires such qualification except where the
failure so to qualify would not have a material adverse
effect upon the condition (financial or otherwise) or
results of operations of the Company and its subsidiaries
taken as a whole;
(2) an opinion to the same general effect as clause
(1) of this subparagraph (i) in respect of the following
subsidiaries of the Company: AMC Regional Holdings, Inc.,
Royal Care Holdings, Inc., Nihan & Martin, Inc.,
Specialized Patient Care Services, Inc., Sterling
Healthcare Services, Inc. and Pharmed Holdings, Inc. (the
"SIGNIFICANT SUBSIDIARIES");
(3) all of the issued and outstanding capital stock
of each Significant Subsidiary of the Company has been
duly authorized, validly issued and is fully paid and
nonassessable, and, except as disclosed in the
Registration Statement, the Company owns of record, either
directly or
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indirectly, all of the outstanding capital stock of each
Significant Subsidiary, and to the best knowledge of such
counsel, such stock is owned free and clear of any claims,
liens, encumbrances or security interests;
(4) the authorized capital stock of the Company, of
which there is outstanding the amount set forth in the
Registration Statement and Prospectus (except for
subsequent issuances, if any, pursuant to stock options or
other rights referred to in the Prospectus), conforms as
to legal matters in all material respects to the
description thereof in the Registration Statement and
Prospectus;
(5) the issued and outstanding capital stock of the
Company has been duly authorized and validly issued and is
fully paid and nonassessable;
(6) the certificates for the Shares to be delivered
hereunder are in due and proper form, and when duly
countersigned by the Company's transfer agent and
delivered to you or upon your order against payment of the
agreed consideration therefor in accordance with the
provisions of this Agreement and the Pricing Agreement,
the Shares represented thereby will be duly authorized and
validly issued, fully paid and nonassessable;
(7) the Registration Statement has become effective
under the 1933 Act, and, to the best knowledge of such
counsel, no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings
for that purpose have been instituted or are pending or
contemplated under the 1933 Act, and the Registration
Statement (including the information deemed to be part of
the Registration Statement at the time of effectiveness
pursuant to Rule 430A(b) and/or Rule 434, if applicable),
the Prospectus and each amendment or supplement thereto
(except for the financial statements and other statistical
or financial data included therein as to which such
counsel need express no opinion) comply as to form in all
material respects with the requirements of the 1933 Act;
such counsel have no reason to believe that either the
Registration Statement (including the information deemed
to be part of the Registration Statement at the time of
effectiveness pursuant to Rule 430A(b) and/or Rule 434, if
applicable) or the Prospectus, or the Registration
Statement or the Prospectus as amended or supplemented
(except as aforesaid), as of their respective effective or
issue dates, contained any untrue statement of a material
fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein
not misleading or that the Prospectus as amended or
supplemented, if applicable, as of the First Closing Date
or the Second Closing Date, as the case may be, contained
any untrue statement of a material fact or omitted to
state any material fact necessary to make the statements
therein not misleading in light of the circumstances under
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which they were made; the statements in the Registration
Statement and the Prospectus summarizing statutes, rules
and regulations are accurate and fairly and correctly
present the information required to be presented by the
1933 Act or the rules and regulations thereunder, in all
material respects and such counsel does not know of any
statutes, rules and regulations required to be described
or referred to in the Registration Statement or the
Prospectus that are not described or referred to therein
as required; and such counsel does not know of any legal
or governmental proceedings pending or threatened required
to be described in the Prospectus which are not described
as required, nor of any contracts or documents of a
character required to be described in the Registration
Statement or Prospectus or to be filed as exhibits to the
Registration Statement which are not described or filed,
as required;
(8) the statements under the captions "Management --
Employee Benefit Plans," "-- Compensation Committee
Interlocks and Insider Participation" "Certain
Transactions," "Description of Capital Stock" and "Shares
Eligible for Future Sale" in the Prospectus, insofar as
such statements constitute a summary of documents referred
to therein or matters of law, are accurate summaries and
fairly and correctly present, in all material respects,
the information called for with respect to such documents
and matters;
(9) this Agreement and the Pricing Agreement and the
performance of the Company's obligations hereunder have
been duly authorized by all necessary corporate action and
this Agreement and the Pricing Agreement have been duly
executed and delivered by and on behalf of the Company,
and are legal, valid and binding agreements of the
Company, enforceable in accordance with their terms,
except as enforceability of the same may be limited by
bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting creditors' rights and by the
exercise of judicial discretion in accordance with general
principles applicable to equitable and similar remedies
and except as to those provisions relating to indemnities
for liabilities arising under the 1933 Act as to which no
opinion need be expressed; and no approval, authorization
or consent of any public board, agency, or instrumentality
of the United States or of any state or other jurisdiction
is necessary in connection with the issue or sale of the
Shares pursuant to this Agreement (other than under the
1933 Act, applicable blue sky laws and the rules of the
NASD) or the consummation by the Company of any other
transactions contemplated hereby;
(10) the execution and performance of this Agreement
will not contravene any of the provisions of, or result in
a default under, any agreement, franchise, license,
indenture, mortgage, deed of trust, or other instrument
known to such counsel, of the Company or any of its
subsidiaries or by which the property of any of them is
bound and which contravention or default would be material
to the Company and its
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subsidiaries taken as a whole; or violate any of the
provisions of the charter or bylaws of the Company or any
of its subsidiaries or, so far as is known to such
counsel, violate any statute, order, rule or regulation of
any regulatory or governmental body having jurisdiction
over the Company or any of its subsidiaries; and
(11) to such counsel's knowledge, all offers and
sales of the Company's capital stock since the Company's
inception were at all relevant times exempt from the
registration requirements of the 1933 Act and were duly
registered or the subject of an available exemption from,
or subject to oral or written "no-action" position with
respect to, the registration requirements of the
applicable state securities or blue sky laws.
In rendering such opinion, such counsel may state
that they are relying upon the certificate of LaSalle National Bank,
Chicago, Illinois, the transfer agent for the Common Stock, as to
the number of shares of Common Stock at any time or times
outstanding, and that insofar as their opinion under clause (7)
above relates to the accuracy and completeness of the Prospectus and
Registration Statement, it is based upon a general review with the
Company's representatives and independent accountants of the
information contained therein, without independent verification by
such counsel of the accuracy or completeness of such information.
Such counsel may also rely upon the opinions of other competent
counsel and, as to factual matters, on certificates of officers of
the Company and of state officials, in which case their opinion is
to state that they are so doing and copies of said opinions or
certificates are to be attached to the opinion unless said opinions
or certificates (or, in the case of certificates, the information
therein) have been furnished to the Representatives in other form.
(ii) Such opinion or opinions of Chapman and Cutler, counsel
for the Underwriters, dated the First Closing Date or the Second
Closing Date, as the case may be, with respect to the incorporation
of the Company, the validity of the Shares, the Registration
Statement and the Prospectus and other related matters as you may
reasonably require, and the Company shall have furnished to such
counsel such documents and shall have exhibited to them such papers
and records as they request for the purpose of enabling them to pass
upon such matters.
(iii) A certificate of the chief executive officer and the
principal financial officer of the Company, dated the First Closing
Date or the Second Closing Date, as the case may be, to the effect
that:
(1) the representations and warranties of the Company set
forth in Section 2 of this Agreement are true and correct as of
the date of this Agreement and as of the First Closing Date or
the Second Closing Date, as the case may be, and the Company has
complied with all the
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agreements and satisfied all the conditions on its part to be
performed or satisfied at or prior to such Closing Date; and
(2) the Commission has not issued an order preventing or
suspending the use of the Prospectus or any preliminary
prospectus filed as a part of the Registration Statement or any
amendment thereto; no stop order suspending the effectiveness
of the Registration Statement has been issued; and to the best
knowledge of the respective signers, no proceedings for that
purpose have been instituted or are pending or contemplated
under the 1933 Act.
The delivery of the certificate provided for in this
subparagraph shall be and constitute a representation and warranty
of the Company as to the facts required in the immediately foregoing
clauses (1) and (2) of this subparagraph to be set forth in said
certificate.
(iv) At the time the Pricing Agreement is executed and also on
the First Closing Date or the Second Closing Date, as the case may
be, there shall be delivered to you a letter addressed to you, as
Representatives of the Underwriters, from Ernst & Young, LLP,
independent accountants, the first one to be dated the date of the
Pricing Agreement, the second one to be dated the First Closing Date
and the third one (in the event of a second closing) to be dated the
Second Closing Date, to the effect set forth in Schedule B. There
shall not have been any change or decrease specified in the letters
referred to in this subparagraph which makes it impractical or
inadvisable in the judgment of the Representatives to proceed with
the public offering or purchase of the Shares as contemplated hereby.
(v) At the time the Pricing Agreement is executed and also on
the First Closing Date or the Second Closing Date, as the case may
be, there shall be delivered to you a letter addressed to you, as
Representatives of the Underwriters, from S.B. Hoover & Company,
L.L.P., independent accountants, the first one to be dated the date
of the Pricing Agreement, the second one to be dated the First
Closing Date and the third one (in the event of a second closing) to
be dated the Second Closing Date, to the effect set forth in
Schedule C.
(vi) At the time the Pricing Agreement is executed and also on
the First Closing Date or the Second Closing Date, as the case may
be, there shall be delivered to you a letter addressed to you, as
Representatives of the Underwriters, from Lindgren, Callihan, Van
Osdol & Co., Ltd., independent accountants, the first one to be
dated the date of the Pricing Agreement, the second one to be dated
the First Closing Date and the third one (in the event of a second
closing) to be dated the Second Closing Date, to the effect set
forth in Schedule D.
(vii) At the time the Pricing Agreement is executed and
also on the First Closing Date or the Second Closing Date, as the
case may be, there shall be delivered to you a letter addressed to
you, as Representatives of the
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Underwriters, from Coopers & Lybrand L.L.P., independent
accountants, the first one to be dated the date of the Pricing
Agreement, the second one to be dated the First Closing Date and the
third one (in the event of a second closing) to be dated the Second
Closing Date, to the effect set forth in Schedule E.
(viii) At the time the Pricing Agreement is executed and
also on the First Closing Date or the Second Closing Date, as the
case may be, there shall be delivered to you a letter addressed to
you, as Representatives of the Underwriters, from Price Waterhouse
LLP, independent accountants, the first one to be dated the date of
the Pricing Agreement, the second one to be dated the First Closing
Date and the third one (in the event of a second closing) to be
dated the Second Closing Date, to the effect set forth in Schedule F.
(ix) Such further certificates and documents as you may
reasonably request.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are satisfactory to you and
to Chapman and Cutler, counsel for the Underwriters, which approval shall not be
unreasonably withheld. The Company shall furnish you with such manually signed
or conformed copies of such opinions, certificates, letters and documents as you
request.
If any condition to the Underwriters' obligations hereunder to be satisfied
prior to or at the First Closing Date is not so satisfied, this Agreement at
your election will terminate upon notification to the Company without liability
on the part of any Underwriter or the Company, except for the expenses to be
paid or reimbursed by the Company pursuant to Sections 6 and 8 hereof and except
to the extent provided in Section 10 hereof.
SECTION 8. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If the sale to the
Underwriters of the Shares on the First Closing Date is not consummated because
any condition of the Underwriters' obligations hereunder is not satisfied or
because of any refusal, inability or failure on the part of the Company to
perform any agreement herein or to comply with any provision hereof, unless such
failure to satisfy such condition or to comply with any provision hereof is due
to the default or omission of any Underwriter, the Company agrees to reimburse
you and the other Underwriters upon demand for all out-of-pocket expenses
(including reasonable fees and disbursements of counsel) that shall have been
reasonably incurred by you and them in connection with the proposed purchase and
the sale of the Shares. Any such termination shall be without liability of any
party to any other party except that the provisions of this Section, Section 6
and Section 10 shall at all times be effective and shall apply.
SECTION 9. EFFECTIVENESS OF REGISTRATION STATEMENT. You and the
Company will use your and its best efforts to cause the Registration Statement
to become effective, if it has not yet become effective, and to prevent the
issuance of any stop order suspending the effectiveness of the Registration
Statement and, if such stop order be issued, to obtain as soon as possible the
lifting thereof.
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SECTION 10. INDEMNIFICATION. (a) The Company agrees to indemnify and
hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of the 1933 Act or the Exchange Act against any
losses, claims, damages or liabilities, joint or several, to which such
Underwriter or such controlling person may become subject under the 1933 Act,
the Exchange Act or other federal or state statutory law or regulation, at
common law or otherwise (including in settlement of any litigation if such
settlement is effected with the written consent of the Company), insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement, including the information
deemed to be part of the Registration Statement at the time of effectiveness
pursuant to Rule 430A and/or Rule 434, if applicable, any preliminary
prospectus, the Prospectus, or any amendment or supplement thereto, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading; and will reimburse each Underwriter and each such
controlling person for any legal or other expenses reasonably incurred by such
Underwriter or such controlling person in connection with investigating or
defending any such loss, claim, damage, liability or action; PROVIDED, HOWEVER,
that the Company will not be liable in any such case to the extent that (i) any
such loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
the Registration Statement, any preliminary prospectus, the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any Underwriter through
the Representatives, specifically for use therein; or (ii) if such statement or
omission was contained or made in any preliminary prospectus and corrected in
the Prospectus and (1) any such loss, claim, damage or liability suffered or
incurred by any Underwriter (or any person who controls any Underwriter)
resulted from an action, claim or suit by any person who purchased Shares which
are the subject thereof from such Underwriter in the offering and (2) such
Underwriter failed to deliver or provide a copy of the Prospectus to such person
at or prior to the confirmation of the sale of such Shares in any case where
such delivery is required by the 1933 Act. In addition to its other obligations
under this Section 10(a), the Company agrees that, as an interim measure during
the pendency of any claim, action, investigation, inquiry or other proceeding
arising out of or based upon any statement or omission, or any alleged statement
or omission, described in this Section 10(a), it will reimburse the Underwriters
on a monthly basis for all reasonable legal and other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the Company's
obligation to reimburse the Underwriters for such expenses and the possibility
that such payments might later be held to have been improper by a court of
competent jurisdiction. This indemnity agreement will be in addition to any
liability which the Company may otherwise have.
(b) Each Underwriter will severally indemnify and hold harmless the
Company, each of its directors, each of its officers who signed the Registration
Statement and each person, if any, who controls the Company within the meaning
of the 1933 Act or the Exchange Act, against any losses, claims, damages or
liabilities to which the Company, or any such director, officer or controlling
person may become subject under the 1933 Act, the Exchange Act or other federal
or state statutory law or regulation, at common law or
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otherwise (including in settlement of any litigation, if such settlement is
effected with the written consent of such Underwriter), insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise
out of or are based upon any untrue or alleged untrue statement of any
material fact contained in the Registration Statement, any preliminary
prospectus, the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in the Registration Statement, any
preliminary prospectus, the Prospectus, or any amendment or supplement
thereto in reliance upon and in conformity with Section 3 of this Agreement
or any other written information furnished to the Company by such Underwriter
through the Representatives specifically for use in the preparation thereof;
and will reimburse any legal or other expenses reasonably incurred by the
Company, or any such director, officer or controlling person in connection
with investigating or defending any such loss, claim, damage, liability or
action. In addition to their other obligations under this Section 10(b), the
Underwriters agree that, as an interim measure during the pendency of any
claim, action, investigation, inquiry or other proceeding arising out of or
based upon any statement or omission, or any alleged statement or omission,
described in this Section 10(b), they will reimburse the Company on a monthly
basis for all reasonable legal and other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as
to the propriety and enforceability of the Underwriters' obligation to
reimburse the Company for such expenses and the possibility that such
payments might later be held to have been improper by a court of competent
jurisdiction. This indemnity agreement will be in addition to any liability
which such Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if
a claim in respect thereof is to be made against an indemnifying party under
this Section, notify the indemnifying party of the commencement thereof; but
the omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party except to the extent
that the indemnifying party was prejudiced by such failure to notify. In
case any such action is brought against any indemnified party, and it
notifies an indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in, and, to the extent that it may
wish, jointly with all other indemnifying parties similarly notified, to
assume the defense thereof, with counsel satisfactory to such indemnified
party; PROVIDED, HOWEVER, if the defendants in any such action include both
the indemnified party and the indemnifying party and the indemnified party
shall have reasonably concluded that there may be legal defenses available to
it and/or other indemnified parties which are different from or additional to
those available to the indemnifying party, or the indemnified and
indemnifying parties may have conflicting interests which would make it
inappropriate for the same counsel to represent both of them, the indemnified
party or parties shall have the right to select separate counsel to assume
such legal defense and otherwise to participate in the defense of such action
on behalf of such indemnified party or parties. Upon receipt of notice from
the indemnifying party to such indemnified party of its election so to assume
the defense of such action and approval by the indemnified party of counsel,
the indemnifying party will not be liable to such indemnified party under
this Section for any legal or other
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expenses subsequently incurred by such indemnified party in connection with
the defense thereof unless (i) the indemnified party shall have employed such
counsel in connection with the assumption of legal defense in accordance with
the proviso to the next preceding sentence (it being understood, however,
that the indemnifying party shall not be liable for the expenses of more than
one separate counsel, approved by the Representatives in the case of
paragraph (a) representing all indemnified parties not having different or
additional defenses or potential conflicting interest among themselves who
are parties to such action), (ii) the indemnifying party shall not have
employed counsel satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of commencement of
the action or (iii) the indemnifying party has authorized the employment of
counsel for the indemnified party at the expense of the indemnifying party.
No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been a
party and indemnity could have been sought hereunder by such indemnified
party, unless such settlement includes an unconditional release of such
indemnified party from all liability arising out of such proceeding.
(d) If the indemnification provided for in this Section is unavailable to
an indemnified party under paragraphs (a) or (b) hereof in respect of any
losses, claims, damages or liabilities referred to therein, then each applicable
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company and the
Underwriters from the offering of the Shares or (ii) if the allocation provided
by clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company and the Underwriters in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. The respective relative benefits received by the Company and
the Underwriters shall be deemed to be in the same proportion in the case of the
Company as the total price paid to the Company for the Shares by the
Underwriters (net of underwriting discount but before deducting expenses), and
in the case of the Underwriters as the underwriting discount received by them
bears to the total of such amounts paid to the Company and received by the
Underwriters as underwriting discount in each case as contemplated by the
Prospectus. The relative fault of the Company and the Underwriters shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission to state a material fact
relates to information supplied by the Company or by the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The amount paid or payable by a
party as a result of the losses, claims, damages and liabilities referred to
above shall be deemed to include any legal or other fees or expenses reasonably
incurred by such party in connection with investigating or defending any action
or claim.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section were determined by pro
rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to in the immediately
preceding paragraph. Notwithstanding the provisions of this Section, no
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Underwriter shall be required to contribute any amount in excess of the
amount by which the total price at which the Shares underwritten by it and
distributed to the public were offered to the public exceeds the amount of
any damages which such Underwriter has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute pursuant to this Section are several
in proportion to their respective underwriting commitments and not joint.
(e) The provisions of this Section shall survive any termination of this
Agreement.
SECTION 11. DEFAULT OF UNDERWRITERS. It shall be a condition to the
agreement and obligation of the Company to sell and deliver the Shares
hereunder, and of each Underwriter to purchase the Shares hereunder, that,
except as hereinafter in this paragraph provided, each of the Underwriters shall
purchase and pay for all Shares agreed to be purchased by such Underwriter
hereunder upon tender to the Representatives of all such Shares in accordance
with the terms hereof. If any Underwriter or Underwriters default in their
obligations to purchase Shares hereunder on the First Closing Date and the
aggregate number of Shares which such defaulting Underwriter or Underwriters
agreed but failed to purchase does not exceed 10 percent of the total number of
Shares which the Underwriters are obligated to purchase on the First Closing
Date, the Representatives may make arrangements satisfactory to the Company for
the purchase of such Shares by other persons, including any of the Underwriters,
but if no such arrangements are made by such date the nondefaulting Underwriters
shall be obligated severally, in proportion to their respective commitments
hereunder, to purchase the Shares which such defaulting Underwriters agreed but
failed to purchase on such date. If any Underwriter or Underwriters so default
and the aggregate number of Shares with respect to which such default or
defaults occur is more than the above percentage and arrangements satisfactory
to the Representatives and the Company for the purchase of such Shares by other
persons are not made within 36 hours after such default, this Agreement will
terminate without liability on the part of any nondefaulting Underwriter or the
Company, except for the expenses to be paid by the Company pursuant to Section 6
hereof and except to the extent provided in Section 10 hereof.
In the event that Shares to which a default relates are to be purchased by
the nondefaulting Underwriters or by another party or parties, the
Representatives or the Company shall have the right to postpone the First
Closing Date for not more than seven business days in order that the necessary
changes in the Registration Statement, Prospectus and any other documents, as
well as any other arrangements, may be effected. As used in this Agreement, the
term "Underwriter" includes any person substituted for an Underwriter under this
Section. Nothing herein will relieve a defaulting Underwriter from liability
for its default.
SECTION 12. EFFECTIVE DATE. This Agreement shall become effective
immediately as to Sections 6, 8, 10 and 13 and as to all other provisions at
10:00 A.M., Chicago Time, on the day following the date upon which the Pricing
Agreement is executed and delivered, unless such a day is a Saturday, Sunday or
holiday (and in that event this Agreement shall
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become effective at such hour on the business day next succeeding such
Saturday, Sunday or holiday); but this Agreement shall nevertheless become
effective at such earlier time after the Pricing Agreement is executed and
delivered as you may determine on and by notice to the Company or by release
of any Shares for sale to the public. For the purposes of this Section, the
Shares shall be deemed to have been so released upon the release for
publication of any newspaper advertisement relating to the Shares or upon the
release by you of telegrams (i) advising Underwriters that the Shares are
released for public offering, or (ii) offering the Shares for sale to
securities dealers, whichever may occur first.
SECTION 13. TERMINATION. Without limiting the right to terminate this
Agreement pursuant to any other provision hereof:
(a) This Agreement may be terminated by the Company by notice to
you or by you by notice to the Company at any time prior to the time this
Agreement shall become effective as to all its provisions, and any such
termination shall be without liability on the part of the Company to any
Underwriter (except for the expenses to be paid or reimbursed pursuant to
Section 6 hereof and except to the extent provided in Section 10 hereof)
or of any Underwriter to the Company.
(b) This Agreement may also be terminated by you prior to the First
Closing Date, and the option referred to in Section 4, if exercised, may
be canceled at any time prior to the Second Closing Date, if (i) trading
in securities on the New York Stock Exchange shall have been suspended or
minimum prices shall have been established on such exchange, or (ii) a
banking moratorium shall have been declared by Illinois, New York, or
United States authorities, or (iii) there shall have been any change in
financial markets or in political, economic or financial conditions
which, in the opinion of the Representatives, either renders it
impracticable or inadvisable to proceed with the offering and sale of the
Shares on the terms set forth in the Prospectus or materially and
adversely affects the market for the Shares, or (iv) there shall have
been an outbreak of major armed hostilities between the United States and
any foreign power which in the opinion of the Representatives makes it
impractical or inadvisable to offer or sell the Shares. Any termination
pursuant to this paragraph (b) shall be without liability on the part of
any Underwriter to the Company or on the part of the Company to any
Underwriter (except for expenses to be paid or reimbursed pursuant to
Section 6 hereof and except to the extent provided in Section 10 hereof).
SECTION 14. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers and of the several Underwriters
set forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any
Underwriter or the Company or any of its or their partners, principals,
members, officers or directors or any controlling person, as the case may be,
and will survive delivery of and payment for the Shares sold hereunder.
SECTION 15. NOTICES. All communications hereunder will be in writing
and, if sent to the Underwriters will be mailed, delivered or telegraphed and
confirmed to you c/o William Blair & Company, L.L.C., 222 West Adams Street,
Chicago, Illinois 60606, with a
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copy to Kenneth J. Vaughan, Esq., Chapman and Cutler; and if sent to the
Company will be mailed, delivered or telegraphed and confirmed to the Company
at its corporate headquarters with a copy to Glenn W. Reed, Esq., Gardner,
Carton & Douglas.
SECTION 16. SUCCESSORS. This Agreement and the Pricing Agreement will
inure to the benefit of and be binding upon the parties hereto and their
respective successors, personal representatives and assigns, and to the
benefit of the officers and directors and controlling persons referred to in
Section 10, and no other person will have any right or obligation hereunder.
The term "successors" shall not include any purchaser of the Shares as such
from any of the Underwriters merely by reason of such purchase.
SECTION 17. REPRESENTATION OF UNDERWRITERS. You will act as
Representatives for the several Underwriters in connection with this
financing, and any action under or in respect of this Agreement taken by you
will be binding upon all the Underwriters. Any action under or in respect of
this Agreement taken by William Blair & Company, L.L.C. will be binding upon
the other Representatives.
SECTION 18. PARTIAL UNENFORCEABILITY. If any section, paragraph or
provision of this Agreement is for any reason determined to be invalid or
unenforceable, such determination shall not affect the validity or
enforceability of any other section, paragraph or provision hereof.
SECTION 19. APPLICABLE LAW. This Agreement and the Pricing Agreement
shall be governed by and construed in accordance with the laws of the State
of Illinois.
SECTION 20. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall be considered one and the same agreement.
-25-
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the
several Underwriters including you, all in accordance with its terms.
Very truly yours,
AMERICAN MEDSERVE CORPORATION
By
-------------------------------------
Timothy L. Burfield
President and Chief Executive Officer
The foregoing Agreement is hereby
confirmed and accepted as of the date
first above written.
WILLIAM BLAIR & COMPANY, L.L.C.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
EQUITABLE SECURITIES CORPORATION
Acting as Representatives of the several
Underwriters named in Schedule A.
By WILLIAM BLAIR & COMPANY, L.L.C.
By
-------------------------------------
Principal
-26-
<PAGE>
SCHEDULE A
Number of Firm
Shares to be
Underwriter Purchased
- ----------- ---------
William Blair & Company, L.L.C. ................................
Donaldson, Lufkin & Jenrette Securities Corporation
Equitable Securities Corporation ...............................
---------
Total ........................................... 5,357,000
---------
---------
<PAGE>
SCHEDULE B
Comfort Letter of Ernst & Young, LLP
(1) They are independent public accountants with respect to the Company
and its subsidiaries and the following companies: G.H.S.C., Inc. and the
Contract Services Division of Louis F. Gatti, Inc. (Predecessor), Nihan &
Martin, Inc., Pharmed, Inc., Sterling Acquisition Partners, Inc., Good
Samaritan Supply Services, Inc. and Johnson Pharmacy and Medical Supply
(collectively, the "ACQUIRED COMPANIES") within the meaning of the 1933 Act.
(2) In their opinion the consolidated financial statements and
schedules of the Company and its subsidiaries and the financial statements of
the Acquired Companies included in the Registration Statement and the
consolidated financial statements of the Company from which the information
presented under the caption "Selected Consolidated Financial Information and
Operating Data" has been derived which are stated therein to have been
examined by them comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act.
(3) On the basis of specified procedures (but not an examination in
accordance with generally accepted auditing standards), including inquiries
of certain officers of the Company and its subsidiaries responsible for
financial and accounting matters as to transactions and events subsequent to
December 31, 1995, a reading of minutes of meetings of the stockholders and
directors of the Company and its subsidiaries since December 31, 1995, a
reading of the latest available interim unaudited consolidated financial
statements of the Company and its subsidiaries (with an indication of the
date thereof) and other procedures as specified in such letter, nothing came
to their attention which caused them to believe that (i) the unaudited
consolidated financial statements of the Company and its subsidiaries
included in the Registration Statement do not comply as to form in all
material respects with the applicable accounting requirements of the 1933 Act
or that such unaudited financial statements are not fairly presented in
accordance with generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial statements
included in the Registration Statement, (ii) the pro forma financial
statements included in the Prospectus are not properly prepared on the basis
set forth therein, do not present fairly the information shown therein, or
were not prepared in accordance with generally accepted accounting principles
and the rules and guidelines of the Commission with respect to pro forma
financial information; or that the assumptions used in the preparation
thereof are not reasonable or that the adjustments used therein are not
appropriate to give effect to the transactions or circumstances referred to
therein, and (iii) at a specified date not more than five days prior to the
date thereof in the case of the first letter and not more than two business
days prior to the date thereof in the case of the second and third letters,
there was any change in the capital stock or long-term debt or short-term
debt (other than normal payments) of the Company and its subsidiaries on a
consolidated basis or any decrease in consolidated net current assets or
consolidated stockholders' equity as compared with amounts shown on the
latest unaudited balance sheet of the Company included in the Registration
Statement or for the period from the date of such balance sheet to a date not
more than five days prior to the date thereof in the case of the first letter
and
<PAGE>
not more than two business days prior to the date thereof in the case of the
second and third letters, there were any decreases, as compared with the
corresponding period of the prior year, in consolidated net sales,
consolidated income before income taxes or in the total or per share amounts
of consolidated net income except, in all instances, for changes or decreases
which the Prospectus discloses have occurred or may occur or which are set
forth in such letter.
(4) They have carried out specified procedures, which have been agreed
to by the Representatives, with respect to certain information in the
Prospectus specified by the Representatives, and on the basis of such
procedures, they have found such information to be in agreement with the
general accounting records of the Company and its subsidiaries.
-2-
<PAGE>
SCHEDULE C
Comfort Letter of S.B. Hoover & Company, L.L.P.
(1) They are independent public accountants with respect to Extended
Care Associates, Inc., Williamson's Pharmacy -- Institutional Division and
Williamson Drug Company, Inc. and the Company and its subsidiaries within the
meaning of the 1933 Act.
(2) In their opinion the financial statements of Extended Care
Associates, Inc., Williamson's Pharmacy -- Institutional Division and
Williamson Drug Company, Inc. included in the Registration Statement and the
financial statements of Extended Care Associates, Inc., Williamson's Pharmacy
- -- Institutional Division and Williamson Drug Company, Inc. which are stated
therein to have been examined by them comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act.
<PAGE>
SCHEDULE D
Comfort Letter of Lindgren, Callihan, Van Osdol & Co., Ltd.
(1) They are independent public accountants with respect to Dixon
Pharmacy, Inc. and the Company and its subsidiaries within the meaning of the
1933 Act.
(2) In their opinion the financial statements of Dixon Pharmacy, Inc.
included in the Registration Statement and the financial statements of Dixon
Pharmacy, Inc. which are stated therein to have been examined by them comply
as to form in all material respects with the applicable accounting
requirements of the 1933 Act.
<PAGE>
SCHEDULE E
Comfort Letter of Coopers & Lybrand L.L.P.
(1) They are independent public accountants with respect to Royal Care
of America, Inc. and the Company and its subsidiaries within the meaning of
the 1933 Act.
(2) In their opinion the consolidated financial statements of Royal
Care of America, Inc. included in the Registration Statement and the
consolidated financial statements of Royal Care of America, Inc. which are
stated therein to have been examined by them comply as to form in all
material respects with the applicable accounting requirements of the 1933 Act.
<PAGE>
SCHEDULE F
Comfort Letter of Price Waterhouse LLP
(1) They are independent public accountants with respect to Royal Care
of America, Inc. and the Company and its subsidiaries within the meaning of
the 1933 Act.
(2) In their opinion the consolidated financial statements of Royal
Care of America, Inc. included in the Registration Statement and the
consolidated financial statements of Royal Care of American, Inc. which are
stated therein to have been examined by them comply as to form in all
material respects with the applicable accounting requirements of the 1933 Act.
<PAGE>
EXHIBIT A
AMERICAN MEDSERVE CORPORATION
5,357,000 Shares Common Stock*
PRICING AGREEMENT
November ___, 1996
William Blair & Company, L.L.C.
Donaldson, Lufkin & Jenrette
Securities Corporation
Equitable Securities Corporation
As Representatives of the Several
Underwriters
c/o William Blair & Company, L.L.C.
222 West Adams Street
Chicago, Illinois 60606
Ladies and Gentlemen:
Reference is made to the Underwriting Agreement dated November ___, 1996
(the "UNDERWRITING AGREEMENT") relating to the sale by the Company and the
purchase by the several Underwriters for whom William Blair & Company, L.L.C.,
Donaldson, Lufkin & Jenrette Securities Corporation and Equitable Securities
Corporation are acting as representatives (the "REPRESENTATIVES"), of the above
Shares. All terms herein shall have the definitions contained in the
Underwriting Agreement except as otherwise defined herein.
Pursuant to Section 4 of the Underwriting Agreement, the Company agrees
with the Representatives as follows:
1. The initial public offering price per share for the Shares shall be
$__________.
2. The purchase price per share for the Shares to be paid by the several
Underwriters shall be $__________, being an amount equal to the initial public
offering price set forth above less $__________ per share.
- ---------------------------
*Plus an option to acquire up to 803,550 additional shares to cover
overallotments.
<PAGE>
Schedule A is amended as follows:
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the
several Underwriters, including you, all in accordance with its terms.
Very truly yours,
AMERICAN MEDSERVE CORPORATION
By
-------------------------------------
Timothy L. Burfield
President and Chief Executive Officer
The foregoing Agreement is hereby
confirmed and accepted as of the date
first above written.
WILLIAM BLAIR & COMPANY, L.L.C.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
EQUITABLE SECURITIES CORPORATION
Acting as Representatives of the several
Underwriters.
By WILLIAM BLAIR & COMPANY, L.L.C.
By
-------------------------------------
Principal
-2-
<PAGE>
EXHIBIT 4.1
Number Common Stock
AM Shares
Par Value $0.01
[LOGO OF AMERICAN MEDSERVE CORPORATION]
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
SEE REVERSE SIDE FOR
CERTAIN DEFINITIONS
CUSIP 027448 10 9
This Certifies that
is the registered holder of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
American Medserve Corporation (hereinafter referred to as the "Company")
transferable on the books of the Company by the holder hereof in person or by
duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate and the shares represented are issued and shall
be subject to all of the provisions of the Certificate of Incorporation and
the By-laws of the Company and all amendments thereto and restatements
thereof (copies of which are on file with the Transfer Agent). This
certificate is not valid until countersigned by the Transfer Agent and
registered by the Registrar.
WITNESS the facsimile signatures of its duly authorized officers.
Dated:
/s/ Charles R. Wallace /s/ Timothy L. Burfield
---------------------- -----------------------
Charles R. Wallace Timothy L. Burfield
Vice President and President
Secretary
COUNTERSIGNED AND REGISTERED:
-----------------------------------
LASALLE NATIONAL BANK
TRANSFER AGENT and REGISTRAR
By
------------------------------------------------
AUTHORIZED SIGNATURE
<PAGE>
The Company will furnish without charge to each stockholder who so
requests, a statement of the powers, designations, preferences, and relative,
participating, optional, or other special rights of each class of stock or
series thereof of the Company and the qualifications, limitations or
restrictions of such preferences and/or rights. Such request may be made to
the Secretary of the Company.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
UNIF GIFT MIN ACT CUSTODIAN
------ --------
(Cust) (Minor)
Under Uniform Gifts to Minors
Act -
-------------------------
(State)
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship
and not as tenants in common
Additional abbreviations may also be used though not in the above list.
For Value Received, hereby sell, assign and transfer unto
-----------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -----------------------------------
- -----------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
- --------------------------------------------------------------------------
represented by the within Certificate, and do hereby irrevocably constitute and
appoint
Attorney
- -----------------------------------------------------------------------
to transfer the said shares on the books of the within named Corporation with
full power of substitution in the premises.
Dated
---------------- ------------------------------------
NOTICE THE SIGNATURE TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
--------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 5.1
GARDNER, CARTON & DOUGLAS
321 NORTH CLARK STREET
SUITE 3400
CHICAGO, ILLINOIS 60614
November 8, 1996
American Medserve Corporation
184 Shuman Blvd., Suite 200
Naperville, Illinois 60563
Ladies and Gentlemen:
As special counsel to American Medserve Corporation, a Delaware
corporation (the "Company"), we have participated in the legal proceedings
and matters relating to the proposed sale of up to 6,160,550 shares of Common
Stock, $.01 par value per share, of the Company (the "Common Stock") referred
to in the Registration Statement filed by the Company with the Securities and
Exchange Commission on Form S-1 (Registration No. 333-11667) (such
Registration Statement as amended or supplemented and together with any
registration statement referred to in the next succeeding sentence, is
hereinafter referred to as the "Registration Statement"). This opinion also
relates to any registration statement in connection with this offering that
is to be effective upon filing pursuant to Rule 462(b) under the Securities
Act of 1933, as amended, and the term "Common Stock" as used herein includes
any additional shares of the Company's Common Stock registered pursuant to
such subsequently filed registration statement.
In our opinion the shares of Common Stock have been duly authorized and,
when issued, delivered and paid for, will be validly issued, fully paid and
non-assessable.
We consent to the use of our name in the Registration Statement and to
the filing of this opinion as an Exhibit to such Registration Statement.
Very truly yours,
/s/ Gardner, Carton & Douglas
GWR/HJM/JHG/ECS
<PAGE>
SENIOR MANAGEMENT AGREEMENT
THIS AGREEMENT is made as of December 3, 1993, between American Medserve
Corporation, a Delaware corporation (the "Company"), and Timothy L. Burfield
("Executive").
The Company and Executive desire to enter into an agreement pursuant to
which Executive will purchase, and the Company will sell the number of shares
of the Company's Class B Common Stock, par value $.01 per share (the "Class B
Common") determined in accordance with Section 1(a) below. All of such shares
of Class B Common and all shares of Class B Common hereafter acquired by
Executive pursuant to this Agreement are referred to herein as "Executive
Stock." Certain definitions are set forth in Section 17 of this Agreement.
The execution and delivery of this Agreement by the Company and
Executive is a condition to the purchase of shares of the Class B Common and
the Company's Class A Common Stock, par value $.01 per share (the "Class A
Common"), by Golder, Thoma, Cressey, Rauner Fund IV, L.P., a Delaware limited
partnership (the "Investor"), pursuant to an equity purchase agreement
between the Company and the Investor dated as of the date hereof (the "Equity
Purchase Agreement"). Certain provisions of this Agreement are intended for
the benefit of, and will be enforceable by, the Investor, and the Investor is
an intended third party beneficiary of this Agreement.
The parties also desire to enter into an agreement pursuant to which
Executive shall be employed by the Company as the Company's President and
Chief Executive Officer.
The parties hereto agree as follows:
PROVISIONS RELATING TO EXECUTIVE STOCK
1. PURCHASE AND SALE OF EXECUTIVE STOCK
(a) Executive hereby agrees to purchase from the Company, and the
Company hereby agrees to sell to Executive, an amount of Class B Common
determined in accordance with the following formulae:
<PAGE>
(i) If the Original Investment is less than $12.5 million:
[ 11 .21 x Original Investment ]
[ ---- x -------------------------- ] + 10
[ 21 .79 ]
(ii) If the Original Investment is greater than or equal to $12.5
million:
[ 11 12,500,000 ]
[ --- X (.21 x ---------------- ) x Original Investment ]
[ 21 Original Investment ]
[ -------------------------------------------------- ] + 10
[ 1 - (.21 x 12,500,000 ) ]
[ -------------------- ]
[ Original Investment ]
(iii) If the Original Investment is greater than $25 million:
[ 11 .105 x Original Investment ]
[ --- x ----------------------------- ] + 10
[ 21 .895 ]
"Original Investment" shall have the meaning set forth in the Equity Purchase
Agreement. The purchase price per share of Class B Common (the "Purchase
Price") shall equal $69,437.50 divided by the number of shares purchased
hereunder.
(b) The closing of the purchase and sale of the Class B Common (the
"Closing") shall take place at the offices of Kirkland & Ellis, 200 East
Randolph Drive, Chicago, Illinois 60601 at 10:00 a.m. on the date of the
Company's first acquisition of another business, which acquisition is
approved by the Investor, or at such other place or on such other date as may
be mutually agreeable to the Company and the Executive. At the Closing, the
Company shall deliver to the Executive stock certificates evidencing the
Class B Common to be purchased by the Executive, registered in the
Executive's name, upon payment of the purchase price thereof by a cashier's
or certified check, or by wire transfer of immediately available funds to
such account as designated by the Company in an amount not less than
$34,718.75 and by delivery of a promissory note substantially in the form
attached hereto as EXHIBIT A (the "Executive Note") in the amount of the
balance of the Purchase Price owed in respect of the Class B Common purchased
hereunder.
- 2 -
<PAGE>
Executive's obligations under the Executive Note will be secured by a pledge
of all of the shares of Executive Stock to the Company and in connection
therewith Executive shall enter into a pledge agreement in the form of
EXHIBIT B attached hereto.
(c) Within 30 days after the purchase of Executive Stock by Executive
from the Company, Executive shall make an effective election with the
Internal Revenue Service under Section 83(b) of the Internal Revenue Code and
the regulations promulgated thereunder substantially in the form of EXHIBIT C
attached hereto and will promptly notify the Company of such election.
(d) Executive represents and warrants to the Company that:
(i) The Executive Stock to be acquired by Executive pursuant to this
Agreement will be acquired for Executive's own account and not with a view
to, or intention of, distribution thereof in violation of the Securities Act,
or any applicable state securities laws, and the Executive Stock will not be
disposed of in contravention of the Securities Act or any applicable state
securities laws.
(ii) Executive is sophisticated in financial matters and is able to
evaluate the risks and benefits of the investment in the Executive Stock.
(iii) Executive is able to bear the economic risk of his investment in
the Executive Stock for an indefinite period of time because the Executive
Stock has not been registered under the Securities Act and, therefore, cannot
be sold unless subsequently registered under the Securities Act or an
exemption from such registration is available.
(iv) Executive has had an opportunity to ask questions and receive
answers concerning the terms and conditions of the offering of the Executive
Stock and has had full access to such other information concerning the
Company as he has requested.
(v) This Agreement constitutes the legal, valid and binding obligation
of Executive, enforceable in accordance with its terms, and the execution,
delivery and performance of this Agreement by Executive does not and will not
conflict with, violate or cause a breach of any agreement, contract or
instrument to which Executive is a party or any judgment, order or decree to
which Executive is subject.
(e) As an inducement to the Company to issue the Executive Stock
to Executive, and as a condition thereto, Executive acknowledges and agrees
that:
- 3 -
<PAGE>
(i) Neither the issuance of any of the Executive Stock to Executive nor
any provision hereof shall entitle Executive to remain in the employment of
the Company and its Subsidiaries or affect the right of the Company to
terminate Executive's employment at any time for any reason.
(ii) The Company shall have no duty or obligation to disclose to
Executive, and Executive shall have no right to be advised of, any material
information regarding the Company or any Subsidiary at any time prior to,
upon or in connection with the repurchase of the Executive Stock upon the
termination of Executive's employment with the Company or any Subsidiary or
as otherwise provided hereunder.
(f) As an inducement to the Company to issue the Executive Stock
to Executive, and as a condition thereto, Executive covenants and agrees to
enter into a Stockholders Agreement in the form of EXHIBIT C attached hereto.
2. VESTING OF EXECUTIVE STOCK.
(a) FULLY VESTED SHARES. 36.36% of the shares of Executive Stock
purchased hereunder (the "Fully Vested Shares") are vested on the date hereof.
(b) PERFORMANCE VESTING SHARES.
(i) Except as otherwise provided in Sections 2(b)(ii) and
2(b)(iii) below, 18.18% of the shares of Executive Stock purchased hereunder
(the "Performance Vesting Shares") shall vest on the seventh anniversary of
the date hereof, if as of such date Executive is still employed by the
Company or any Subsidiary, provided that if at the end of any of the first
five fiscal years of the Company following the Closing (however, if the end
of the first fiscal year following the Closing occurs within six months of
the Closing, the test described below shall be made at the end of the five
consecutive fiscal years of the Company starting with the end of the second
fiscal year following the Closing), both the Company's EBITDA and EBITDA
Percentage equal or exceed 90% of the Company's's Projected EBITDA and
Projected EBITDA Percentage, as determined in good faith by the Board,
respectively, for such fiscal years, then 20% of the Performance Vesting
Shares shall vest as of the end of each fiscal year in which such requirement
is satisfied. In the event the Company does not satisfy the requirement for
20% of the Performance Vesting Shares to vest as of the end of any fiscal
year, IF (i) the sum of the Company's EBITDA for the fiscal year in which
such requirement is not met and the immediately succeeding fiscal year equals
or exceeds 90% of the sum of the Company's Projected EBITDA for such two
fiscal
- 4 -
<PAGE>
years, and (ii) the average of the Company's EBITDA Percentages for such
two years equals or exceeds 90% of the average of the Company's Projected
EBITDA Percentages for such two fiscal years, THEN 40% of the Performance
Vesting Shares shall vest as of the end of the second of such two fiscal
years.
(ii) Except as set forth in Section 2(b)(iii) below, in the
event Executive ceases to be employed by the Company for any reason, then
any Performance Vesting Shares which have not become vested on or prior to
such date shall not vest after such date.
(iii) In the event the Company terminates Executive (other
than for Cause or as a result of Executive's death or disability) prior
to the fifth anniversary of the date of the Closing and the Additional
Benefits Requirements (as defined below) are satisfied as determined in
good faith by the Board, the Performance Vesting Shares shall continue to
vest after Executive's termination in accordance with the provisions of
Section 2(b)(i) as if Executive were still employed by the Company.
The "Additional Benefits Requirements" are defined as:
(x) the Company's EBITDA for the 12 months ending as of the
month end immediately preceding the date of Executive's termination
equals or exceeds 85% of the Projected EBITDA for such 12 month
period, provided that if such 12 month period is not one complete
fiscal year of the Company, then the Projected EBITDA for such
period shall be deemed to be a proportionate blend of the Projected
EBITDA for the then current fiscal year and the immediately
preceding fiscal year taking into account the relative number of
months elapsed in each such fiscal year which are part of such
12 month period; and
(y) the Company's EBITDA Percentage as of the end of such 12
month period equals or exceeds 85% of the Projected EBITDA Percentage
as of the end of such 12 month period, provided that if such 12 month
period is not one complete fiscal year of the Company, then the
Company's Projected EBITDA Percentage for such period shall be deemed
to be a proportionate blend of the Projected EBITDA Percentages for
the then current fiscal year and the immediately preceding fiscal
year, taking into account the relative number of months elapsed in
each such fiscal year which are part of such 12 month period.
See attached Appendix 1 for an example of such calculation.
- 5 -
<PAGE>
(c) TIME VESTING SHARES.
(i) Except as otherwise provided in Section 2(c)(ii) below,
45.46% of the shares of Executive Stock purchased hereunder (the "Time
Vesting Shares") will become vested in accordance with the following
schedule, if as of each such date Executive is still employed by the
Company or any Subsidiary:
Cumulative
Percentage of Time
Date Vesting Shares Vested
-------------- ---------------------
At the Closing 20%
1st Anniversary of Closing 36%
2nd Anniversary of Closing 52%
3rd Anniversary of Closing 68%
4th Anniversary of Closing 84%
5th Anniversary of Closing 100%
(ii) If Executive ceases to be employed by the Company or its
Subsidiaries on any date prior to an anniversary date listed above, the
cumulative percentage of Time Vesting Shares to become vested will be
determined on a pro rata basis according to the number of days elapsed
since the prior anniversary date. Upon the occurrence of a Sale of the
Company while Executive is still employed by the Company or its
Subsidiaries, all Time Vesting Shares which have not yet become vested
shall become vested at the time of such event. In the event the Company
terminates Executive (other than for Cause or as a result of Executive's
death or disability) prior to the fifth anniversary of the date of the
Closing and the Additional Benefits Requirements are satisfied as of the
date of Executive's termination, all Time Vesting Shares which have not
become vested on such date. Any Time Vesting Shares which have not become
vested as of the date that Executive ceases to be employed by the Company
or its Subsidiaries shall not vest after such date.
(d) Shares of Executive Stock which have become vested (including
the Fully Vested Shares) are referred to herein as "Vested Shares," and all
other shares of Executive Stock are referred to herein as "Unvested Shares."
3. REPURCHASE OPTION
(a) Subject to Section 3(f) below, in the event Executive ceases
to be employed by the Company or its Subsidiaries for any reason (the
"Termination"), the Executive Stock (whether held by Executive or one or more
of Executive's transferees) will
- 6 -
<PAGE>
be subject to repurchase by the Company and the Investor pursuant to the
terms and conditions set forth in this Section 3 (the "Repurchase Option").
(b) The purchase price for each Unvested Share will be the lesser
of Executive's Original Cost or the Fair Market Value for such share, and the
purchase price for each Vested Share will be the Fair Market Value for such
share.
(c) The Board may elect to purchase all or any portion of the
Unvested Shares and the Vested Shares by delivering written notice (the
"Repurchase Notice") to the holder or holders of the Executive Stock within
100 days after the Termination. The Repurchase Notice will set forth the
number of Unvested Shares and Vested Shares to be acquired from each holder,
the aggregate consideration to be paid for such shares and the time and place
for the closing of the transaction. The number of shares to be repurchased
by the Company shall first be satisfied to the extent possible from the
shares of Executive Stock held by Executive at the time of delivery of the
Repurchase Notice. If the number of shares of Executive Stock then held by
Executive is less than the total number of shares of Executive Stock which
the Company has elected to purchase, the Company shall purchase the remaining
shares elected to be purchased from the other holder(s) of Executive Stock
under this Agreement, pro rata according to the number of shares of Executive
Stock held by such other holder(s) at the time of delivery of such Repurchase
Notice (determined as nearly as practicable to the nearest share). The
number of Unvested Shares and Vested Shares to be repurchased hereunder will
be allocated among Executive and the other holders of Executive Stock (if
any) pro rata according to the number of shares of Executive Stock to be
purchased from such person.
(d) If for any reason the Company does not elect to purchase all
of the Executive Stock pursuant to the Repurchase Option, the Investor shall
be entitled to exercise the Repurchase Option for the shares of Executive
Stock the Company has not elected to purchase (the "Available Shares"). As
soon as practicable after the Company has determined that there will be
Available Shares, but in any event within 60 days after the Termination, the
Company shall give written notice (the "Option Notice") to the Investor
setting forth the number of Available Shares and the purchase price for the
Available Shares. The Investor may elect to purchase any or all of the
Available Shares by giving written notice to the Company within thirty days
after the Option Notice has been given by the Company. As soon as
practicable, and in any event within ten days after the expiration of the
thirty day period set forth above, the Company shall notify each holder of
Executive Stock as to the number of shares being purchased from such holder
by the Investor (the "Supplemental Repurchase Notice"). At the time
the Company delivers the
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Supplemental Repurchase Notice to the holder(s) of Executive Stock, the
Company shall also deliver written notice to the Investor setting forth the
number of shares the Investor is entitled to purchase, the aggregate purchase
price and the time and place of the closing of the transaction. The number
of Unvested Shares and Vested Shares to be repurchased hereunder shall be
allocated among the Company and the Investor pro rata according to the number
of shares of Executive Stock to be purchased by each of them.
(e) The closing of the purchase of the Executive Stock pursuant to
the Repurchase Option shall take place on the date designated by the Company
in the Repurchase Notice or Supplemental Repurchase Notice, which date shall
not be more than thirty days nor less than five days after the delivery of
the later of either such notice to be delivered. The Company and/or the
Investor will pay for the Executive Stock to be purchased pursuant to the
Repurchase Option by delivery of a check, a wire transfer of funds and/or a
note (payable in three equal annual installments commencing on the first
anniversary of such closing) in form and substance determined by the board in
good faith in the aggregate amount of the purchase price for such shares. In
addition, the Company may pay the purchase price for such shares by
offsetting amounts outstanding under the Executive Note issued to the Company
hereunder and any other debts owed by Executive to the Company. The Company
and the Investor will be entitled to receive customary representations and
warranties from the sellers regarding such sale and to require all sellers'
signatures be guaranteed.
(f) Notwithstanding anything to the contrary set forth above, in
the event the Company terminates Executive (other than for Cause or as a
result of Executive's death or disability) prior to the fifth anniversary of
the date of Closing and the Additional Benefits Requirements are satisfied,
then (i) Executive will be entitled to retain all Performance Vesting Shares
which are Unvested Shares until it is finally determined whether they will
vest under the EBITDA and EBITDA Percentage tests described in Section 2(b)
above (at which time, as such determinations are made, the Company and the
Investor will be entitled to exercise the Repurchase Option in respect of
such Shares of Executive Stock) and (ii) subject to Section 3(h) below,
Executive shall be entitled to require the Company to purchase all Vested
Shares as soon as practicable after such termination by delivery of written
notice to the Company within 30 days following such termination and all
Performance Vesting Shares which had not vested as of the date of such
termination as soon as practicable after the date on which all such
Performance Vesting Shares become Vested Shares by delivery of written notice
to the Company within 30 days following such vesting. The Company will pay
for the Executive Stock to be purchased pursuant to the Section 3(f) by
delivery of a check, a wire transfer of funds and/or a note (payable in three
equal annual installments without interest commencing on the first anniversary
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of the date of purchase by the Company) in form and substance determined by
the Board in good faith. In addition, the Company, at its election, may pay
the purchase price of any such shares by offsetting amounts outstanding under
the Executive Note issued to the Company hereunder and any other debts owed
by Executive to the Company.
(g) The right of the Company and the Investor, and the requirement
for the Company, to repurchase Vested Shares pursuant to this Section 3 shall
terminate upon the first to occur of a Sale of the Company or a Qualified
Public Offering.
(h) Notwithstanding anything to the contrary contained in this
Agreement, all repurchases of Executive Stock by the Company shall be subject
to applicable restrictions contained in the Delaware General Corporation Law
and in the Company's and any Subsidiary's debt and equity financing
agreements. If any such restrictions prohibit the repurchase of Executive
Stock hereunder which the Company is otherwise entitled (or required) to
make, the Company may (or shall) make such repurchases as soon as it is
permitted to do so under such restrictions.
(i) All shares of Executive Stock purchased by the Company
pursuant to this Section 3 and pursuant to Section 4 shall remain available
for reissuance to new executives as determined by the Board.
4. RESTRICTIONS ON TRANSFER.
(a) TRANSFER OF EXECUTIVE STOCK. Prior to the earlier to occur of
(x) the fifth anniversary of the date of the Closing or (y) 100 days
following the Termination, Executive shall not sell, transfer, assign, pledge
or otherwise dispose of (whether with or without consideration and whether
voluntarily or involuntarily or by operation of law) any interest in any
shares of Executive Stock (a "Transfer"), except pursuant to (i) the
provisions of Section 3 hereof, a Public Sale or a Sale of the Company
("Exempt Transfers") or (ii) the approval of the Company and the Investor and
pursuant to the provisions of this Section 4; provided that in no event shall
any Transfer of Executive Stock pursuant to this Section 4 be made for any
consideration other than cash payable upon consummation of such Transfer or
in installments over time. Prior to making any Transfer other than an Exempt
Transfer (whether such Transfer occurs prior to or following the dates set
forth in clauses (x) and (y) above), Executive will give written notice (the
"Sale Notice") to the Company and the Investor. The Sale Notice will disclose
in reasonable detail the identity of the prospective transferee(s), the
number of shares to be transferred and the terms and conditions of the
proposed transfer. Executive will not consummate any Transfer until 90 days
after the Sale Notice has been given to the Company and to the Investor,
unless the parties
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to the Transfer have been finally determined pursuant to this Section 4 prior
to the expiration of such 90-day period. The date of the first to occur of
such events is referred to herein as the "Authorization Date".
Notwithstanding the foregoing, in no event shall Executive be entitled to
Transfer (A) any Unvested Shares of Executive Stock, other than to the
Company or the Investor pursuant to Section 3 until, in the case of Time
Vesting Shares which are Unvested Shares, 100 days following such
Termination, and in the case of Performance Vesting Shares which are Unvested
Shares, the later of 100 days following such Termination or, if the
Additional Benefits Requirements are satisfied, 100 days following the date
upon which it is finally determined whether such shares shall become Vested
Shares or (B) any Shares of Executive Stock which the Company and/or the
Investor have elected to purchase pursuant to Section 3, except to the
Company or the Investor, as applicable.
(b) FIRST REFUSAL RIGHTS. The Company may elect to purchase all
(but not less than all) of the shares of Executive Stock to be transferred
upon the same terms and conditions as those set forth in the Sale Notice by
delivering a written notice of such election to Executive and the Investor
within 60 days after the Sale Notice has been given to the Company. If the
Company has not elected to purchase all of the Executive Stock to be
transferred, the Investor may elect to purchase all (but not less than all)
of the Executive Stock to be transferred upon the same terms and conditions
as those set forth in the Sale Notice by giving written notice of such
election to Executive within 90 days after the Sale Notice has been given to
the Investor. If neither the Company nor the Investor elects to purchase all
of the shares of Executive Stock specified in the Sale Notice, Executive may
transfer the shares of Executive Stock specified in the Sale Notice, subject
to the provisions of Section 4(d) below, at a price and on terms no more
favorable to the transferee(s) thereof than specified in the Sale Notice
during the 60-day period immediately following the Authorization Date. Any
shares of Executive Stock not transferred within such 60-day period will be
subject to the provisions of this Section 4(b) upon subsequent transfer. The
Company may pay the purchase price for such shares by offsetting amounts
outstanding under the Executive Note or any other debts owed by Executive to
the Company.
(c) CERTAIN PERMITTED TRANSFERS. The restrictions contained in
this Section 4 will not apply with respect to (i) transfers of shares of
Executive Stock pursuant to applicable laws of descent and distribution or
(ii) transfers of shares of Executive Stock among Executive's Family Group,
other than transfers of the type described in the last sentence of Section
4(a) above; provided that such restrictions will continue to be applicable to
the Executive Stock after any such transfer and the transferees of such
Executive Stock will have agreed in writing to be bound by the provisions of
this Agreement.
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(d) TERMINATION OF RESTRICTIONS. The restrictions on the Transfer
of shares of Executive Stock set forth in this Section 4 will continue with
respect to each share of Executive Stock until the date on which such
Executive Stock has been transferred in a transaction permitted by this
Section 4 (except in a transaction contemplated by Section 4(c)); provided
that in any event such restrictions will terminate on the first to occur of a
Sale of the Company or a Qualified Public Offering; and further provided that
the restrictions contained in clause (A) of the last sentence of Section 4(a)
above shall survive in perpetuity.
5. ADDITIONAL RESTRICTIONS ON TRANSFER.
(a) LEGEND. The certificates representing the Executive Stock will
bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED
AS OF ________ __, 1993, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND
MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT OR AN EXEMPTION FROM REGISTRATION
THEREUNDER AND IN COMPLIANCE WITH STATE SECURITIES LAWS. THE SECURITIES
REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL
RESTRICTIONS ON TRANSFER, CERTAIN REPURCHASE OPTIONS AND CERTAIN OTHER
AGREEMENTS SET FORTH IN A SENIOR MANAGEMENT AGREEMENT BETWEEN THE ISSUER
(THE "COMPANY") AND THE ORIGINAL HOLDER HEREOF DATED AS OF ________ __,
1993. A COPY OF SUCH AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT
THE COMPANY'S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE."
(b) OPINION OF COUNSEL. No holder of Executive Stock may sell,
transfer or dispose of any Executive Stock (except pursuant to an effective
registration statement under the Securities Act) without first delivering to
the Company an opinion of counsel (reasonably acceptable in form and
substance to the Company) that neither registration nor qualification under
the Securities Act and applicable state securities laws is required in
connection with such transfer.
6. LIMITED PREEMPTIVE RIGHTS.
(i) Except for the issuance of Common Stock (a) pursuant to
the Equity Purchase Agreement, (b) pursuant to a public offering registered
under the Securities Act, (c) to a Lender to the Company in connection with a
debt facility, (d) in accordance with Section 5 of the Stockholders
Agreement, (e) to new members of management of the Company and its
Subsidiaries in accordance with Section 6 of the Stockholders Agreement or
(f) to employees of the
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Company and/or its Subsidiaries pursuant to any plan approved by the Board,
if the Company at any time after the Closing authorizes the issuance or sale
of any shares of Common Stock or any securities containing options or rights
to acquire any shares of Common Stock (other than as a dividend on the
outstanding Common Stock), the Company shall first offer to sell to each
holder of Executive Stock a portion of such stock or securities equal to the
quotient determined by dividing (1) the number of shares of Executive Stock
held by such holder by (2) the total number of shares of Common Stock
outstanding on a fully diluted basis immediately prior to such issuance. Each
holder of Executive Stock shall be entitled to purchase such stock or
securities at the most favorable price and on the most favorable terms as
such stock or securities are to be offered to any other Persons.
(ii) In order to exercise its purchase rights hereunder, a
holder of Executive Stock must, within 30 days after receipt of written
notice from the Company describing in reasonable detail the stock or
securities being offered, the purchase price thereof, the payment terms and
such holder's percentage allotment, deliver a written notice to the Company
describing its election hereunder. If all of the stock and securities offered
to the holders of Executive Stock is not fully subscribed by such holders,
the remaining stock and securities shall be reoffered by the Company to the
holders purchasing their full allotment upon the terms set forth in this
Section, except that such holders must exercise their purchase rights within
five days after receipt of such reoffer.
(iii) Upon the expiration of the offering periods described
above, the Company shall be entitled to sell such stock or securities which
the holders of Executive Stock have not elected to purchase during the 90
days following such expiration on terms and conditions no more favorable to
the purchasers thereof than those offered to such holders. Any stock or
securities offered or sold by the Company after such 90-day period must be
reoffered to the holders of Executive Stock pursuant to the terms of this
Section.
(iv) Nothing contained in this Section 6 shall be deemed to
amend, modify or limit in any way the restrictions on the issuance of shares
of Stock set forth in Section 3C of the Equity Purchase Agreement or in any
other agreement to which the Company is presently bound.
In the event that, in connection with its purchase of shares
of Common Stock or securities containing options or rights to acquire shares
of Common Stock ("Common Convertible Securities") as described in this
Section 6, the other purchasers are also purchasing other securities of the
Company or any Subsidiary (collectively, the "Other Securities"), then the
Executive shall
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purchase a ratio of Other Securities to the number of Shares of Common Stock
or Common Convertible Securities in the same proportion as the other
purchasers purchase in each of such securities.
7. CO-SALE RIGHTS. In the event of a Change of Control effected by
a transfer of shares of the Investor that includes the transfer of shares of
Class B Common, at least 30 days prior to any such transfer (other than a
Public Sale), the Investor shall deliver a written notice (the "Sale Notice")
to the Company and the Executive, specifying in reasonable detail the
identity of the prospective transferee(s) and the terms and conditions of the
transfer. The Executive may elect to participate in the contemplated transfer
of Class B Common by delivering written notice to the Investor within 30 days
after delivery of the Sale Notice. If the Executive has elected to
participate in such transfer, the Investor and the Executive shall be
entitled to sell in the contemplated transfer, at the same price and on the
same terms, a number of shares of Class B Common equal to the product of (i)
the quotient determined by dividing the percentage of shares of Class B
Common owned by such person by the aggregate percentage of shares of Class B
Common owned by the Investor and the Executive and (ii) the number of shares
of Class B Common to be sold in the contemplated transfer.
FOR EXAMPLE, if the Sale Notice contemplated a sale of 100 shares of
Class B Common by the Investor, and if the Investor at such time owns
90% of all shares of Class B Common and if the Executive elects to
participate and owns 10% of all shares of Class B Common, the Investor
would be entitled to sell 90 shares (90% + 100% X 100 shares) and the
Executive would be entitled to sell 10 shares (10% + 100% X 100 shares).
The Investor shall use reasonable efforts to obtain the agreement of the
prospective transferee(s) to the participation of the Executive in any
contemplated transfer, and the Investor shall not transfer any of its shares
of Class B Common (if such transfer would result in a Change of Control) if
the prospective transferee(s) decline(s) to allow the participation of the
Executive.
8. PIGGYBACK REGISTRATIONS.
(a) Whenever the Company proposes to register any of its
securities under the Securities Act and the registration form to be used may
be used for the registration of Executive Stock (a "Piggyback Registration"),
the Company will give prompt written notice to all holders of Executive Stock
of its intention to effect such a registration and will include in such
registration all Fully Vested Shares with respect to which the Company has
received
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written requests for inclusion therein within 15 days after the receipt of
the Company's notice.
(b) The Registration Expenses of the holders of Executive Stock
will be paid by the Company in all Piggyback Registrations.
(c) If a Piggyback Registration is an underwritten primary
registration on behalf of the Company, and the managing underwriters advise
the Company in writing that in their opinion the number of securities
requested to be included in such registration exceeds the number which can be
sold in such offering, the Company will include in such registration (i)
first, the securities the Company proposes to sell, (ii) second, other
securities requested to be included in such registration which are not
Executive Stock, and (iii) third, Fully Vested Shares, pro rata based upon
the number of Fully Vested Shares held by each holder thereof.
(d) If a Piggyback Registration is an underwritten secondary
registration on behalf of holders of the Company's securities, and the
managing underwriters advise the Company in writing that in their opinion the
number of securities requested to be included in such registration exceeds
the number which can be sold in such offering, the Company will include in
such registration (i) first, the securities requested to be included therein
by the holders requesting such registration, (ii) second, other securities
requested to be included in such registration which are not Executive Stock,
and (iii) third, Fully Vested Shares, pro rata based upon the number of Fully
Vested Shares held by each holder thereof.
(e) If any Piggyback Registration is an underwritten offering,
the underwriter's commissions and discounts shall be paid out of the proceeds
from the sale of such securities, and shall not be paid by the Company with
respect to the sale of such securities.
(f) Each holder of Executive Stock agrees not to effect any
public sale and/or distribution of any equity security of the company, or
any securities convertible into or exchangeable or exercisable for such
securities, during the seven days prior to and the 90 days after the
effectiveness of any underwritten Piggyback Registration, except as part of
such underwritten registration, unless otherwise authorized by the Company.
PROVISIONS RELATING TO EMPLOYMENT
9. EMPLOYMENT. The Company agrees to employ Executive and Executive
accepts such employment for the period beginning as of the date of the
Closing and ending upon termination pursuant to
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Section 11 hereof (the "Employment Period"). During the Employment Period,
Executive shall serve as the President and Chief Executive Officer of the
Company and shall have the normal duties, responsibilities and authority of
the President and Chief Executive Officer, including, without limitation,
responsibility for all aspects of the daily operations of the Company and the
identification, negotiation and integration of acquisitions, subject to the
power of the Board to supervise, and to override actions of, the President
and Chief Executive Officer.
10. SALARY, BONUS AND BENEFITS. (a) During the Employment Period,
the Company will pay Executive a base salary (the "Annual Base Salary") as
the Board may designate from time to time, at the rate of not less than
$241,500 per annum, subject to increases, but not decreases, as determined by
the Board in its sole discretion. Following the end of each fiscal year, the
Board may, in its sole discretion, award a bonus to Executive in an amount
not to exceed 30% of Executive's Annual Base Salary for such year, as
determined by the Board based upon the Company's achievement of budgetary and
other objectives. Executive's Annual Base Salary for any partial year will be
prorated based upon the number of days elapsed in such year.
(b) On the date of the Closing, the Company shall pay Executive
an amount equal to the product obtained by multiplying (i) a fraction, the
numerator of which is the number of days from September 1, 1993 to the date
of Closing and the denominator of which is 365, times (ii) $120,750, provided
that such amount shall not exceed $60,375.
11. TERMINATION.
(a) The Employment Period will continue until Executive's
resignation, disability (as reasonably determined by the Board) or death or
until the Board determines in its good faith judgment that termination of
Executive's employment is in the best interests of the Company.
(b) Subject to Section 11(c) below, if Executive's employment
with the Company is terminated by the Company without Cause, Executive shall
be entitled to receive (i) if the Termination occurs prior to the second
anniversary of the Closing, payments at the same rate as the Annual Base
Salary for 18 months (or, at the Company's option, for a greater period of up
to two years) following the date of Termination, payable in monthly
installments, or (ii) if the Termination occurs after the second anniversary
of the date of the Closing, payments at the rate of the Annual Base Salary
for six months (or, at the Company's option, for a greater period of up to
two years) following the date of Termination, payable in monthly
installments. Amounts payable by the Company to Executive pursuant to this
Section 11(b) shall be
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reduced by the amount of any payments received by Executive from other
employment during the period in which payments are being made pursuant to
this Section 11(b), and Executive hereby agrees that upon the termination of
Executive, Executive shall use his best efforts to seek employment with
similar responsibilities and similar compensation to the position with the
Company contemplated by the terms of this Agreement. The Company may cease
making payments to Executive pursuant to this Section 11(b) at any time after
which Executive breaches any of the provisions of Section 12 or 13; provided
that no such cessation shall relieve Executive of his obligations under
Section 12 or 13.
(c) If Executive's employment with the Company is terminated by
the Company for Cause or as a result of a voluntary termination by Executive,
then Executive's right to receive the Annual Base Salary shall cease on the
date of such termination and no severance payments shall be made.
(d) For purposes of this Agreement, "Cause" shall mean (i) the
commission of a felony or the commission of any other act which is materially
injurious to the Company or any Subsidiary involving dishonesty, disloyalty
or fraud with respect to the Company or any Subsidiary, (ii) gross negligence
or willful misconduct with respect to the Company or any Subsidiary which is
materially injurious to the Company or any Subsidiary, (iii) substantial and
repeated failure to perform duties commensurate with his position as
reasonably directed in writing by the Board in good faith or (iv) any other
material breach of this Agreement which is not cured within 21 days after
written notice thereof to Executive.
12. CONFIDENTIAL INFORMATION. Executive acknowledges that the
information, observations and data obtained by him during the course of his
performance under this Agreement concerning the business and affairs of the
Company and its affiliates are the property of the Company. Therefore,
Executive agrees that he will not disclose to any unauthorized person or use
for his own account or for the account of any third party any of such
information, observations or data without the Board's written consent, unless
and to the extent that the aforementioned matters become generally known to
and available for use by the public other than as a result of Executive's
acts or omissions to act. Executive shall use his best efforts to prevent the
unauthorized misuse, espionage, loss or theft of the aforementioned matters.
Executive agrees to deliver to the Company at the termination of his
employment, or at any other time the Company may request in writing, all
memoranda, notes, plans, records, reports and other documents (and copies
thereof) relating to the business of the Company and its affiliates
(including, without limitation, all acquisition prospects, lists and contact
information) which he may then possess or have under his control.
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13. NONCOMPETITION AND NONSOLICITATION
(a) NONCOMPETITION. Executive acknowledges that in the course of
his employment with the Company he will become familiar with the Company's
trade secrets and with other confidential information concerning the Company
and that his services will be of special, unique and extraordinary value to
the Company. Therefore, Executive agrees that, during the Employment Period
and (i) if Executive's employment is terminated by the Company for Cause or
as a result of voluntary termination by Executive, for two years thereafter,
or (ii) if Executive's employment is terminated for any other reason, the
period during which the Company is required or has elected (without giving
effect to the last two sentences of Section 11(b)) to make payments to
Executive pursuant to Section 11(b) (the "Noncompete Period"), he shall not
directly or indirectly own, manage, control, participate in, consult with,
render services for, or in any manner engage in any business competing with
the businesses of the Company or its Subsidiaries as such businesses exist on
the date of the termination of Executive's employment, within those limited
states or metropolitan areas in which the Company is engaged in business (or
in which the Company is in the process of attempting to engage in business)
during the Employment Period or at the time of termination of Executive's
employment.
(b) NONSOLICITATION. During the Employment Period and for two
years thereafter, Executive shall not directly or indirectly through another
person or entity (i) induce or attempt to induce any employee of the Company
or any Subsidiary to leave the employ of the Company or such Subsidiary, or
in any way interfere with the relationship between the Company or any
Subsidiary and any employee thereof, (ii) hire any person who was an employee
of the Company or any Subsidiary at any time during the Employment Period, or
(iii) induce or attempt to induce any customer, supplier, licensee or other
business relation of the Company or any Subsidiary to cease doing business
with the Company or such Subsidiary, or in any way interfere
with the relationship between any such customer, supplier, licensee or business
relation and the Company or any Subsidiary.
(c) ENFORCEMENT. If, at the time of enforcement of Section 12 or
13 of this Agreement, a court holds that the restrictions stated herein are
unreasonable under circumstances then existing, the parties hereto agree that
the maximum duration, scope or geographical area reasonable under such
circumstances shall be substituted for the stated period, scope or area and
that the court shall be allowed to revise the restrictions contained herein
to cover the maximum duration, scope and area permitted by law. Because
Executive's services are unique and because Executive has access to
confidential information, the parties hereto agree that money damages would
be an inadequate remedy for any breach of
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this Agreement. Therefore, in the event of a breach or threatened breach of
this Agreement, the Company or its successors or assigns may, in addition to
other rights and remedies existing in their favor, apply to any court of
competent jurisdiction for specific performance and/or injunctive or other
relief in order to enforce, or prevent any violations of, the provisions
hereof (without posting a bond or other security).
(d) The parties hereto contemplate the acquisition of an ongoing
business or businesses. Executive agrees to enter into a noncompetition and
nonsolicitation agreement substantially in the form of this Section 13 upon
the consummation of any such acquisition.
14. CONFIDENTIAL INFORMATION OF PRIOR EMPLOYERS.
(a) DISCLOSURE AND USE. Executive acknowledges and agrees that
Executive has been employed based upon personal and professional attributes
attained through his experience and education and that his employment with
the Company is not predicated on any implied or explicit understanding or
inference that Executive shall disclose or use any proprietary or
confidential information that Executive has acquired or been made privy to as a
result of his prior employment or relationships. Executive acknowledges and
affirms that he has been directed by the Company not to display or otherwise
make available to the Company, directly or indirectly (including by
undisclosed incorporation in his work product), any such proprietary or
confidential information. Executive represents and warrants that: (i) he has
not misappropriated, infringed or otherwise improperly disclosed or used any
proprietary or confidential information (in whatever form or medium) that he
has acquired or been made privy to as a result of his prior employment or
relationships; (ii) no claim by any of Executive's former employers or any
other third parties alleging misappropriation, infringement or improper
disclosure of use of same has been made, is currently outstanding or is
threatened, and there are no grounds therefor; and (iii) no injunction or
judgment has been imposed on Executive that restricts him from disclosing or
using same.
(b) PRIOR AGREEMENTS. Executive represents and warrants that:
(i) Executive has provided the Company with copies of any and all written
agreements or other arrangements that restrict or limit his conduct or
activities; (ii) Executive has no oral agreements or constraints with respect
to his conduct or activities; and (iii) all such written and oral agreements,
arrangements and constraints are listed on SCHEDULE 14(b) attached hereto
and incorporated herein. Executive recognizes that the Company is not in a
position to evaluate the scope or extent of his obligations and agreements
and is not a party to such agreements.
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His disclousure of such agreements in no way creates an imputation or
assumption of such agreements to or by the Company.
(c) PERFORMANCE OF EMPLOYMENT DUTIES. The Company has explained
to Executive the scope and responsibilities of his employment, and Executive
hereby represents and warrants that the performance of his employment duties
shall not place him in breach or violation of any pre-existing fiduciary
duty, covenant, agreement, restriction or limitation. Executive acknowledges
and agrees that Executive has been directed by the Company not to engage in
any conduct or activity that would cause him to violate any pre-existing
fiduciary duty, covenant, agreement, restriction or limitation and that, if
requested to engage in any activity or job function or to disclose any
information that would result in any such violation, Executive shall report
such request immediately and is relieved from any obligation to comply with
such request.
15. NO CONFLICTS. Executive represents and warrants that there is
no other contract in existence, written or oral, between him and any third
party that relates to the grant or assignment to others of any interest in
intellectual property hereafter contributed to, or conceived or made by, him
and that his performance of his duties to the Company will not place him in
breach of any existing agreement.
GENERAL PROVISIONS
16. CODE SECTION 280G. Notwithstanding any provision in this
Agreement to the contrary, if all or any portion of the payments or benefits
received or realized by Executive either alone or together with other
payments or benefits which Executive receives or realizes or is then entitled
to receive or realize from the Company or any of its affiliates would
constitute a "parachute payment" within the meaning of Section 280G of the
Internal Revenue Code of 1986, as amended (or any successor section) and the
regulations promulgated thereunder (the "Code") and/or any corresponding and
applicable state law provision, such payments or benefits provided to
Executive shall be reduced by reducing the amount of payments or benefits
payable to Executive pursuant to Section 11 of this Agreement to the extent
necessary so that no portion of such payments shall be subject to the excise
tax imposed by Section 4999 of the Code and any corresponding and/or
applicable state law provision; provided, however, that such reduction shall
only be made if, by reason of such reduction, Executive's net after tax
benefit shall exceed the net after tax benefit if such reduction were not
made. For purposes of this Section 16, "net after tax benefit" shall mean
the sum of (i) the total amount received or realized by Executive pursuant to
this Agreement that would constitute a "parachute payment" within the meaning
of Section 280G of the Code and any corresponding and applicable state
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<PAGE>
law provision plus (ii) all other payments or benefits which Executive
receives or realizes or is then entitled to receive or realize from the
Company and any of its affiliates that would constitute a "parachute payment"
within the meaning of Section 280G of the Code and any corresponding and
applicable state law provision, less (iii) the amount of federal or state
income taxes payable with respect to the payments or benefits described in
(i) and (ii) above calculated at the maximum marginal individual income tax
rate for each year in which payments or benefits shall be realized by
Executive (based upon the rate in effect for such year as set forth in the
Code at the time of the first receipt or realization of the foregoing), less
(iv) the amount of excise taxes imposed with respect to the payments or
benefits described in (i) and (ii) above by Section 4999 of the Code and any
corresponding and applicable state law provision.
17. DEFINITIONS.
"CHANGE OF CONTROL" means any sale, exchange, transfer or
issuance, or series of related sales, exchanges, transfers or issuances of
Stockholder Shares in a recapitalization or otherwise which results
in any person or group of related persons who are not Stockholders owning
shares entitling them to a majority of the ordinary voting power to elect
directors of the Company.
"COMMON STOCK" means the Class A Common and Class B Common.
"EBITDA" for any fiscal period of the Company means the Company's
consolidated earnings from continuing operations before interest, taxes,
depreciation and amortization for such fiscal period, as determined in
accordance with GAAP.
"EBITDA PERCENTAGE" as of the end of any fiscal period of the
Company means the quotient of (a) the Company's EBITDA for such period
divided by (b) the sum of (1) the monthly average amount of equity invested
in the Company during such period plus (2) the monthly average amount of
Indebtedness of the Company during such period, all as determined in
accordance with GAAP.
"EXECUTIVE'S FAMILY GROUP" means Executive's spouse and
descendants (whether natural or adopted) and any trust solely for the benefit
of Executive and/or Executive's spouse and/or descendants. Executive Stock
will also include shares of the Company's capital stock issued with respect
to Executive Stock by way of a stock split, stock dividend or other
recapitalization.
"EXECUTIVE STOCK" will continue to be Executive Stock in the hands
of any holder other than Executive (except for the Company and the Investor
and except for transferees in a Public Sale), and except as otherwise
provided herein, each such other
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<PAGE>
holder of Executive Stock will succeed to all rights and obligations
attributable to Executive as a holder of Executive Stock hereunder.
"FAIR MARKET VALUE" of each share of Executive Stock means the
average of the closing prices of the sales of the Company's Common Stock on
all securities exchanges on which the Common Stock may at the time be listed,
or, if there have been no sales on any such exchange on any day, the average
of the highest bid and lowest asked prices on all such exchanges at the end
of such day, or, if on any day the Common Stock is not so listed, the average
of the representative bid and asked prices quoted in the NASDAQ System as of
4:00 P.M., New York time, or, if on any day the Common Stock is not quoted in
the NASDAQ System, the average of the highest bid and lowest asked prices on
such day in the domestic over-the-counter market as reported by the National
Quotation Bureau Incorporated, or any similar successor organization, in each
such case averaged over a period of 21 days consisting of the day as of which
the Fair Market Value is being determined and the 20 consecutive business
days prior to such day. If at any time the Common Stock is not listed on any
securities exchange or quoted in the NASDAQ System or the over-the-counter
market, the Fair Market Value will be the fair value of the Common Stock
determined in good faith by the Board. If the Executive does not agree with
the fair market value determined by the Board, then Executive may request
that such value be determined by an independent investment banking firm of
national or regional reputation utilizing valuation techniques then commonly
used for the valuation of such investment interests, which investment banking
firm will be jointly selected by the Board and Executive in good faith, and
expenses of which will be borne equally by the Company and Executive. If the
Board and Executive cannot agree on an investment banking firm, the Board
shall select one investment banking firm and Executive shall select a second
investment banking firm, which firms shall jointly select a third investment
banking firm (the "Third Firm"). The Third Firm shall then determine the Fair
Market Value in accordance with the specifications set forth within this
definition.
"GAAP" means generally accepted accounting principles, as in effect
from time to time.
"INDEBTEDNESS" shall mean at a particular time, without
duplication, (i) indebtedness for borrowed money or for the deferred purchase
price of property or services in respect of which any Person is liable,
contingently or otherwise, as obligor or otherwise (other than trade payables
and other current liabilities incurred in the ordinary course of business) or
any commitment by which any Person assures a creditor against loss, including
contingent reimbursement obligations with respect to letters of credit, (ii)
indebtedness guaranteed in any manner by any Person, including guarantees in
the form of an agreement to repurchase or
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<PAGE>
reimburse, (iii) obligations under capitalized leases in respect of which
obligations any Person is liable, contingently or otherwise, as obligor,
guarantor or otherwise, or in respect of which obligations any Person assures
a creditor against loss and (iv) any unsatisfied obligation of any Person for
"withdrawal liability" to a "multiemployer plan" as such terms are defined
under ERISA.
"ORIGINAL COST" of each share of Class B Common purchased hereunder
will be equal to the price paid therefor as determined pursuant to Section
1(a) above (as proportionately adjusted for all subsequent stock splits,
stock dividends and other recapitalizations).
"PROJECTED EBITDA" for any fiscal period of the Company shall mean
the EBITDA of the Company for such fiscal period set forth on Appendix 2
attached hereto.
"PROJECTED EBITDA PERCENTAGE" for any fiscal period of the Company
shall mean the EBITDA Percentage of the Company for such fiscal period set
forth on Appendix 2 attached hereto.
"PUBLIC SALE" means any sale pursuant to a registered public
offering under the Securities Act or any sale to the public pursuant to Rule
144 promulgated under the Securities Act effected through a broker, dealer or
market maker.
"QUALIFIED PUBLIC OFFERING" means the sale in an underwritten
public offering registered under the Securities Act of shares of the
Company's Common Stock having an aggregate offering value of at least $30
million.
"REGISTRATION EXPENSES" means all expenses incident to the
Company's performance of a Piggyback Registration pursuant to Section 8,
including registration and filing fees, fees and expenses of compliance with
securities of blue sky laws, printing expenses, and fees and disbursements
for Counsel for the Company (but not for Counsel for the Executive) and all
independent public accountants, underwriters and other persons retained by
the Company.
"SALE OF THE COMPANY" means any transaction or series of related
transaction pursuant to which any person or entity (other than the Investor)
acquires (i) capital stock of the Company possessing the voting power to
elect a majority of the Board (whether by merger, consolidation,
reorganization, combination, sale or transfer of the Company's capital stock
or otherwise) or (ii) all or substantially all of the Company's assets
determined on a consolidated basis.
"SECURITIES ACT" means the Securities Act of 1933, as amended from
time to time.
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<PAGE>
"SUBSIDIARY" means any corporation of which the Company owns
securities having a majority of the ordinary voting power in electing the
board of directors directly or through one or more subsidiaries.
18. NOTICES. Any notice provided for in this Agreement must be in
writing and must be either personally delivered, mailed by first class mail
(postage prepaid and return receipt requested) or sent by reputable overnight
courier service (charges prepaid) to the recipient at the address below
indicated:
IF TO THE COMPANY:
American Medserve Corporation
c/o Golder, Thoma, Cressey, Rauner Fund IV, L.P.
120 South La Salle Street
Chicago, Illinois 60603
Attention: CEO
WITH A COPY TO:
Golder, Thoma, Cressey, Rauner Fund IV, L.P.
120 South La Salle Street
Chicago, Illinois 60603
Attention: Bryan C. Cressey
John F. Gregg
AND
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attention: Kevin R. Evanich, Esq.
IF TO THE EXECUTIVE:
Timothy L. Burfield
c/o Golder, Thoma, Cressey, Rauner Fund IV, L.P.
120 South La Salle Street
Chicago, Illinois 60603
Attention: Bryan C. Cressey
John F. Gregg
IF TO THE INVESTOR:
Golder, Thoma, Cressey, Rauner Fund IV, L.P.
120 South La Salle Street
Chicago, Illinois 60603
Attention: Bryan C. Cressey
John F. Gregg
- 23 -
<PAGE>
WITH A COPY TO:
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attention: Kevin R. Evanich, Esq.
or such other address or to the attention of such other person as the
recipient party shall have specified by prior written notice to the sending
party. Any notice under this Agreement will be deemed to have been given when
so delivered or sent or, if mailed, five days after deposit in the U.S. mail.
19. MISCELLANEOUS
(a) TRANSFERS IN VIOLATION OF AGREEMENT. Any Transfer or
attempted Transfer of any Executive Stock in violation of any provision of
this Agreement shall be void, and the Company shall not record such Transfer
on its books or treat any purported transferee of such Executive Stock as the
owner of such stock for any purpose.
(b) SEVERABILITY. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
invalid, illegal or unenforceable in any respect under any applicable law or
rule in any jurisdiction, such invalidity, illegality or unenforceability
will not affect any other provision or any other jurisdiction, but this
Agreement will be reformed, construed and enforced in such jurisdiction as if
such invalid, illegal or unenforceable provision had never been contained
herein.
(c) COMPLETE AGREEMENT. This Agreement, those documents expressly
referred to herein and other documents of even date herewith embody the
complete agreement and understanding among the parties and supersede and
preempt any prior understandings, agreements or representations by or among
the parties, written or oral, which may have related to the subject matter
hereof in any way.
(d) COUNTERPARTS. This Agreement may be executed in separate
counterparts, each of which is deemed to be an original and all of which
taken together constitute one and the same agreement.
(e) SUCCESSORS AND ASSIGNS. Except as otherwise provided herein,
this Agreement shall bind and inure to the benefit of and be enforceable by
Executive, the Company, the Investor and their respective successors and
assigns (including subsequent holders of Executive Stock); provided that the
rights and obligations of Executive under this Agreement shall not be
- 24 -
<PAGE>
assignable except in connection with a permitted transfer of Executive Stock
hereunder.
(f) GOVERNING LAW. All questions concerning the construction,
validity and interpretation of this Agreement and the exhibits and schedules
hereto shall be governed by and construed in accordance with the internal
laws of the State of Delaware, without giving effect to any choice of law or
conflict of law provision or rule (whether of the State of Delaware or any
other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Delaware.
(g) REMEDIES. Each of the parties to this Agreement (including
the Investor) will be entitled to enforce its rights under this Agreement
specifically, to recover damages and costs (including attorneys' fees) caused
by any breach of any provision of this Agreement and to exercise all other
rights existing in its favor. The parties hereto agree and acknowledge that
money damages may not be an adequate remedy for any breach of the provisions
of this Agreement and that any party may in its sole discretion apply to any
court of law or equity of competent jurisdiction (without posting any bond or
deposit) for specific performance and/or other injunctive relief in order to
enforce or prevent any violations of the provisions of this Agreement.
(h) AMENDMENT AND WAIVER. The provisions of this Agreement may be
amended and waived only with the prior written consent of the Company,
Executive and the Investor.
(i) BUSINESS DAYS. If any time period for giving notice or taking
action hereunder expires on a day which is a Saturday, Sunday or holiday in
the state in which the Company's chief executive office is located, the time
period shall be automatically extended to the business day immediately
following such Saturday, Sunday or holiday.
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<PAGE>
(j) TERMINATION. This Agreement (except for the provisions of
Sections 9 and 10) shall survive the termination of Executive's employment
with the Company and shall remain in full force and effect after such
termination.
(k) NO STRICT CONSTRUCTION. The parties hereto have participated
jointly in the negotiation and drafting of this Agreement. In the event an
ambiguity or question of intent or interpretation arises, this Agreement
shall be construed as if drafted jointly by the parties hereto and no
presumption or burden of proof shall arise favoring or disfavoring any party
by virtue of the authorship of any of the provisions of this Agreement.
* * * * *
[Signature Page Follows]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
on the date first written above.
AMERICAN MEDSERVE CORPORATION
By /s/ Timothy L. Burfield
-------------------------------------
Its C.E.O.
------------------------------------
/s/ Timothy L. Burfield
---------------------------------------
Timothy L. Burfield
Agreed and Accepted:
GOLDER, THOMA, CRESSEY, RAUNER FUND IV, L.P.
By: GTCR IV, L.P.
Its General Partner
By: Golder, Thoma, Cressey, Rauner, Inc.
Its General Partner
By /s/ Bryan C. Cressey
-----------------------------------------
Its /s/ Principal
-----------------------------------------
<PAGE>
APPENDIX 1
EXAMPLE OF ADDITIONAL BENEFITS REQUIREMENTS
Assume that Executive was terminated without Cause, death or
disability on the 100th day of a fiscal year and (i) actual EBITDA for the
immediately preceding 12 months was $8 million, (ii) Projected EBITDA for the
then current fiscal year was $10 million, (iii) Projected EBITDA for the
immediately preceding fiscal year was $9 million, (iv) the actual EBITDA
Percentage for the immediately preceding 12 months was 17%, (v) the Projected
EBITDA Percentage for the then current fiscal year was 20% and (vi) the
Projected EBITDA Percentage for the immediately preceding fiscal year was
18%. Since 100 days had elapsed in the current fiscal year, the 12 month
period would include three months in the current fiscal year and nine months
in the immediately preceding fiscal year. In that event (a) applicable
Projected EBITDA would equal $9.25 million [i.e., (3 + 12 x $10 million) +
(9 + 12 x $9 million)] and (b) the applicable Projected EBITDA Percentage
would equal 18.5% [i.e., (3 + 12 x 20) + (9 + 12 x 18)]. The Performance
Vesting Shares would continue to vest, since (x) actual EBITDA was greater
than 85% of applicable Projected EBITDA [i.e., $9.25 million x 85% = $7.86
million, which is less than actual EBITDA of $8 million] and (y) the actual
EBITDA Percentage was greater than 85% of the applicable Projected EBITDA
Percentage [18.5 x 85% = 15.725%, which is less than the actual EBITDA
Percentage of 17%].
<PAGE>
APPENDIX 2
YEAR PROJECTED EBITDA PROJECTED EBITDA PERCENTAGE
----- ---------------- ---------------------------
1994 $ 2,266,000 7.87%
1995 $ 5,368,000 12.75%
1996 $ 9,337,000 16.95%
1997 $13,976,000 20.68%
1998 $19,387,000 24.43%
<PAGE>
EXHIBIT 11.1
AMERICAN MEDSERVE CORPORATION
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
PREDECESSOR
-----------------------------------
PERIOD FROM COMPANY
JANUARY 1, 1994 --------------------------------
YEAR ENDED TO AUGUST 2, YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1993 1994 JUNE 30, 1995 DECEMBER 31, 1995
----------------- ---------------- ------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Primary
Average number of shares outstanding....... 1,000 1,000 4,052 4,421
Net effect of common and common equivalent
shares issued in an initial public
offering under SAB 83..................... 383 383
Net effect of common shares issued in
connection with the preferential mandatory
distribution 1,774 1,774
----------------- ---------------- ------------- -------
Total.................................... 1 1 6,209 6,578
----------------- ---------------- ------------- -------
----------------- ---------------- ------------- -------
Net income................................. $ 206 $ 537 $ 92 $ 296
Net income per share....................... $ 206.00 $ 537.00 $ 0.01 $ 0.04
</TABLE>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
JURISDICTION OF
SUBSIDIARY INCORPORATION
- ---------- ---------------
AMC Regional Holdings, Inc. Delaware
Dixon Pharmacy, Inc. Illinois
Gatti LTC Services, Inc. Pennsylvania
Nihan & Martin, Inc. Delaware
Pharmacy Associates of Glens Falls, Inc. New York
Pharmed Holdings, Inc. Delaware
Royal Care Holdings, Inc. Delaware
Specialized Patient Care Services, Inc. Delaware
Sterling Healthcare Services, Inc. Delaware
Williamson Drug Company, Inc. Virginia
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports on: the consolidated financial statements for American
Medserve Corporation as of June 30, 1995 and December 31, 1995 and for the year
ended June 30, 1995 and the six months ended December 31, 1995, dated April 25,
1996, except for Notes 11 and 14 as to which the date is November , 1996; the
financial statements of G.S.H.C. Inc. and the Contract Services Division of
Louis F. Gatti, Inc. as of December 31, 1993 and August 2, 1994 and for the year
ended December 31, 1993 and for the period from January 1, 1994 to August 2,
1994, dated July 26, 1996; the financial statements of Good Samaritan Supply
Services, Inc. as of December 31, 1994 and 1995 and for each of the three years
in the period ended December 31, 1995, dated October 4, 1996; the financial
statements of Nihan & Martin for the years ended December 31, 1993 and 1994 and
the period from January 1, 1995 to March 8, 1995, dated April 4, 1996; the
financial statements of Pharmed, Inc. as of December 31, 1994 and 1995 and for
the years ended December 31, 1994 and 1995, dated July 5, 1996; the financial
statements of Johnson's Pharmacy and Medical Supply, Inc. for the period from
April 1, 1995 to April 16, 1995, dated September 26, 1996; and the financial
statements for Sterling Acquisition Partners, Inc. for each of the two years in
the period ended December 31, 1994 and the period from January 1, 1995 to July
31, 1995, dated April 26, 1996, included in the Registration Statement and
Related Prospectus of American Medserve Corporation for the registration of
5,357,000 shares of its common stock.
Chicago, Illinois
October 23, 1996
- --------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon the completion
of the common stock reclassification described in Note 14, to the financial
statements for American Medserve Corporation.
ERNST & YOUNG LLP
Chicago, Illinois
November 8, 1996
