As filed with the Securities and Exchange Commission on December 10, 1996
Registration No. 333-14755
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
Under
The Securities Act of 1933
-------------------
LIFE CRITICAL CARE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 7352 52-0980785
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
3333 W. Commercial Blvd., Suite 203
Fort Lauderdale, Florida 33309
(954) 486-0424
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
Thomas H. White
Chief Executive Officer
3333 W. Commercial Blvd., Suite 203
Fort Lauderdale, Florida 33309
(954) 486-0424
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
George S. Lawler, Esquire David S. Rosenthal, Esquire
Whiteford, Taylor & Preston L.L.P. Shereff, Friedman, Hoffman & Goodman, LLP
210 West Pennsylvania Avenue 919 Third Avenue
Towson, Maryland 21204-4515 New York, New York 10022
(410) 832-2000 (212) 758-9500
Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement becomes effective.
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 statement 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.
Prospectus 2,000,000 Shares Subject to completion
December __, 1996
LIFE CRITICAL CARE CORPORATION
Common Stock
All of the shares of common stock, par value $.01 per share (the
"Common Stock"), offered hereby (the "Offering") are being issued and sold by
Life Critical Care Corporation (the "Company" or "Life Critical Care").
Prior to the Offering, there has been no public market for the Common
Stock. It is currently estimated that the initial public offering price will be
$5.50 per share. For information relating to the factors considered in
determining the initial public offering price, see "Underwriting." The Company
has applied to have the Common Stock approved for quotation on the Nasdaq
Small-Cap Market under the trading symbol "LCCC."
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH
DEGREE OF RISK AND IMMEDIATE AND SUBSTANTIAL DILUTION AND SHOULD NOT BE
PURCHASED BY INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE
INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE NINE HEREOF AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION (THE "COMMISSION") OR ANY STATE SECURITIES
COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
================================== ======================= ====================
Underwriting
Price to Public Discounts and Proceeds to
Commissions(1) the Company(2)
- ---------------------------------- ----------------------- --------------------
Per Share.... $____ $____ $____
- ---------------------------------- ----------------------- --------------------
Total(3)..... $____ $____ $____
================================== ======================= ====================
(1) Does not include a 3.0% non-accountable expense allowance payable
to H. J. Meyers & Co., Inc. (the "Underwriter") and warrants to
purchase 200,000 shares of Common Stock issuable to the Underwriter
(the "Underwriter Warrants"). The Company has agreed to indemnify the
Underwriter against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Securities Act").
See "Underwriting."
(2) Before deducting expenses in connection with the Offering, estimated at
$1,010,000 including the non-accountable expense allowance of $330,000, or
$379,500 if the Underwriter's over-allotment option is exercised in full,
payable by the Company.
(3) The Company and certain selling stockholders (the "Selling Stockholders")
have granted to the Underwriter an option, exercisable within 30 days of
the date of this Prospectus, to purchase up to 300,000 additional shares
of Common Stock on the same terms as set forth above, solely to cover
over-allotments. If this option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions, Proceeds to the Company
and Proceeds to the Selling Stockholders will be $___________,
$___________, $___________ and $___________, respectively. See
"Underwriting."
The shares of Common Stock offered hereby are being offered by the
Underwriter when, as and if delivered to and accepted by the Underwriter,
subject to prior sale and acceptance by the Underwriter and subject to its right
to withdraw, cancel, modify or reject any order in whole or in part. It is
expected that delivery of the Common Stock will be made at the offices of H. J.
Meyers & Co., Inc., 1895 Mt. Hope Avenue, Rochester, New York 14620.
H. J. MEYERS & CO., INC.
The date of this Prospectus is ____________, 1996.
<PAGE>
[MAP]
IN CONNECTION WITH THE OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ SMALL-CAP MARKET, OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
The Company intends to furnish to its stockholders annual reports containing
consolidated audited financial statements and quarterly reports containing
consolidated unaudited financial information for the first three fiscal quarters
of each fiscal year.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Simultaneously with the closing of the Offering, Life Critical
Care will acquire, in separate transactions (the "Acquisitions") in exchange for
cash and shares of its Common Stock, substantially all of the assets of three
home health care companies (each an "Acquired Company" and collectively the
"Acquired Companies"). The completion of the Acquisitions and the closing of the
Credit Facility (defined below) are conditions to the consummation of the
Offering. Unless otherwise indicated, references to the Company assume
completion of the Acquisitions and include the operations of the Acquired
Companies. Except as otherwise indicated, all information in this Prospectus
assumes no exercise of the Underwriter's over-allotment option and has been
adjusted to reflect the occurrence of the following transactions on or before
the consummation of the Offering: (i) the issuance of 771,875 shares of Common
Stock as part of the consideration for the Acquisitions, (ii) the amendment to
the Company's Restated Certificate of Incorporation (the "Certificate of
Incorporation") increasing the number of authorized shares of Common Stock to
10,000,000 and (iii) a 1,110-for-one stock split of the Company's Common Stock.
When used herein, the term "Offering Price" means $5.50 per share of Common
Stock.
THE COMPANY
Life Critical Care is a provider of home health care products and
services in the Northern Midwest region of the United States. Life Critical Care
provides a wide range of home health care products and services, including
respiratory therapy services and home medical equipment sales and rentals. The
Company operates from a total of 22 locations in Michigan and Wisconsin. The
Company believes that the Midwest region offers significant growth opportunities
due to the fragmentation of the home health market in the region. The Company's
objective is to become a leading comprehensive provider of home health care
products and services in the Midwest through acquisitions, internal growth and
the development of provider networks and strategic alliances, such as
contracting with other home health care providers for the provision of certain
services.
Life Critical Care was founded in June 1995. Although it has conducted
no operations to date, Life Critical Care has entered into definitive agreements
to acquire, simultaneously with the closing of the Offering, substantially all
of the assets of the following three home health care companies: (i) Blue Water
Medical Supply, Inc. and Blue Water Industrial Products, Inc. (collectively,
"Blue Water"); (ii) Great Lakes Home Medical, Inc. ("Great Lakes"); and (iii)
ABC Medical Supply, Inc. ("ABC") (collectively, the "Acquired Companies"). The
pro forma consolidated revenues of the Acquired Companies was approximately
$11.5 million and $8.9 million for the year ended December 31, 1995 and the nine
months ended September 30, 1996, respectively. The aggregate purchase price of
the Acquired Companies consists of 771,875 shares of Common Stock and
approximately $14.0 million in cash to be provided by the net proceeds of the
Offering to the Company and proceeds from a bank credit facility (the "Credit
Facility"). The purchase prices for each of the Acquired Companies were
determined by arms-length negotiations between the respective sellers of the
Acquired Companies and Life Critical Care. See "The Company."
The home health care industry includes the provision of respiratory,
infusion therapy and nursing services in the home and the sale or rental of
medical
2
<PAGE>
equipment and supplies for use in the home. According to industry sources,
home health care is among the fastest growing segments of the health care
industry, with total expenditures in 1995 estimated to be approximately $27.0
billion. The underlying growth factors in the home health care industry
include the following: (i) the cost-effective nature of home care compared to
hospital care; (ii) demographic trends toward an aging population; (iii)
technological advances that expand the range of home health procedures; and (iv)
patient preference for treatment in the home. See "Business -- Industry
Overview."
Historically, the home health care industry has been highly fragmented
and largely characterized by local providers serving discrete geographic areas
and offering a limited range of services. The Company believes these providers
often do not have the capital necessary to expand their operations or the range
of services offered, which limits their ability to compete for referrals and to
realize efficiencies in their operations. Payors are increasingly seeking home
health care providers that offer a cost-effective, comprehensive range of
services, which further limits the ability of local providers to compete. As a
result of these economic and competitive pressures, and an increasing regulatory
burden, the home health care industry is undergoing rapid consolidation, a trend
the Company expects to continue.
The Company has developed the following strategy in order to achieve
its goal of becoming a leading comprehensive provider of home health care
products and services in the Midwest.
(bullet) Expanding through Acquisitions. The Company intends to pursue
an aggressive acquisition strategy. In existing markets, the Company
will seek acquisitions that increase market share and broaden the
range of products and services provided by the Company in those
markets. In new geographic markets, the Company will target established
Midwestern home health care providers that are either leaders in their
geographic markets or provide other strategic advantages to the
Company.
(bullet) Accelerating Internal Growth. A key component of the Company's strategy
is to accelerate internal growth at each Acquired Company and each
subsequently acquired home health care business by expanding existing
product and service offerings. The Company intends to expand its
respiratory services operations and addinfusion therapy and nursing
services at selected locations. The expansion of these products and
services may be accomplished through provider networks or strategic
alliances with other home health care companies. The Company also
intends to enhance its sales and marketing efforts by developing
programs targeted at each of the major referral sources, including
hospital discharge planners, physicians and physician groups, as well
as managed care sources.
(bullet) Capitalizing on New Management and Corporate Structure. The Company
is assembling a professional management team with extensive experience
in the home health care industry. The Company's new management team
intends to position the Company to take advantage of the growth
opportunities presented by industry consolidation. In addition, the
new corporate structure will allow the consolidation of administrative
functions of the Acquired Companies such as reimbursement, billing and
collection, purchasing, management information and accounting systems
and the improvement of operating efficiencies through the elimination
of redundant facilities and equipment. The Company also believes that
it will have greater purchasing power in such areas as supplies,
inventory, equipment and
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insurance and better access to capital than the Acquired Companies had
independently. See "Business -- Strategy."
The Offering
Common Stock offered by the Company................ 2,000,000 shares(1)
Common Stock to be outstanding after the Offering.. 3,925,000 shares(2)
Use of proceeds.................................... To pay a part of the cash
portion of the purchase
price for the Acquired
Companies and repay
indebtedness. See "Use
of Proceeds."
Proposed Nasdaq Small-Cap Market Symbol............ LCCC
- ------------------
(1) Includes 525,000 shares held by founding stockholders and management
that are prohibited from being transferred prior to December 2004
unless and until the Company satisfies certain earnings performance
criteria. See "Shares Eligible for Future Sale."
(2) Excludes (i) 425,000 shares of Common Stock reserved for issuance upon
the exercise of stock options outstanding under individual awards and
the Company's 1996 Stock and Incentive Plan (the "1996 Plan"), none of
which will vest until December 2004 unless the Company satisfies
certain earnings performance criteria and (ii) 200,000 shares issuable
upon exercise of the Underwriter Warrants. See "Management -- Board of
Directors," " -- 1996 Plan," "Shares Eligible for Future Sale" and
"Underwriting."
Risk Factors
The Common Stock offered hereby involves a high degree of risk,
including those discussed under "Risk Factors."
4
<PAGE>
SUMMARY FINANCIAL DATA
Life Critical Care will acquire the Acquired Companies simultaneously
with the closing of the Offering. The following table presents summary
historical financial data for each of the Acquired Companies and Life Critical
Care Corporation, as well as unaudited summary pro forma consolidated financial
data. The historical financial data below are derived from and should be read in
conjunction with the historical financial statements included elsewhere in this
Prospectus. The pro forma consolidated financial data below give effect to the
Acquisitions as if they had occurred as of the beginning of the periods
presented. During the periods presented, the Acquired Companies were not under
common control or common management. Therefore, the unaudited pro forma
consolidated financial data presented may not be indicative of the future
results of operations or financial condition of the Company or the results which
would have occurred had the Acquired Companies been consolidated during the
periods presented. See the Unaudited Condensed Consolidated Pro Forma Financial
Statements included elsewhere in this Prospectus.
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<CAPTION>
Year Ended Nine Months
December 31, Ended
1995 September 30, 1996
------------- ------------------
<S><C>
Life Critical Care Pro Forma Consolidated
Financial Data(1)
Pro Forma Consolidated Statement of
Operations Data:
Pro forma revenues....................................... $11,477,572 $8,885,443
Pro forma income from operations......................... 2,643,320 1,945,065
Forfeiture of deposit(2) ................................ - 700,000
Other (income) expense, net.............................. 869,416 634,991
Pro forma income before income taxes......... 1,773,904 610,074
Pro forma net income..................................... $ 1,064,342 $ 366,044
Pro forma net income per share........................... $ 0.32 $ 0.11
Pro forma weighted average shares(3)..................... 3,318,267 3,438,319
September 30, 1996
Pro Forma
As Adjusted (4)
------------------
Pro Forma Consolidated Balance Sheet Data:
Working capital.......................................... $ 2,459,699
Total assets............................................. 20,097,978
Total debt, including current portion.................... 8,031,797
Stockholders' equity..................................... 11,492,988
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Year Ended Nine Months
December 31, Ended September 30,
---------------------- -------------------
1994 1995 1995 1996
---- ---- ---- ----
<S><C>
Historical Financial Data
Blue Water:
Revenues............................... $4,773,100 $5,289,682 $3,870,821 $4,208,055
Income from operations................. 517,788 677,905 471,352 697,539
Net income............................. 459,334 623,774 442,559 632,628
Great Lakes:
Revenues............................... $2,672,078 $3,229,062 $2,344,402 $2,454,346
Income from operations................. 440,673 1,196,959 819,250 837,991
Net income............................. 413,576 1,142,258 795,912 824,256
ABC:
Revenues............................... $2,602,203 $2,958,828 $2,206,910 $2,223,042
Income (loss) from operations......... (485) 359,243 284,315 328,753
Net income (loss)...................... (11,211) 358,156 284,284 326,381
June 19, 1995
(Inception) to Nine Months Ended
December 31, 1995 September 30, 1996
----------------- ------------------
Life Critical Care:
Operating expenses:
General and administrative........... $ 20,049 $ 187,273
Management fee....................... 225,000 116,500
Professional fees.................... 10,259 143,229
--------- ------------
Operating loss.............................. (255,308) (447,002)
Forfeiture of deposit (2) .................. -- 700,000
Interest and financing expense.............. 12,618 203,693
========= ============
Net loss.................................... $(267,926) $ (1,350,695)
========= ============
</TABLE>
- -----------------------------------
(1) See Unaudited Condensed Consolidated Pro Forma Financial Statements for a
discussion of the pro forma adjustments.
(2) Represents the non-recurring forfeiture of a deposit on a home health care
company that is not being acquired by Life Critical Care for strategic
business reasons. Excluding the forfeiture of deposit, pro forma net income
and pro forma net income per share would have been $786,044 and $0.23,
respectively, for the nine months ended September 30, 1996. The Company
believes that future acquisitions, if any, will not involve non-refundable
cash deposits, and therefore does not anticipate incurring forfeitures of
deposits in the future.
(3) Excludes shares reserved for issuance pursuant to the Company's stock
option plans and under individual awards.
(4) Gives effect to (i) the Acquisitions using the purchase method of
accounting as if they occurred on September 30, 1996, (ii) the issuance of
771,875 shares of Common Stock to the sellers of the Acquired Companies,
and (iii) the incurrence of indebtedness under the Credit Facility, as
adjusted for the sale of the 2,000,000 shares of Common Stock offered
hereby at the Offering Price and the application of the net proceeds
therefrom.
6
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THE COMPANY
Although the Company has conducted no operations to date, the Company
has executed definitive agreements to acquire, simultaneously with the
consummation of the Offering, the Acquired Companies. Set forth below is certain
information with respect to each of the Acquired Companies.
Blue Water Medical Supply, Inc. and Blue Water Industrial Products, Inc.
Blue Water, based in New Baltimore, Michigan, provides respiratory
therapy and home medical equipment and supplies to customers in Southeastern
Michigan, including the Detroit metropolitan area. Blue Water also supplies
industrial gases to medical offices and other customers. Blue Water received
accreditation from The Joint Commission on the Accreditation of Healthcare
Organizations ("JCAHO") in 1993 and has been in business for over 30 years. Blue
Water has two locations and, as of October 31, 1996, had 44 employees.
Great Lakes Home Medical, Inc.
Great Lakes, based in Escanaba, Michigan, provides respiratory therapy
and home medical equipment and supplies to customers in the upper peninsula area
of Michigan and Northern Wisconsin. The Company intends to apply for JCAHO
accreditation for Great Lakes following the Offering. Great Lakes has been in
business for over 9 years and has 7 locations and, as of October 31, 1996, had
40 employees serving mostly non-urban areas.
ABC Medical Supply, Inc.
ABC, based in West Branch, Michigan, provides respiratory therapy and
home medical equipment and supplies to customers in Central and Northern
Michigan. ABC has a total of 13 locations and, as of October 31, 1996, had 34
employees, serving mostly non-urban areas, and received its JCAHO accreditation
in 1994.
-----------------
The consideration to be paid by Life Critical Care to complete the
Acquisitions consists of approximately $14.0 million in cash and 771,875 shares
of Common Stock, subject to certain adjustments. The consideration was
determined by arms-length negotiations between Life Critical Care and the
sellers of each of the Acquired Companies, based primarily on the results of
operations and financial condition of each Acquired Company, as well as
strategic considerations. None of the sellers of the Acquired Companies are
affiliated with Life Critical Care or its founding stockholders.
7
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The following table sets forth the consideration being paid for each
Acquired Company:
<TABLE>
<CAPTION>
Common Stock
------------------ Total
Cash Shares(#) Value (1) Consideration
------------ ---------- ---------- -------------
<S><C>
Blue Water(2)......................... $ 5,494,500 122,100 $ 671,550 $ 6,166,050
ABC................................... 3,700,000 327,275 1,800,000 5,500,000
Great Lakes(3)........................ 4,837,500 322,500 1,773,750 6,611,250
----------- ------- ---------- -----------
Total............................ $14,032,000 771,875 $4,245,300 $18,277,300
=========== ======= ========== ===========
</TABLE>
- -----------------
(1) Represents the cash value of the shares of Common Stock issued as
consideration based upon the Offering Price.
(2) The purchase price for Blue Water is $6,105,000, payable 90% in cash and
10% in Common Stock valued at 90% of the Offering Price. The Company may be
required to issue Common Stock with a value of up to $201,465 in the event
the average closing prices of the Common Stock for the ten business days
ending with the second anniversary of closing decline by at least 15% from
the Offering Price.
(3) The purchase price for Great Lakes is $6,450,000, payable 75% in cash and
25% in Common Stock valued at 91% of the Offering Price.
The Company was incorporated in Delaware in June 1995. The Company's
executive offices will be located at the headquarters of Blue Water Medical
Supply, 37885 Green Street, New Baltimore, Michigan 48047, following
consummation of the Offering. The Company's executive offices are currently
located at 3333 West Commercial Blvd., Suite 203, Fort Lauderdale, Florida
33309, and its telephone number is 954-486-0424.
8
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RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should carefully consider the following risk factors
before making an investment in the Common Stock offered hereby.
Lack of Combined Operating History. The Company has no independent
operating history. Although the Acquired Companies each have a substantial
operating history on an individual basis, they have not been operated as a
consolidated entity. Accordingly, the Company's prospects cannot be evaluated
solely based on the history of the Acquired Companies and should be evaluated in
light of the uncertainties and risks related to the Company's ability to
successfully integrate the Acquired Companies, to recognize operational and
administrative efficiencies in delivering products and services and to expand
operations and enhance its ability to compete for referrals. The Company's
management group has been assembled only recently and there can be no assurance
that the management group will be able to effectively manage the consolidated
entity or effectively implement the Company's strategy, including the objective
of becoming a leading provider of comprehensive home health care. There can be
no assurance that the Company will succeed in addressing any or all of these
risks. The failure to do so could have a material adverse effect on the
Company's business, results of operations and financial condition.
Risks Associated with Acquisition Strategy. The Company will consummate
the Acquisitions simultaneously with the consummation of the Offering. The
Company intends to expand its business through selective acquisitions of other
established home health care companies, primarily those engaged in respiratory
therapy and durable medical equipment sales and rentals. There can be no
assurance, however, that the Company will be able to successfully integrate or
retain key personnel of the Acquired Companies or of future acquisitions. There
also can be no assurance that the Company will not incur disruptions and
unexpected expenses or experience reduced revenues in integrating the Acquired
Companies or future acquisitions. Competition for acquisition candidates exists
and may intensify, in which event there may be fewer acquisition opportunities,
as well as higher acquisition prices. Many of the competitors for such
acquisitions have greater financial and operational resources than Life Critical
Care. Furthermore, the process of identifying, evaluating, negotiating and
integrating acquisitions may divert management time and resources away from
current operations. There can be no assurance that any given acquisition, when
consummated, will not materially adversely affect the Company's business,
results of operations or financial condition. The Company currently has no
agreements, commitments or understandings with respect to any acquisitions.
Inability to Obtain Acquisition Financing. The Company currently
anticipates that a substantial portion of the consideration for future
acquisitions will consist of cash and that the Company will be required to
utilize borrowings, if available, to pursue its acquisition program. The Company
has limited cash resources and borrowing capacity which may be insufficient to
allow the Company to pursue its acquisition program. In addition, the Credit
Facility contains restrictive financial covenants, including minimum debt
service coverage and net worth requirements, limitations on indebtedness,
capital expenditures, mergers and the purchase or sale of assets not in the
ordinary course of business, which may restrict the Company's ability to borrow.
There can be no assurance that the Company will be able to obtain financing for
its acquisition program on terms the Company deems acceptable or at all.
9
<PAGE>
See " -- Substantial Indebtedness;" " -- Future Capital Needs; Uncertainty
of Additional Financing" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Dependence on Reimbursement by Third-Party Payors. The Company is
dependent on third-party payors for a majority of its revenues. Medicare,
Medicaid and other payors, such as managed care organizations (including health
maintenance organizations ("HMOs") and preferred provider organizations
("PPOs")), traditional indemnity insurers and third-party administrators
("TPAs") are increasing pressures both to control health care utilization and to
limit reimbursement. Since substantially all of the Company's revenues will be
attributable to payments received from Medicare and a limited number of other
payor categories, the level of revenues and profitability of the Company will be
subject to the effect of possible changes in the mix of the Company's patients
among Medicare, Medicaid and third-party payor categories, increases in case
management and review of services or reductions in coverage or reimbursement
rates by such payors. Such changes could have a material adverse effect on the
Company's business, results of operations or financial condition. See
"Business--Reimbursement, Billing and Collection" and "--Regulation."
Potential Reductions in Medicare Reimbursement. The Federal government
is considering significant reductions in planned Medicare spending. The Senate
and the House of Representatives have passed budget resolutions calling for
reductions of up to $270 billion in forecasted Medicare expenditures over the
next seven years. No specific measures for achieving such reductions have been
adopted, but Congressional proposals include reductions in oxygen reimbursement
rates of up to 20% and a prohibition on increases in reimbursement rates for a
seven year period. In August 1996, the Health Care Financing Administration
("HCFA"), which regulates the Medicare and Medicaid programs, after completing
its study of reasonable market prices, proposed a 40% reduction in oxygen
reimbursement rates. HCFA has not yet issued this proposal for Administration
approval for publication for notice and comment, but it is expected to do so in
connection with efforts to restrain federal spending. If approved, the reduction
would have a material adverse effect on the Company's business by significantly
decreasing the Company's revenues from its respiratory therapy services, which
represented approximately 72.0% of the Company's pro forma consolidated revenues
during each of 1995 and the nine months ended September 30, 1996. Another
proposal would change Medicare reimbursement for skilled nursing, rehabilitation
services and the first 60 days of home health care services by "bundling"
payments for these services into a single prospective payment to hospitals to
cover "post-acute" care for beneficiaries who are discharged from a hospital.
The adoption of any or all of such proposals could have a material adverse
effect on the Company's business, results of operations or financial condition.
See "Business -- Regulation."
Reimbursement Payment Delays. The Company generally is paid for its
services by government health administration authorities, insurance companies,
or other third party payors, not by the patients themselves. The home health
care industry is generally characterized by long collection cycles for accounts
receivable due to the complex and time consuming requirements for obtaining
reimbursement from private and governmental third party payors. In addition,
reimbursement from government payors is subject to examination and retroactive
adjustment. Such delays or retroactive adjustments could lead to cash
10
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shortages, which may require the Company to borrow funds, issue equity
securities or take other action to meet its ongoing obligations. The Company
would be adversely affected if it were to experience such difficulties and
were unable to obtain funds on acceptable terms to meet possible cash
shortages. See "Business -- Reimbursement, Billing and Collection" and
"-- Regulation."
Health Care Reform Risks. The health care industry is subject to
changing political, economic and regulatory influences that may affect the
procurement practices and operation of health care industry participants.
Changes in the law or new interpretations of existing laws may have a dramatic
effect on the definition of permissible or impermissible activities, the
relative costs associated with doing business and the amount of payment for
medical care by both governmental and other payors. In addition, numerous health
care reform proposals have been formulated by the current administration,
members of Congress and state legislators. Recent HCFA regional office action,
which became effective December 1, 1996, imposes reductions in reimbursement
rates and delivery restrictions on aerosol medications, and prohibits DME
suppliers from billing for prescription products unless they are licensed as
pharmacies. Government officials can be expected to continue to review and
assess alternative health care delivery systems and payment methodologies, and
public debate of these issues can be expected to continue in the future. The
adoption of reforms or alternative delivery systems could have a material
adverse effect on the Company's business, results of operations or financial
condition. See "Business --Regulation."
Risks Associated with Governmental Regulation. As a provider of
services under the Medicare and Medicaid programs, the Company is subject to
strict laws at both the federal and state levels which provide for civil and
criminal penalties, loss of licensure and exclusion from participation in the
Medicare and Medicaid programs. As a result of the Acquisitions, the Medicare
participation agreements of the Acquired Companies will automatically be
assigned to the Company. The federal government, private insurers and various
state enforcement agencies have increased their scrutiny of provider business
practices and claims, particularly in the area of home health care and durable
medical equipment, in an effort to identify and prosecute fraudulent and abusive
practices. While the Company believes that the Acquired Companies are in
material compliance with such laws, there can be no assurance that the practices
of the Company, if reviewed, would be found to be in full compliance with such
laws, as such laws ultimately may be interpreted. In addition, the federal
government and individual states regulate various aspects of the home health
care industry. Such regulations include federal and state laws covering the
dispensing of drugs and the operation of pharmacies, as well as state laws which
impose licensure requirements on home health care agencies and on certain types
of health care practitioners employed by the Company. The failure to obtain,
renew or maintain any of the required federal, state or local regulatory
certifications, approvals or licenses could have a material adverse affect on
the Company. There can be no assurance that either the Federal government or the
states will not impose additional regulations which would adversely affect the
Company's business, results of operations or financial condition. See "Business
- -- Regulation."
Dependence on Relationships with Referral Sources. The growth and
profitability of the Company depend on its ability to establish and maintain
close working relationships with referral sources, including payors, hospitals,
physicians and other health care professionals. Hospitals, physicians and
managed care organizations, which are exerting an increasing amount of influence
over the health care industry, have been consolidating to enhance their
11
<PAGE>
ability to impact the delivery of health care services. There can be no
assurance that the Company will be able to successfully maintain existing
referral sources or develop and maintain new referral sources, or that some of
its referral sources will not become competing providers of home health care
services. The loss of any significant number of existing referral sources or
the failure to develop new referral sources could have a material adverse
effect on the Company's business, results of operations or financial
condition. The Company's relationships with existing and potential
referral sources also could be adversely affected by a loss of JCAHO
accreditation or by the inability of the Company to obtain JCAHO
accreditation. Accredited companies are subject to periodic resurveys by
JCAHO, and there can be no assurance that a renewal of accreditation will be
forthcoming. See "Business-- Operations -- Sales and Marketing."
Substantial Indebtedness. Upon consummation of the Offering, the
Company's sources of liquidity will consist of cash and cash equivalents and
amounts available under the revolving credit portion of the Credit Facility, as
well as funds generated from operations. The Company will have only
approximately $204,000 in cash and cash equivalents and will be required to make
substantial principal and interest payments under the Credit Facility. Based on
current rates, required principal and interest payments under the term and
subordinated debt portions of the Credit Facility will total approximately
$1,413,000 during 1997. Payments of principal and interest will have to be made
with respect to such borrowings regardless of the Company's operating results.
Because a substantial portion of the Company's operating cash flow will be
required to be utilized to service the indebtedness under the Credit Facility,
the working capital available to the Company to capitalize on business
opportunities and to pursue all elements of its growth strategy will be limited.
In addition, the credit agreements relating to the Credit Facility contain
customary representations, warranties and covenants, as well as prohibitions
against the incurrence of other indebtedness without the consent of the lender.
The Company's obligations under the Credit Facility are secured by a pledge of
substantially all of the assets of the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Future Capital Needs; Uncertainty of Additional Financing. The Company
may need to raise additional funds to meet its working capital needs, develop
new or enhanced services, respond to competitive pressures, acquire
complementary businesses or upgrade management information systems. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of the existing stockholders of the Company will be
reduced, stockholders may experience additional dilution, or such equity
securities may have rights, preferences or privileges senior to those of the
holders of the Company's Common Stock. There can be no assurance that additional
financing will be available when needed on terms favorable to the Company or at
all. The inability of the Company to obtain additional financing on acceptable
terms could have a material adverse effect on the Company's business, financial
condition or operating results. In addition, the Company has agreed that it will
not sell any securities (except upon the exercise of outstanding options,
warrants or rights) for a period of 12 months from the date of this Prospectus,
without the Underwriter's prior written consent. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations --Liquidity and
Capital Resources" and "Underwriting."
Current Geographic Concentration. Substantially all of the Company's
pro forma consolidated net revenues has been derived from operations in Michigan
and Wisconsin.
12
<PAGE>
Unless and until the Company's operations become more diversified geographically
(as a result of acquisitions or internal expansion), adverse economic,
regulatory, or other developments in the foregoing states could have a material
adverse effect on the Company. See "Business -- Regulation."
Uncertainty of Expansion into New Geographic Markets. In pursuing its
growth strategy, the Company may expand its presence into new geographic
markets. When entering new geographic markets, the Company will need to
establish relationships with additional referral sources and will be reliant on
local management, who have important relationships with local referral sources.
In addition, the Company will be required to comply with laws and regulations of
states that could differ from those in which the Company currently operates, and
may face competitors with greater knowledge of such local markets. There can be
no assurance that the Company will be able to maintain existing or establish new
referral sources, develop efficient business operations or otherwise establish a
presence in these new geographic markets. See "Business--Business Strategy."
Dependence on Key Management and Health Care Professionals. The
Company's success will be highly dependent on Thomas H. White, its Chief
Executive Officer, Frank E. McGeath, its Chief Financial Officer, as well as its
other key management and health care professionals. The loss of one or more of
these personnel could have a material adverse effect on the Company. The Company
has entered into an employment agreement with Mr. White; however, the Company
does not have similar arrangements with its other key management personnel. The
Company intends to obtain a $1.0 million key man life insurance policy on Mr.
White, which will be assigned to the Bank (as defined) under the Credit
Facility. The Company's success will also depend in part on its ability to
attract and retain additional qualified management and health care
professionals. Competition for such personnel in the health care industry is
strong. There can be no assurance that the Company will be successful in
attracting or retaining the personnel it requires. See "Business--Employees" and
"Management."
Highly Competitive Industry. The home health care industry is highly
competitive and includes a large number of providers. The Company competes with
major national and regional companies, hospital-based provider programs as well
as local providers. Some current and potential competitors have or may obtain
significantly greater financial and marketing resources than the Company. In
addition, compared to other health care markets, relatively few barriers to
entry exist in the home health care industry. Other companies, including
manufacturers and suppliers of home health care equipment, managed care
organizations, hospitals and other health care providers and provider groups
that currently are not serving the home health care market, may become
competitors. To the extent that these companies enter the home health care
market, the Company may also lose existing and potential referral sources. As a
result, there can be no assurance that the Company will not encounter increased
competition in the future that may limit its ability to maintain or increase its
market share or otherwise materially adversely affect its business, results of
operations or financial condition. See "Business--Competition."
Potential Liability. Participants in the home health care market,
including the Company, are sometimes the subject of lawsuits alleging
negligence, products liability and other legal theories, many of which involve
large claims and significant defense costs. The Company also distributes
industrial gas products, such as acetylene, which have been the subject of
13
<PAGE>
lawsuits arising from industrial and other accidents. Although the Acquired
Companies currently maintain liability insurance, there can be no assurance that
the coverage limits of such insurance policies were adequate in the past or will
be adequate in the future, or that such claims will be covered by insurance.
While the Acquired Companies have been able to obtain insurance in the past,
such insurance varies in cost, may be difficult to obtain and may not be
available in the future on terms acceptable to the Company. Claims, regardless
of their merit or eventual outcome, may have a material adverse effect on the
Company's business, results of operations or financial condition. See
"Business--Insurance."
Concentration of Stock Ownership. Upon the completion of the Offering,
the Company's directors, executive officers and founding stockholders will
beneficially own approximately 27.1% of the outstanding Common Stock. As a
result, assuming they act collectively, these stockholders will be able to
exercise significant influence over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. Such concentration of ownership may also have the effect of
preventing or deterring a change in control of the Company. See "Management --
Executive Officers and Directors" and "Principal Stockholders."
Related Party Transactions. The majority of the funding for the
Company's operations to date has been provided by $1.5 million in bridge funds
(the "Morgenthau Bridge Funds") sponsored by Morgenthau Bridge Financing Corp.
("MBFC"), the principals of which are the Company's founding stockholders. In
connection with its sponsorship and management of the Morgenthau Bridge Funds,
MBFC received management fees totaling $341,500 and was reimbursed $65,000 for
travel and other expenses incurred in connection with the formation and
organization of the Company, investigating and evaluating potential acquisition
candidates and arranging and negotiating the Acquisitions and the Offering. Each
of the four founding stockholders received compensation from MBFC associated
with raising the Morgenthau Bridge Funds, and may receive additional
compensation dependent on the results of the funds, which are presently unknown.
In connection with raising $500,000 in additional bridge financing (referred to
as the "September Bridge"), Morgenthau & Associates, Inc., a registered
broker-dealer of which Anthony R. Morgenthau, a founding stockholder, is the
President, received placement fees of $40,000.
At the time the Morgenthau Bridge Funds were raised, the principals of
MBFC were the Company's only stockholders, and the Company's sole director was
affiliated with MBFC. Accordingly, the management fees and expenses paid to MBFC
were not subject to arms-length negotiations and necessarily involved conflicts
between the interests of the founding stockholders and the Company. The Company
has adopted a policy that any future transactions between the Company and its
affiliates will be on terms at least as favorable to the Company as those
available from non-affiliates and will be approved by a majority of the
Company's directors not having an interest in the transaction. See "Certain
Transactions."
Continuing Relationships with the Underwriter. The Company and the
Underwriter have established written contractual arrangements to which the
Company will remain subject after the completion of the Offering. For a period
of three years from the date of this Prospectus, the Company will allow a
non-voting observer of the Underwriter to receive notice of and attend meetings
of the Company's Board of Directors or, in lieu of an observer, will allow the
Underwriter, at its election, to cause the Company to use its best efforts to
14
<PAGE>
elect one designee of the Underwriter to the Board of Directors. It is currently
anticipated that a designee of the Underwriter will be named to the Board of
Directors after the Offering, although such person has not yet been selected.
The Underwriter has been granted warrants exercisable for 200,000 shares of
Common Stock at an exercise price equal to 120% of the Offering Price. The
warrants may adversely affect the Company's ability to raise capital in the
future. In addition, the Company will enter into a consulting agreement and a
merger and acquisition agreement with the Underwriter. Under the consulting
agreement, the Underwriter will perform consulting services related to corporate
finance and other financial services at the request of the President of the
Company for a fee of $72,000. The Company also has agreed to pay pre-set fees to
the Underwriter if, during the two years following the closing of the Offering,
it participates in any merger, consolidation or other transaction that closes
within 36 months of the closing of the Offering. The consulting agreement and
merger and acquisition agreements preclude the Company from entering into such
arrangements with other investment bankers, on more favorable terms than those
contained in such agreements. See "Underwriting."
No Prior Public Market; Possible Volatility of Stock Price. Prior to
the Offering, there has been no market for the Company's Common Stock, and there
can be no assurance that an active public market for the Common Stock will
develop or be sustained after the Offering. The initial offering price will be
determined by negotiation between the Company and the Underwriter based upon
several factors. The market price of the Company's Common Stock is likely to be
highly volatile and could be subject to wide fluctuations in response to
quarterly variations in operating results, announcements related to acquisitions
or products or services offered by the Company or its competitors, changes in
financial estimates by securities analysts, or other events or factors, many of
which are beyond the Company's control. In addition, the stock market has
experienced significant price and volume fluctuations that have particularly
affected the market prices of equity securities of many health care companies
and that often have been unrelated to the operating performance of such
companies. These broad market fluctuations may adversely affect the market price
of the Company's Common Stock.
Possible Illiquidity of Trading Market; Penny Stock. The Company has
filed an application to have the shares of Common Stock included for quotation
on the Nasdaq Small-Cap Market, for which it expects to receive approval. The
Nasdaq Small-Cap Market is less liquid than the Nasdaq National Market, on which
larger Nasdaq issues trade. If the Company's Common Stock were removed from
quotation on the Nasdaq Small-Cap Market, the Common Stock could be subject to
so-called "penny stock" rules that impose additional sales practice and
market-making requirements on broker-dealers who sell and/or make a market in
such securities. Consequently, removal from the Nasdaq Small-Cap Market, if it
were to occur, could affect the ability or willingness of broker-dealers to sell
and/or make a market in the Company's Common Stock and the ability of purchasers
of the Company's Common Stock to sell their securities in the secondary market.
In addition, if the market price of the Company's Common Stock is less than
$5.00 per share, the Company may become subject to certain penny stock rules
even if still quoted on the Nasdaq Small-Cap Market. While such penny stock
rules should not affect the quotation of the Company's Common Stock on the
Nasdaq Small-
15
<PAGE>
Cap Market, such rules may further limit the market liquidity of the Common
Stock and the ability for purchasers in the Offering to sell such Common
Stock in the secondary market.
Shares Eligible for Future Sale. Sales of substantial numbers of shares
of Common Stock in the public market following the Offering could adversely
affect the market price for the Common Stock. Upon completion of the Offering,
the Company will have outstanding an aggregate of 3,925,000 shares of Common
Stock (4,175,250 shares of Common Stock if the Underwriter's over-allotment
option is exercised in full). Of these shares, all of the shares sold in the
Offering will be freely tradable without restriction except for shares purchased
by "affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act. The remaining 1,925,000 shares of Common Stock and shares
underlying outstanding warrants are "restricted securities" as that term is
defined in Rule 144 under the Securities Act ("Restricted Shares"). Restricted
Shares may only be sold pursuant to a registration statement under the
Securities Act or an applicable exemption from the registration requirements of
the Securities Act, including Rule 144 thereunder. In addition, a total of
525,000 Restricted Shares are subject to a performance earn-out restricting
their sale prior to December 2005 unless and until the Company meets certain
earnings per share thresholds. Subject to meeting the terms of the performance
earn-out, approximately 270,485 shares will be eligible for sale in the public
market (subject to certain volume limitations) upon expiration of the lock-up
agreement 18 months after the date of this Prospectus and the remainder of the
Restricted Shares will be eligible for sale from time to time thereafter upon
expiration of their respective two-year holding periods. Any shares subject to
the lock-up agreements may be released at any time without notice by the
Underwriter. In addition, beneficial owners of 1,035,875 shares of Common Stock,
and the Underwriter with respect to the Underwriter Warrants, have registration
rights. See "Description of Capital Stock -- Registration Rights." Moreover, the
Company intends to register under the Securities Act a total of 675,000 shares
of Common Stock reserved for issuance under the 1996 Plan, the Non-Employee
Directors Stock Option Plan (the "Directors Option Plan") and individual option
grants. See "Shares Eligible for Future Sale" and "Underwriting."
Immediate and Substantial Dilution. Purchasers of the Common Stock in
the Offering will experience immediate and substantial dilution of approximately
$6.50, or 118.0% in the pro forma consolidated net book value per share of the
Common Stock so purchased, based on the Offering Price and the Acquisitions. The
Offering and the Acquisitions will result in the existing stockholders of the
Company realizing an immediate dilution in the net tangible book value of their
investment of approximately $0.23 per share. See "Dilution."
No Dividends. The Company intends to retain its earnings to support the
growth and development of its business and has no present intention of paying
any cash dividends on the Common Stock in the foreseeable future. The Credit
Facility does not permit the payment of dividends on the Common Stock. See
"Dividend Policy."
Limitations on Officer and Director Liability. Pursuant to the
Company's Certificate of Incorporation and under Delaware law, directors of the
Company are not liable to the Company or its stockholders for monetary damages
for breach of fiduciary duty, except for liability in connection with a breach
of the duty of loyalty, for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, for dividend
16
<PAGE>
payments or stock repurchases illegal under Delaware law or any transaction
in which a director has derived an improper personal benefit.
As a result of the inclusion of such provisions, stockholders may be
unable to recover monetary damages against directors for actions taken by them
that constitute negligence or gross negligence or that are in violation of their
fiduciary duties, even though it may be possible to obtain injunctive or other
equitable relief with respect to such actions. If equitable remedies are found
not to be available to stockholders in any particular case, stockholders may not
have any effective remedy against the challenged conduct. These provisions may
have the effect of reducing the likelihood of derivative litigation against
directors that might have benefited the Company.
Potential Effect of Anti-Takeover Provisions. The Company's Board of
Directors has the authority to issue shares of preferred stock and to determine
the price, rights, preferences, privileges and restrictions of those shares
without any further vote or action by the stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any preferred stock that may be issued in the
future. The issuance of preferred stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company. The Company has no
present plans to issue shares of preferred stock. Furthermore, the Company's
Certificate of Incorporation and Amended and Restated Bylaws provide that the
Board of Directors may take certain actions without stockholder approval, such
as establishing a staggered board of directors or limiting stockholder actions
and proposals, which actions may have the effect of discouraging, delaying or
preventing a merger, tender offer or proxy contest. Such actions could adversely
affect the market price of the Common Stock. See "Management" and "Description
of Capital Stock."
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares
of Common Stock offered by the Company hereby, after deducting underwriting
discounts and commissions and estimated Offering expenses, will be approximately
$9.0 million ($10.2 million if the Underwriter's over-allotment option is
exercised in full). The net proceeds of the Offering, together with proceeds of
the Credit Facility, will be used to (i) fund the cash portion of the purchase
price for the Acquired Companies (approximately $14.0 million), (ii) repay $2.0
million in bridge loans (and interest thereon) made to the Company by Morgenthau
Bridge Investment LP ("Bridge LP") and Morgenthau Bridge Loan LLC ("Bridge LLC")
(together, the "Morgenthau Bridge Funds") and by certain investors (the
"September Bridge," together with the loans made by the Morgenthau Bridge Funds,
the "Bridge Financing") (the Morgenthau Bridge Funds and the September Bridge
are sometimes referred to collectively as the "Bridge Funds") and (iii) repay
approximately $490,000 in Acquisition and other expenses not paid out of the
proceeds of the Bridge Financing. The Bridge Financing has been used to fund
deposits to the sellers of the Acquired Companies under the acquisition
agreements and to pay certain expenses in connection with the Acquisitions and
the Offering. A portion of the proceeds from the Bridge Financing were used for
a non-refundable deposit on a home health care company which is not being
acquired by the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources." The
Morgenthau Bridge Funds were sponsored by MBFC, and the principals of MBFC are
directors and beneficial owners of more than 5% of the Common Stock of the
Company. The outstanding principal balance, interest rate and maturity of the
financing provided by the Morgenthau Bridge Funds is $1.5 million, 18.0% and
December 31, 1997, respectively. The outstanding principal balance, interest
rate and maturity of the financing provided by the September Bridge is $500,000,
12.0% and June 30, 1997, respectively. The Morgenthau Bridge Funds also received
warrants to purchase an aggregate of 214,000 shares of Common Stock at $0.10 per
share, which were exercised in September 1996. The exercise price was paid by
foregoing $21,400 in accrued interest. See "Certain Transactions." The investors
in the September Bridge also received 50,000 shares of Common Stock.
Any amounts remaining from the net proceeds of the Offering, including
any proceeds from the exercise of the Underwriter's over-allotment option, will
be used for working capital purposes, including future acquisitions. The Company
currently has no agreements, commitments or understandings with respect to any
such acquisitions. Pending such uses, the Company intends to invest the net
proceeds in short-term, interest bearing investment grade securities.
The Company has obtained a commitment from Manufacturers and Traders
Trust Company (the "Bank") for a $6.0 million term loan, a $4.0 million
revolving credit facility and a $2.0 subordinated note facility. The term
portion of the Credit Facility and the subordinated note facility will be used
to pay the remainder of the cash portion of the purchase price for the
Acquisitions, repay the Bridge Financing and pay certain expenses of the
Acquisitions and the Offering. The remainder of the Credit Facility will be
available for working capital and other general corporate purposes, including
future acquisitions. Borrowings under the term and subordinated note portions of
the Credit Facility amortize over six years. The revolving facility and term
loan bear interest at a floating rate based upon the lower of an index to the
Bank's prime rate or LIBOR. Borrowings under the
18
<PAGE>
subordinated note facility bear interest at a fixed rate of 19% per annum. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
19
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization
of the Company as of September 30, 1996: (i) on a consolidated pro forma basis
giving effect to the Acquisitions, and (ii) on a consolidated pro forma basis,
as adjusted, to give effect to the Acquisitions, borrowings under the Credit
Facility and the sale by the Company of 2,000,000 shares of Common Stock at the
Offering Price and the application of the net proceeds therefrom as described
under "Use of Proceeds." This table does not include Common Stock reserved for
issuance upon exercise of the Underwriter's Warrants or options to be issued
under the Company's 1996 Plan, the Directors Option Plan or individual option
grants. See "Management -- Board of Directors," "-- Stock Option Plan,"
"Certain Transactions," "Shares Eligible for Future Sale" and "Underwriting."
<TABLE>
<CAPTION>
September 30, 1996
-------------------------------
Pro Forma,
Pro Forma As Adjusted
----------- -----------
<S><C>
Short-term debt, including current
portion of long-term debt........................... $ 522,132 $ 27,132
Long term debt......................................... 1,519,653 8,004,665
Stockholders' equity:
Preferred stock, par value $.01
per share; 500,000 shares
authorized; no shares
issued and outstanding.................... - -
Common stock, par value $.01
per share; 10,000,000 authorized;
1,925,000 shares issued and
outstanding, pro forma;
3,925,000 shares issued and
outstanding on a pro forma
basis, as adjusted........................ 20,282 40,282
Additional paid-in-capital.................... $ 4,341,528 13,296,939
Retained earnings (deficit)................... (1,616,621) (1,844,233)
Total stockholders' equity............................. 2,743,189 $11,492,999
Total capitalization.......................... $ 4,262,842 $19,497,653
</TABLE>
20
<PAGE>
This table should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," the financial
statements and notes thereto and the Unaudited Condensed Consolidated Pro Forma
Financial Statements included elsewhere in this Prospectus.
21
<PAGE>
DILUTION
The net pro forma tangible book value of the Company as of September
30, 1996 was $(1,478,279) or $(0.77) per share of outstanding Common Stock. Pro
forma net tangible book value per share is determined by dividing the pro forma
negative net tangible book value (tangible assets less liabilities) of the
Company by the number of shares of Common Stock outstanding on a pro forma
basis.
After giving effect to the Acquisitions, borrowings of $8.0 million
under the Credit Facility and the sale of 2,000,000 shares of Common Stock
offered by the Company hereby at an initial pubic offering price equal to the
Offering Price, the pro forma net tangible book value of the Company as of
September 30, 1996 would have been $(3,915,528) or $(1.00) per share of
outstanding Common Stock, representing an immediate dilution of $6.50 and $0.23
per share of Common Stock to new investors and existing stockholders,
respectively. The following table illustrates this pro forma per share dilution
as of September 30, 1996:
<TABLE>
<S><C>
Initial public offering price per share (1)........................................... $ 5.50
Pro forma negative net tangible book value per share before the Offering........... $(0.77)
Decrease in pro forma net tangible book value per share of Common Stock
attributable to sale of Common in the Offering and the Acquisitions(2)........... $(0.23)
Pro forma adjusted negative net tangible book value per share after the
..............Offering and Acquisitions(2)............................................ $(1.00)
------
Dilution per share to new investors................................................... $ 6.50
======
</TABLE>
- ---------------------------
(1) Before deduction of underwriting discounts and commissions and estimated
expenses of the Offering payable by the Company.
(2) After deduction of underwriting discounts and commissions and estimated
expenses of the Offering payable by the Company.
22
<PAGE>
The following table sets forth, on a pro forma basis as of September
30, 1996, the number and percentage of total outstanding shares of Common Stock
purchased, the total cash consideration and percentage of total cash
consideration paid, and the average price per share paid by existing
stockholders, and by purchasers of the Common Stock offered hereby. The
calculations in this table with respect to the Common Stock to be issued to the
Sellers of the Acquired Companies and to be purchased by new investors in the
Offering reflect an initial offering price of $5.50 per share.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------------ ----------------------- Per Share
Number Percent Amount Percent Price
------ ------- ------ ------- ---------
<S><C>
Existing stockholders(1)..... 1,925,000 49.0% $ 30,310(1) 0.3% $ 0.02
New investors................ 2,000,000 51.0 11,000,000 99.7 5.50
Total..................... 3,925,000 100.0% $11,030,310 100.0%
</TABLE>
- ---------------------------
(1) Excludes approximately $4.2 million of the stockholders' equity contributed
to the Company by the sellers of the Acquired Companies.
23
<PAGE>
DIVIDEND POLICY
The Company currently intends to retain any future earnings to support
the growth and development of its business and has no present intention of
paying any cash dividends on its Common Stock for the foreseeable future. Any
future determination as to the payment of dividends will be at the discretion of
the Company's Board of Directors and will depend on the Company's financial
condition, results of operations, capital requirements and such other factors as
the Board of Directors deems relevant. The Company's Credit Facility does not
permit the payment of dividends on the Common Stock.
24
<PAGE>
SELECTED FINANCIAL DATA
The following tables present selected historical financial data for
each of the Acquired Companies and Life Critical Care Corporation, as well as
unaudited selected pro forma consolidated financial data. The historical
financial data for each of the periods ended December 31, 1994 and 1995 have
been derived from the historical financial statements which have been audited by
Ernst & Young LLP, independent auditors, included elsewhere in this Prospectus.
The selected financial data set forth below for the respective nine month
periods ended September 30, 1995 and 1996 are unaudited and include all
adjustments (consisting only of normal recurring adjustments) that management
believes necessary for a fair presentation of the data for those periods and are
not necessarily indicative of the results to be expected for the year ended
December 31, 1996. During the periods presented, the Acquired Companies were not
under common control or common management. Therefore, the unaudited pro forma
consolidated financial data presented may not be indicative of the future
results of operations or financial condition of the Company or the results which
would have occurred had the Acquired Companies been consolidated during the
periods presented. See Unaudited Condensed Consolidated Pro Forma Financial
Statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Life Critical Care Pro Forma Consolidated
Financial Data(1)
Pro Forma Consolidated Statement of Operations Year Ended
Data: December 31, Nine Months Ended
1995 September 30, 1996
------------ ------------------
<S><C>
Pro forma revenues.......................... $11,477,572 $8,885,443
Pro forma income from operations............ 2,643,320 1,985,065
Forfeiture of deposit(2).................... - 700 000
Other (income) expense, net................. $ 869,416 $ 634,991
Pro forma income before income taxes........ 1,773,904 610,074
Pro forma net income........................ 1,064,342 366,044
Pro forma net income per share.............. $ 0.32 $ 0.11
Pro forma weighted average shares(3)........ 3,318,267 3,438,319
September 30, 1996
Pro Forma Consolidated Balance Sheet Data: Pro Forma,
As Adjusted (4)
------------------
Working capital............................. $ 2,459,699
Total assets................................ 20,097,978
Total debt, including current portion....... 8,031,797
Stockholders' equity........................ 11,492,988
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Year Ended Nine Months
December 31, Ended September 30,
--------------------- -----------------------
Historical Financial Data 1994 1995 1995 1996
---- ---- ---- ----
<S><C>
Blue Water:
Revenues...................................... $4,773,100 $5,289,682 $3,870,821 $4,208,055
Cost of revenues.............................. 1,632,018 1,752,968 1,245,944 1,273,035
Gross profit.................................. 3,141,082 3,536,714 2,624,877 2,935,020
Selling, general and
administrative expenses.................... 2,623,294 2,858,809 2,153,525 2,237,481
Income from operations........................ 517,788 677,905 471,352 697,539
Net income.................................... 459,334 623,774 442,559 632,628
Great Lakes:
Revenues...................................... $2,672,078 $3,229,062 $2,344,402 $2,454,346
Cost of revenues.............................. 677,488 694,637 517,384 502,479
Gross Profit.................................. 1,994,590 2,534,425 1,827,018 1,951,867
Selling, general and
administrative expenses.................... 1,553,917 1,337,466 1,007,768 1,113,876
Income from operations........................ 440,673 1,196,959 819,250 837,991
Net income.................................... 413,576 1,142,258 795,912 824,256
ABC:
Revenues...................................... $2,602,203 $2,958,828 $2,206,910 $2,223,042
Cost of revenues.............................. 1,170,701 1,308,517 915,034 886,133
Gross profit.................................. 1,431,502 1,650,311 1,291,876 1,336,909
Selling, general and
administrative expenses.................... 1,431,987 1,291,068 1,007,561 1,008,156
Income (loss) from operations................. (485) 359,243 284,315 328,753
Net income (loss)............................. (11,211) 358,156 284,284 326,381
June 19, 1995
(Inception) to Nine Months Ended
December 31, 1995 September 30, 1996
----------------- ------------------
Life Critical Care:
Operating expenses:
General and administrative............. $ 20,049 $ 187,273
Management fee......................... 225,000 116,500
Professional fee....................... 10,259 143,229
--------- -----------
Operating loss................................ (255,308) (447,002)
Forfeiture of deposit(2) .................... -- 700,000
Interest and financing expense................ 12,618 203,693
========= ===========
Net Loss...................................... $(267,926) $(1,350,695)
========= ===========
</TABLE>
- ------------------------
(1) See Unaudited Condensed Consolidated Pro Forma Financial Statements for a
discussion of the pro forma adjustments.
(2) Represents the non-recurring forfeiture of a deposit on a home health care
company that is not being acquired by Life Critical Care for strategic
business reasons. Excluding the forfeiture of deposit, pro forma net income
and pro forma net income per share would have been $786,044 and $0.23,
respectively, for the nine months ended September 30, 1996. The Company
believes that future acquisitions, if any, will not involve
non-refundable cash deposits, and therefore does not anticipate incurring
forfeitures of deposits in the future.
(3) Excludes shares reserved for issuance pursuant to the Company's stock option
plans and under individual awards.
(4) Gives effect to (i) the Acquisitions using the purchase method of accounting
as if they occurred on September 30, 1996, (ii) the issuance of 771,875 to
the sellers of the Acquired Companies and (iii) the incurrence of
indebtedness under the Credit Facility, as adjusted for the sale of the
2,000,000 shares of Common Stock offered hereby and the application of
the net proceeds therefrom.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains forward-looking statements that involve risks
and uncertainties. The Company's actual results may differ significantly from
the results discussed in the forward-looking statements for the reasons set
forth herein and under "Risk Factors."
General
Prior to the completion of the Offering, the Company's only business
was to identify and evaluate potential acquisition candidates, negotiate the
terms of the Acquisitions and the Offering and to arrange for the financing of
the Acquisitions.
Life Critical Care provides a wide range of home health care products
and services, including respiratory therapy services and home medical equipment
sales and rentals in the Northern Midwest region. The Company operates from a
total of 22 locations in the region, consisting of 18 locations in Michigan and
three locations in Wisconsin. The discussion of the Company's Plan of Operation
and Liquidity and Capital Resources assumes the Company's completion of the
Acquisitions.
The Company derives substantially all of its revenues from Medicare,
Medicaid and private payors, such as traditional indemnity insurers and managed
care organizations, including HMOs and PPOs, and TPAs. The Company anticipates
that Medicare will continue to represent a significant component of its
revenues. Based on available industry and demographic data, the Company believes
that demand for home health care will continue to increase as the ongoing
pressure to contain health care costs accelerates the growth and utilization of
alternate site care, such as home health care, and as the elderly percentage of
the population continues to grow. The Company also believes that regulatory and
industry pressure to significantly reduce health care costs and the growth of
managed care organizations will result in increased pricing pressure.
The Company has preliminarily analyzed the savings that it expects to
be realized by consolidating certain administrative functions (including
reimbursement, billing and collection, purchasing and management information and
accounting systems), and anticipates that it may realize significant savings in
other general and administrative areas. The Company, however, has not and cannot
quantify these savings until completion of the combination of the Acquired
Companies. It is anticipated that these savings will be partially offset by the
costs of being a public company and the costs related to the Company's new
corporate structure. However, these costs, like the savings that they offset,
cannot be quantified accurately. Accordingly, neither the anticipated savings
nor the anticipated costs have been included in the pro forma financial
information. See Unaudited Condensed Consolidated Pro Forma Financial
Statements.
Effective upon the completion of the Offering, the Company will acquire
three home health care companies. The historical results of the Acquired
Companies are discussed below. The Acquired Companies have operated as
closely-held independent private companies and their results of operations
reflect S Corporation tax structures which have influenced, among
27
<PAGE>
other things, historical levels of owners' compensation. The differential
between the previous compensation and the compensation subsequent to the
Acquisitions is referred to as the "Compensation Differential." In addition, as
a result of the Acquisitions, the Company has acquired intangible assets,
primarily goodwill, of approximately $15.2 million which will be amortized over
a useful life of 40 years. On a pro forma consolidated basis, assuming
completion of the Acquisitions as of the beginning of the respective periods,
the Company would have recognized amortization expense related to goodwill of
approximately $379,600 and $285,100 during 1995 and the nine months ended
September 30, 1996, respectively. The Compensation Differential, the related and
certain other income tax effects and the amortization expense related to
goodwill (as well as other adjustments) have been included as pro forma
adjustments in the Unaudited Condensed Consolidated Pro Forma Financial
Statements.
The variations in the gross margins of the Acquired Companies are
primarily due to internal reporting and product mix differences. For example,
ABC, unlike Blue Water and Great Lakes, records the cost of contract labor
(respiratory therapists) in cost of goods sold resulting in lower gross margins.
In addition, Blue Water sells industrial gases, which typically have a lower
gross margin than other products and services sold by the Company.
Plan of Operation
The Company anticipates that during the next 12 months it will seek to
integrate and expand the operations of the Acquired Companies. In particular,
the Company intends to expand its respiratory services operations and add
infusion therapy and nursing services at selected locations. The expansion of
products and services may occur through provider networks or strategic alliances
with other home health care companies. In addition, management will centralize
certain administrative functions in order to increase efficiency and take
advantage of economies of scale. Management also anticipates that it will seek
to strengthen its regional base through the acquisition of established
Midwestern home health care companies. Management believes that acquisition
opportunities will arise as regulatory and competitive pressures encourage
further consolidation in the industry. See "Business -- Industry Overview,"
and "-- Strategy."
Results of Operations - Blue Water
Nine months ended September 30, 1995 and September 30, 1996
Revenues. Revenues increased approximately $337,000, or 8.7%, from $3.9
million for the nine months ended September 30, 1995 (the "1995 Period") to $4.2
million for the nine months ended September 30, 1996 (the "1996 Period") as a
result of increased rental revenues from an expanded customer base.
Cost of revenues. Cost of revenues increased approximately $27,000 from
$1,246,000 for the 1995 Period to $1,273,000 for the 1996 Period, and cost of
revenues as a percentage of revenues declined from 32.2% to 30.3%. The decrease
in cost of revenues as a percentage of revenues is primarily due to increased
rental revenues,
28
<PAGE>
which generally have a higher margin than sales. Gross profit increased
approximately $310,000, or 11.8%, from $2.6 million for the 1995 Period to
$2.9 million for the 1996 Period.
Selling, general and administrative expenses. Selling, general and
administrative expenses were approximately $2.2 million for both periods,
primarily due to a decrease in the profit sharing contribution, partially offset
by higher overhead costs due to the expanded customer base.
Income from operations. Income from operations increased $226,000, or
approximately 48.0%, from $471,000 for the 1995 Period to $698,000 for the 1996
Period as a result of an increase in higher margin rentals.
Net Income. Net income, increased 43.0%, , from $443,000, or 11.4% of
revenues, for the 1995 Period to $633,000, or 15.0% of revenues, for the 1996
Period.
Years ended December 31, 1994 and 1995
Revenues. Revenues increased approximately $517,000, or 10.8%, from
$4.8 million for 1994 to $5.3 million for 1995. This increase was due to an
increase in both rentals and sales of Blue Water's products and services.
Cost of revenues. Cost of revenues increased approximately $121,000, or
7.4%, from approximately $1.6 million in 1994 to approximately $1.8 million in
1995, but decreased as a percentage of revenues from 34.2% for 1994 to 33.1% for
1995. Gross profit increased approximately $396,000, or 12.6%, from $3.1 million
in 1994 to $3.5 million in 1995.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased approximately $236,000, or 9.0%, from $2.6
million for 1994 to $2.9 million for 1995 primarily due to higher overhead costs
including increased professional fees associated with the pending sale of Blue
Water.
Income from operations. Income from operations increased approximately
$160,000, or 30.9%, from $518,000 in 1994 to $678,000 in 1995, primarily due to
increased revenues and gross profits.
Net Income. Net income increased approximately $164,000, or 35.8%,
from $459,000, or 9.6% of revenues, for 1994 to $624,000, or 11.8% of revenues,
for 1995.
Results of Operations - Great Lakes
Nine months ended September 30, 1995 and September 30, 1996
Revenues. Revenues increased approximately $110,000, or 4.7%, from $2.3
million for the 1995 Period to $2.5 million for the 1996 Period due to increases
in both rentals and sales of Great Lake's products and services.
29
<PAGE>
Cost of revenues. Cost of revenues decreased approximately $15,000 from
$517,000 for the 1995 Period to $502,000 for the 1996 Period. Gross profit
increased approximately $125,000, or 6.8%, from $1.8 million for the 1995 Period
to $2.0 million for the 1996 Period.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased approximately $106,000, or 10.5%, from
$1,008,000 for the 1995 Period to $1,114,000 for the 1996 Period, primarily due
to higher overhead costs, including annual salary increases, and the institution
of an employee incentive compensation plan.
Income from operations. Income from operations increased $19,000, or
2.3%, from $819,000 for the 1995 Period to $838,000 for the 1996 Period due
primarily to improved gross margins on higher revenues.
Net income. Net income increased approximately $28,000, or 3.6%, from
$796,000, or 33.9% of revenues, for the 1995 Period to $824,000, or 33.6% of
revenues, for the 1996 Period.
Years ended December 31, 1994 and 1995
Revenues. Revenues increased approximately $557,000, or 20.8%, from
$2.7 million for 1994 to $3.2 million for 1995 primarily due to an increase in
rental revenues.
Cost of revenues. Cost of revenues increased approximately $17,000, or
2.5%, from $677,000 for 1994 to $695,000 for 1995, but declined as a percentage
of revenues from 25.4% for 1994 to 21.5% for 1995. The decline in cost of
revenues as a percentage of revenues was primarily due to decreased depreciation
expense. Gross profit increased approximately $540,000, or 27.1%, from $2.0
million for 1994 to $2.5 million for 1995.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased approximately $216,000, or 13.9%, from $1.6
million for 1994 to $1.3 million for 1995 primarily due to a non-compete payout
to a former owner which was completed in 1994, a decrease in facilities expense
and a decrease in other administrative expenses.
Income from operations. Income from operations increased approximately
$756,000, or 171.6%, from $441,000 for 1994 to $1.2 million for 1995 due to
higher revenues, increased gross margins and decreased overhead costs.
Net income. Net income increased approximately $729,000, or 176.2%,
from $414,000, or 15.5% of revenues, for 1994 to $1.1 million, or 35.4% of
revenues, for the same period in 1995.
Results of Operations - ABC
Nine months ended September 30, 1995 and September 30, 1996
30
<PAGE>
Revenues. Revenues were approximately $2.2 million for both periods.
Cost of revenues. Cost of revenues decreased approximately $29,000, or
3.2%, from $915,000 for the 1995 Period to $886,000 for the 1996 Period, and
cost of revenues as a percentage of revenues decreased from 41.5% for the 1995
Period to 39.9% for the 1996 Period. Gross profit increased approximately
$45,000, or 3.5%, from $1,292,000 for the 1995 Period to $1,337,000 for the 1996
Period. Gross profit increased primarily due to decreased depreciation expense
as more assets became fully depreciated and ABC made no significant new
purchases at the request of the Company.
Selling, general and administrative expenses. Selling, general and
administrative expenses were approximately $1,008,000 for each of the 1995
Period and the 1996 Period.
Income from operations. Income from operations increased approximately
$44,000, or 15.6%, from $284,000 for the 1995 Period to $329,000 for the 1996
Period as a result of lower operating expenses on relatively flat revenues.
Net income. Net income increased approximately $42,000, or 14.8%, from
$284,000, or 12.9% of revenues, for the 1995 Period to $326,000, or 14.7% of
revenues, for the 1996 Period.
Years ended December 31, 1994 and 1995
Revenues. Revenues increased approximately $357,000, or 13.7%, from
$2.6 million for 1994 to $3.0 million for 1995. This increase was primarily due
to increased volume for both rental and sales of the company's products and
services.
Cost of revenues. Cost of revenues increased $138,000, or 11.8%, from
$1.2 million in 1994 to $1.3 million in 1995, but decreased as a percentage of
revenues from 45.0% for 1994 to 44.2% for 1995. The decline in the cost of
revenues as a percentage of revenues was primarily due to a decrease in
depreciation expense and an improved commission structure. Gross profit
increased approximately $219,000, or 15.3%, from $1.4 million in 1994 to $1.7
million in 1995.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased approximately $141,000, or 9.8%, from $1.4
million in 1994 to $1.3 million in 1995 primarily due to lower overhead expenses
and lower owners' compensation.
Income from operations. Income from operations increased by
approximately $360,000 to $359,000 in 1995 primarily due to lower operating
expenses on higher revenues and lower owners' compensation.
Net income. Net income increased $369,000 from a loss of $11,000 for
1994 to income of $358,000, or 12.1% of revenues, for 1995.
Liquidity and Capital Resources - Consolidated
Since its inception in June 1995, the Company has incurred expenses in
connection with the Acquisitions, including cash deposits to the sellers of the
Acquired Companies and
31
<PAGE>
preparation for the Offering, which have been paid by the Bridge Financing.
Approximately $700,000 of the proceeds of the Bridge Financing were used for a
non-refundable deposit on a home health care company that is not being acquired
by the Company for strategic business reasons. The net proceeds of the
Offering, together with the term and subordinated note portions of the Credit
Facility, will be used to pay the remainder of the cash portion of the
purchase price for the Acquisitions and to repay the Bridge Financing. See "Use
of Proceeds."
In connection with the Offering, the Company has obtained the Credit
Facility, consisting of a $6.0 million six year term loan, a $4.0 million
revolving credit facility and a $2.0 million subordinated note facility. The
Company incurred a one-time facility fee of $140,000 and is required to pay a
fee on the average unused portion of the line of credit of 0.375% per annum.
Borrowings under the revolving credit facility and term portions of the Credit
Facility will bear interest at a floating rate based upon the lower of an index
to the Bank's prime rate or LIBOR. As of December 3, 1996, the applicable
interest rates for the term loan and the revolving credit facility would have
been 8.29% and 8.04%, respectively. Borrowings under the subordinated note
facility amortize over six years, and will bear interest at a fixed rate of
19.0% per annum. The revolving credit facility will be available for working
capital and acquisition funding purposes. Borrowings under the Credit Facility
are collateralized by substantially all of the Company's assets. The Credit
Facility also contains financial covenants applicable to the Company, including
minimum debt service coverage and net worth requirements, and limitations on
indebtedness, dividends, capital expenditures, mergers and the sale or purchase
of assets not in the ordinary course of business.
On a pro forma consolidated basis as of September 30, 1996, assuming
the completion of the Acquisitions and the Offering, the Company expects to have
working capital of approximately $2.5 million, including cash and cash
equivalents of approximately $204,000. The Company anticipates that existing
working capital, together with $4.0 million available to it under the revolving
credit facility and cash generated from operations, will be sufficient to fund
the operations of the Company after the consummation of the Acquisitions, and to
fund the planned expansion of services to be offered by the Company during the
next 12 months, including the potential addition of infusion therapy and nursing
services at selected locations. However, delays in reimbursement may result in
working capital constraints and there can be no assurance that the funds
available to the Company from the Offering and the Credit Facility will be
sufficient for the Company's working capital needs or to fund any further
acquisitions. In that event, the Company may be required to seek additional
financing or issue additional shares of capital stock in order to consummate any
such acquisitions. There can be no assurance that any such additional financing
will be available on terms acceptable to the Company or at all. See "Risk
Factors -- Substantial Indebtedness" and "--Future Capital Needs; Uncertainty of
Additional Financing."
Impact of Inflation
A substantial portion of the Company's revenues is subject to
reimbursement rates which are regulated by the federal and state governments or
through contractual arrangements and do not automatically adjust for inflation.
These reimbursement rates are adjusted
32
<PAGE>
periodically based upon certain factors, including legislation and executive
and congressional budget reduction and control processes, inflation and
costs incurred in rendering the services, but in the past have had little
relationship to the actual cost of doing business. See "Risk Factors --
Potential Reductions in Medicare Reimbursement," "-- Reimbursement Payment
Delays," "-- Health Care Reform Risks" "-- Risks Associated with Governmental
Regulation" and "Business --Regulation."
33
<PAGE>
BUSINESS
General
Life Critical Care is a provider of home health care products and
services in the Northern Midwest region. Life Critical Care provides a wide
range of home health care products and services, including respiratory therapy
services and home medical equipment sales and rentals. In the region, the
Company operates from a total of 22 locations in Michigan and Wisconsin. The
Company believes that the Midwest region offers significant growth opportunities
due to the fragmentation of the home health market in the region. The Company's
objective is to become a leading comprehensive provider of home health care
products and services in the Midwest through acquisitions, internal growth and
the development of provider networks and strategic alliances with other home
health care providers.
Industry Overview
Total expenditures within the health care industry, which have
increased at twice the rate of inflation in recent years, were approximately
$1.1 trillion in 1995. The ongoing pressure to contain health care costs, while
maintaining high quality care, is accelerating the growth of alternate site
care, such as home health care, that reduces hospital admissions and lengths of
hospital stays. Home health care is among the fastest growing segments of the
health care industry, with total expenditures in 1995 estimated to be
approximately $27.0 billion. The Company believes that the growth in home health
care is influenced by the following factors and trends:
(bullet) Cost Effective Alternative. Health care providers, as well as
Medicare and other payors, are increasingly recognizing that in
many situations home health offers a less costly alternative to
in-patient hospital care.
(bullet) Aging Population. The U.S. Bureau of the Census has estimated
that in 1995 approximately 12.6% of the U.S. population was 65 or
more years of age, with the population of persons over 85 years of
age growing at an annual rate of 3.6%, more than three times
faster than the total population.
(bullet) Technological Advancements. Advancements in medical technology
have allowed the delivery of an increasing amount of health care
products and services in the home and other residential
environments.
(bullet) Patient Preference for Home Care. In general, patients prefer to
recuperate in their homes rather than in a hospital or other
institutional environment.
Historically, the home health care industry has been highly fragmented
and largely characterized by local providers that typically do not offer a
comprehensive range of cost-effective services. These local providers often do
not have the capital necessary to expand their operations or the range of
services offered, which limits their ability to compete for referrals and to
realize efficiencies in their operations. Payors increasingly are seeking home
health care
34
<PAGE>
providers that offer a cost-effective, comprehensive range of services in
each market served, which further inhibits the ability of local providers
to compete effectively. As a result of these economic and competitive
pressures, the home health care industry is undergoing rapid consolidation, a
trend the Company expects will continue.
Strategy
The Company intends to utilize a decentralized operating and service
philosophy in order to assure high quality customer service while capitalizing
on the centralization of certain administrative functions. The strategy also
emphasizes the retention of local management, all of which the Company believes
will allow it to achieve its goal of becoming a leading comprehensive provider
of home health care products and services in the Midwest.
(bullet) Expanding through Acquisitions. The Company intends to pursue
an aggressive acquisition strategy primarily in the Midwest Region,
where the Company believes there are significant growth
opportunities due to fragmentation of the market in the region. In
existing markets, the Company will seek acquisitions that increase
market share and broaden the range of products and services provided
by the Company in those markets. In new geographic markets, the
Company will target established Midwestern home health care service
providers that are either leaders in their markets or provide other
strategic advantages for the Company.
(bullet) Accelerating Internal Growth. A key component of the Company's strategy
to become a comprehensive provider to accelerate internal growth
at each Acquired Company and each subsequently acquired home health
care business by standardizing and expanding existing products and
services. The Company intends to expand its respiratory services
operations and add infusion therapy and nursing services at selected
locations. The expansion of these products and services may be
accomplished through provider networks or strategic alliances with
other home health care companies. The Company also intends to enhance
its sales and marketing efforts by developing programs targeted at
each of the major referral sources, including hospital discharge
planners, physicians and physician groups, as well as managed care
sources.
(bullet) Capitalizing on New Management and Corporate Structure. The Company
is assembling a professional management team with extensive experience
in the home health care industry. The Company's new management team
intends to position the Company to take advantage of the growth
opportunities presented by industry consolidation. In addition,
the new corporate structure will allow the consolidation of
administrative functions of the Acquired Companies such as
reimbursement, billing and collection, purchasing, management
information and accounting systems and the improvement of
operating efficiencies through the elimination of redundant facilities
and equipment. The Company also believes that it will have greater
purchasing power in such areas as supplies, inventory, equipment and
insurance and better access to capital than the Acquired Companies had
independently.
Products and Services
The Company derives its revenues primarily through the provision of
home respiratory therapy products and services and home medical equipment
("HME") sales and rentals. The
35
<PAGE>
Company estimates that respiratory therapy products and services, HME
sales and rentals and other products and services represented approximately
72.0%, 20.0% and 8.0%, respectively, of pro forma consolidated revenues
during 1995 and approximately 72.0%, 19.0% and 9.0%, respectively, of pro
forma consolidated revenues during the nine months ended September 30, 1996.
The products and services discussed below are provided by the Company on a
consolidated basis, although not all of the Acquired Companies provide all
products and services.
Respiratory Therapy Services. Respiratory therapy patients use
equipment such as oxygen systems, which assist patients with breathing;
nebulizers, which aerosolize medications; and ventilators, which breathe for the
patient. The Company believes that increasing physician acceptance of home
health care, improving clinical techniques which prolong life, the aging
population, and cost effectiveness are resulting in the increasing utilization
of home respiratory therapy services.
In providing respiratory therapy products and services to patients, the
Company's personnel manage the needs of the patient according to the
physician-directed plan of care and educate the patient and care giver regarding
treatment requirements, use of equipment and self-care. Certain equipment, such
as oxygen concentrators, ventilators and apnea monitors, require periodic visits
to the patient's home to assure patient compliance with physician orders and to
monitor the proper functioning of the equipment. The respiratory therapy
services that the Company provides include the following:
Oxygen systems to assist patients with breathing. There are
three types of oxygen systems: (i) oxygen concentrators, which
are stationary units that filter ordinary air in order to
provide continuous flow of oxygen; (ii) liquid oxygen systems,
which are portable, thermally-insulated containers of liquid
oxygen; and (iii) high pressure oxygen cylinders, which are
used for portability with oxygen concentrators. Oxygen systems
are used to treat patients with chronic obstructive pulmonary
disease, cystic fibrosis and neurologically-related
respiratory problems.
Nebulizers to deliver aerosol medication to patients.
Nebulizers are used to treat patients with asthma, chronic
obstructive pulmonary disease, cystic fibrosis and
neurologically-related respiratory problems.
Home ventilators to sustain a patient's respiratory function
mechanically in cases when a patient requires breathing
assistance.
Continuous positive airway pressure therapy ("CPAP") to force
air through respiratory passage-ways during sleep. This
treatment is used primarily on adults with sleep apnea, a
condition in which a patient's normal breathing patterns are
disturbed during sleep.
Apnea monitors to monitor and warn parents of apnea episodes
in newborn infants as a preventive measure against sudden
infant death syndrome.
36
<PAGE>
Home Medical Equipment Sales and Rentals. The Company's primary product
lines include hospital beds, wheelchairs, bathroom aids, patient aids (such as
walkers, canes and commodes) and diabetic supplies, including meters and strips.
The Company also offers a variety of incontinence, ostomy supplies and orthotic
fittings as well as self-help items such as lift chairs, blood pressure kits and
ice packs. In addition to its sales activities, the Company rents durable
medical equipment, such as beds and wheelchairs, to patients on a short-term and
a long-term basis.
Future Services.
The Company intends to add infusion therapy and nursing services at
selected locations as part of its efforts to become a leading comprehensive
provider of home health care products and services in the Midwest. The expansion
may be the result a combination of internal growth, acquisitions and the
development of provider networks and strategic alliances with other home health
care providers.
Home Infusion Therapy. Home infusion therapy is the administration
outside the hospital setting of nutrients, antibiotics and other medications
intravenously (into the vein), subcutaneously (under the skin), intramuscularly
(into the muscle), intrathecally or epidurally (via spinal routes) or through
tubes into the digestive tract. Typical infusion services include antibiotic and
related therapies (therapies used to treat various infections and diseases);
parenteral nutrition therapy (the intravenous feeding of life sustaining
nutrients to patients with impaired or altered digestive tracts); blood
products; and enteral nutrition therapy (the administration of nutrients through
a feeding tube).
Nursing and Related Care. Nursing services include Registered Nurses,
who provide a broad range of nursing care services, Licensed Practical Nurses,
who perform a variety of technical nursing procedures, specialty therapists,
occupational therapists, speech therapists, social workers and home health aids
and companions.
Operations.
General. The Company's corporate offices will be located at Blue Water
Medical Supply's office in New Baltimore, Michigan. The Company maintains
offices and warehouse facilities in the following locations:
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Michigan Marquette
Atlanta Menominee
Bay City New Baltimore (2 locations)
Charlevoix Reed City
Cheboygan Sault Ste. Marie
Escanaba West Branch (2 locations)
Gaylord
Gladwin Wisconsin
Ionia
Kalkaska Appleton
Lapeer Manitowoc
Manistee Sturgeon Bay
The Company intends to centralize certain administrative functions at
its corporate offices, including reimbursement, billing and collection,
purchasing and management information and accounting systems. The Company
intends to retain local control over most aspects of day to day operations,
especially those functions that are related to patient care.
Sales and rentals at each of the Company's locations are generally
handled by customer service representatives, who take orders, obtain payor
information and dispatch equipment and supplies to the patient's home. The
Company's technicians deliver and install HME and instruct patients in the use
of the equipment. The Company maintains warehouse and repair facilities where
most orders are filled and repairs and maintenance of equipment are performed.
The Company has a periodic routing system to pick up and deliver equipment in
need of repair or maintenance and to provide inventory to individual store
locations.
Sales and Marketing. The Company currently markets its services and
products to referral sources such as physicians, hospital discharge planners and
social service workers, insurance companies and prepaid health plans, as well as
directly to patients. In seeking to attract and retain referral sources, the
Company emphasizes its reputation for quality service and responsiveness to the
requirements of the referral sources. In general, the sales representatives
market the Company's services through direct contact with referral sources in
the form of meetings, telephone calls and solicitations. In addition to these
traditional referral sources, management believes that managed care
organizations and other third party payors will become increasingly important
sources of referrals to home health care providers. As a result, the Company is
developing marketing initiatives directed at managed care organizations.
In addition to its direct marketing efforts, the Company participates
in local trade shows and exhibitions in order to promote its products and
services to potential referral sources and managed care payors. The Company also
provides referral sources with in-service education programs and training
sessions.
In most of the Company's markets, the Company maintains a retail store
and showroom where patients may purchase supplies or purchase or rent
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various types of equipment. The Company believes its retail locations increase
community awareness of its products and services.
Purchasing. The Company purchases or leases medical equipment and
supplies required in connection with the Company's business from many suppliers,
and participates in a buying group that provides the opportunity to receive
volume discounts. The Company has not experienced, and does not anticipate that
it will experience, difficulty in purchasing such materials or leasing such
equipment and supplies. If the Company's current suppliers should cease to
supply the Company, the Company believes that alternative sources can be readily
located that would adequately meet its needs.
Quality Assurance and Accreditation. In order to compete effectively,
management believes that it is essential that the Company provide high quality
products and services with the goal of improving patient outcomes and efficiency
in the delivery of care. Management also believes that all of the Acquired
Companies have reputations in the markets served for providing quality products
and services. In order to promote continued quality, the Company will institute
a rigorous, Company-wide quality assurance program which will emphasize a
corporate philosophy of service excellence and will provide guidance, education
and resources for implementing the quality improvement program.
Blue Water and ABC have been accredited by the JCAHO, a nationally
recognized organization that develops standards for various health care industry
segments and monitors compliance with those standards through voluntary surveys
of participating providers. The Company intends to apply for JCAHO accreditation
for the Great Lakes locations following completion of the Offering. Not all home
health providers have chosen to undergo this accreditation process due to its
expense and time burden. As the home health care industry becomes increasingly
competitive and as managed care organizations increase their penetration in the
markets served by the Company, management believes that JCAHO accreditation will
become an increasingly important factor in procuring business.
The Acquired Companies are subject to periodic resurveys by the JCAHO,
and there can be no assurance that a renewal of accreditation will be
forthcoming. The Company relationship with existing and potential referral
sources could be adversely affected by a loss of JCAHO accreditation at one or
more of the Acquired Companies.
Reimbursement, Billing and Collection. The Company's revenues are
derived primarily from Medicare, Medicaid, private insurance companies, HMOs and
PPOs, workers' compensation programs and directly from patients. The Company
assumes payment for some durable equipment and directly bills Medicare, Medicaid
and private insurance companies for the collection of these patient claims. This
service allows customers to obtain rental and purchase equipment after they have
received proper documentation from a physician or discharge planner, without
up-front cash payments.
Reimbursement from private insurers, Medicare and Medicaid is largely
dependent on the Company's timely and correct claims form submission in
accordance with varying requirements of different payors. This process is
facilitated by the Company's use of electronic billing systems which are in
place for certain major payors. The Company intends to
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consolidate its billing and collections functions, thus eliminating certain
duplicate overhead costs.
The Company estimates that Medicare, Medicaid, private pay, and private
insurance and other payors represented approximately 57.0%, 12.0%, 9.0%, and
22.0%, respectively, of the Company's pro forma consolidated revenues during
1995 and approximately 60.0%, 11.0%, 7.0%, and 22.0%, respectively, for the nine
months ended September 30, 1996.
The home health care industry is generally characterized by long
collection cycles for accounts receivable due to the complex and time consuming
requirements for obtaining reimbursement from private and governmental third
party payors. In addition, reimbursement from government payors is subject to
examination and retroactive adjustment. Such delays or retroactive adjustments
could lead to cash shortages, which may require the Company to borrow funds,
issue equity securities or take other action to meet its ongoing obligations.
The Company would be adversely affected if it were to experience such
difficulties and were unable to obtain funds on acceptable terms to meet
possible cash shortages.
Management Information Systems. All of the Acquired Companies have
computerized billing systems, which provide invoicing and statistical data and
electronic billing systems for claims with Medicare and certain other payors.
Following the completion of the Acquisitions, the Company intends to consolidate
the claims processing functions of the Acquired Companies. The consolidation is
expected to take place in stages, with the initial stage being the consolidation
of the Blue Water and ABC billing systems. Further consolidation will depend
upon the Company's assessment of the benefits and costs of consolidation. In
certain markets, providers, payors and managed care organizations are demanding
data on outcomes and utilization and other analytical reports as a measure of
the efficacy and quality of care. In these markets, home health care companies
are required to invest in increasingly sophisticated systems. Management does
not believe that a significant portion of home health care companies in the
markets served by the Acquired Companies are currently utilizing sophisticated
systems, although inroads by managed care organizations could lead to increased
information system requirements. In such event, the Company would need to make
capital investments in such systems, which may require the Company to seek
additional financing.
Competition
The home health care industry is highly competitive. Historically, it
has been highly fragmented and characterized by small, local operators with only
a small number of national providers. The Company competes with a number of home
health care providers including some national companies which seek to offer a
comprehensive range of home health care services as well as regional companies
and locally-owned, limited service home health care providers. In addition,
there are relatively few barriers to entry into the home health care industry.
Other companies, including manufacturers and suppliers of home health care
equipment, managed care organizations, hospitals and other health care providers
and provider groups that currently are not serving the home health care market,
may become competitors. To the extent that these companies enter the home health
care market, the Company may also lose existing and potential referral sources.
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The Company believes that the most important competitive factors are
quality of care and services, reputation with referral sources, payors, patients
and the medical community, reasonable and competitive prices, the range of
services offered and geographic coverage. Management believes the Company is
well positioned to compete effectively with respect to quality of care and
service, reputation and pricing. Management intends to expand the range of
services offered and the geographic coverage of the Company in order to more
effectively compete in the future, particularly as managed care becomes a more
significant source of business for the Company.
In attempting to carry out its acquisition strategy, Life Critical Care
will also compete for acquisition candidates. The Company believes that its
decentralized management and operating strategies will make it an attractive
acquirer to home health care companies. However, other potential home health
care acquirers have greater financial and operational resources than the
Company, and there can be no assurance that the Company will be able to compete
effectively in its chosen markets.
Regulation
The Company's business is subject to extensive federal, state and local
regulation.
Permits and Licensure. Many states require companies providing certain
home health care services to be licensed as home health agencies. In addition,
certain of the Company's operations are subject to federal and other state laws
and regulations governing the packaging and repackaging and dispensing of drugs
(including oxygen). State laws also require licensing of the sale of industrial
and other gases. Federal laws may require registration with the Drug Enforcement
Administration of the United States Department of Justice and the satisfaction
of certain requirements concerning security, record keeping, inventory controls,
prescription, order forms and labeling. In addition, certain health care
practitioners employed by the Company require state licensure and/or
registration and must comply with laws and regulations governing standards of
practice. The failure to obtain, renew or maintain any of the required
regulatory approvals or licenses could adversely affect the Company's business.
There can be no assurance that either the states or the federal government will
not impose additional regulations upon the Company's activities which might
adversely affect its business, results of operations or financial condition.
Certificates of Need. Certain states require companies providing home
health care services to obtain a certificate of need issued by a state health
planning agency. Some states require such certificates of need only for
Medicare-certified home health agencies. Where required by law, the Company has
obtained certificates of need from those states in which it operates. There can
be no assurance that the Company will be able to obtain any certificates of need
which may be required in the future if the Company expands the scope of its
services or if state laws change to impose additional certificate of need
requirements, and any attempt to obtain additional certificates of need will
cause the Company to incur certain expenses.
Fraud and Abuse Laws. The Company is also subject to federal and state
laws prohibiting direct or indirect payments for patient referrals, prohibiting
referrals to an entity in which the referring provider has a financial interest,
and regulating reimbursement procedures and practices under Medicare, Medicaid
and state programs as well as in relation to private payors.
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The anti-kickback provisions of the federal Medicare and Medicaid
Patient and Program Protection Act of 1987 (the "Anti-kickback Statute")
prohibit the offer, payment, solicitation or receipt of any remuneration in
return for the referral of items or services paid for in whole or in part under
the Medicare or Medicaid programs (or certain other state health care programs).
To date, courts and government agencies have interpreted the Anti-kickback
Statute to apply to a broad range of financial relationships between providers
and referral sources, such as physicians and other practitioners. The United
States Department of Health and Human Services has adopted regulations creating
"safe harbors" from federal criminal and civil penalties under the Anti-kickback
Statute by exempting certain types of ownership interests and other financial
arrangements that do not appear to pose a threat of Medicare and Medicaid
program abuse. Transactions covered by the Anti-kickback Statute that do not
conform to an applicable safe harbor are not necessarily in violation of the
Anti-kickback Statute, but the practice may be subject to increased scrutiny and
possible prosecution. The criminal penalty for conviction under the
Anti-kickback Statute is a fine of up to $25,000 and/or up to five years
imprisonment. In addition, conviction mandates exclusion from participation in
the Medicare and Medicaid programs. Such exclusion can also result based on
conviction under other federal laws which impose civil and criminal penalties
for submitting false claims, such as claims for services not provided as
alleged. Several health care reform proposals have included an expansion of the
Anti-kickback Statute to apply to referrals of any patients regardless of payor
source.
The Federal government has enacted the so-called "Stark Law," which
generally prohibits referrals by physicians to certain entities with which they
have a financial relationship. More recently, the Stark Law was broadly expanded
by the "Amended Stark Law," which provides that where a physician has a
"financial relationship" with a provider of "designated health services"
(including, among other things, the provision of parenteral and enteral
nutrients, equipment and supplies, home health services, ultrasound services and
durable medical equipment, which are products and services provided by the
Company), the physician will be prohibited from making a referral to the health
care provider (and the provider will be prohibited from billing) for the
designated health service for which Medicare or Medicaid payment would otherwise
be made. Certain exceptions are available under the Amended Stark Law, which may
or may not be available to the Company for arrangements in which the Company may
be involved. Submission of a claim that a provider knows or should know is for
services for which payment is prohibited under the Amended Stark Law could
result in refunds of any amounts billed, civil money penalties of not more than
$15,000 for each such service billed and possible exclusion from the Medicare
and Medicaid programs. Furthermore, Medicare regulations contain similar
self-referral restrictions which provide that unless certain conditions are met
a plan of care for home health services generally may not be certified by a
physician who has a significant ownership interest in, or a significant
financial or contractual relation with, that home health agency.
Many states have adopted statutes and regulations which vary from state
to state prohibiting provider referrals to an entity in which the provider has a
financial interest, direct or indirect remuneration or fee-splitting
arrangements between health care providers for patient referrals, and other
types of financial arrangements with health care providers. Sanctions for
violation of these state restrictions may include loss of licensure and civil
and criminal penalties. Certain states also require health care practitioners to
disclose to patients
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any financial relationship with a provider and to advise patients of the
availability of alternative providers.
The federal government has increased significantly the financial and
human resources allocated to enforcing the fraud and abuse laws. Private
insurers and various state enforcement agencies also have increased their
scrutiny of health care providers' practices and claims, particularly in the
home health and durable medical equipment areas. Although it is the Company's
policy to monitor compliance with these laws, no assurance can be given that the
practices of the Company, if reviewed, would be found to be in compliance with
such laws or with any future laws, as such laws ultimately may be interpreted.
Reimbursement. In August 1993, Congress passed the Omnibus Budget
Reconciliation Act of 1993 ("OBRA 1993"), which included approximately $56
billion in reimbursement reductions to the Medicare program over five years. In
January 1994, two developments lowered the Company's reimbursement by Medicare
for nebulizers, each of which had a significant impact on net revenues of the
Company attributable to the rental of nebulizers. First, reclassification of
nebulizers to "capped rental equipment" pursuant to OBRA 1993 capped the total
allowable rental payments at the allowable purchase cost of such equipment.
Second, effective January 1, 1994, new fee schedules published by the various
Durable Medical Equipment Regional Carriers ("DMERCs") reduced by approximately
50% the allowable monthly rental fees for nebulizers. Recently, the DMERCs
released for industry comment a draft policy which, if adopted, would
incorporate the pharmacy requirement imposed by HCFA and described above and
impose certain conditions to the coverage of nebulizers and aerosol medications.
Comments on the proposed draft policy have been submitted by members of the home
care industry and currently are being reviewed by the DMERCs and HCFA. In its
continuing effort to contain health care costs, Congress also is contemplating
changes in oxygen reimbursement.
More generally, government officials are continuing to review and
assess alternative health care delivery systems and payment methodologies in
efforts to curtail costs. Several proposals involving potential changes in the
way home health care services are reimbursed are presently under consideration.
See "-Current Developments."
Current Developments. Political, economic and regulatory influences are
subjecting the health care industry in the United States to fundamental change.
Although Congress has failed to pass comprehensive health care reform
legislation, the Company anticipates that Congress and state legislatures will
continue to review and assess alternative health care delivery and payment
systems and may in the future propose and adopt legislation effecting
fundamental changes in the health care delivery system. Congress currently is
considering proposals to reduce Medicare spending increases by $270 billion over
the next seven years. Legislative debate on health care reform is expected to
continue in the future. While the principal focus of these broad initiatives is
not on costs in the home health care segment of the industry (which in 1995
represented only approximately 3% of total health care costs), it can be
expected that the home health care segment would be affected to some extent by
the passage of any such initiative.
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Congress passed the Balanced Budget Act of 1995 (H.R. 2491) (the
"Budget Act") which included provisions that would have converted Medicaid to a
block grant program that would give the states greater freedom to experiment
with innovative benefit packages, provider payment levels, delivery systems, and
eligibility criteria and would have reduced the rate of spending growth, with
projected savings of $182 billion over the next seven years. On December 7,
1995, President Clinton vetoed the Budget Act and offered an alternative
balanced budget proposal. The Medicaid portion of President Clinton's proposal
calls for a per capita spending cap to limit the growth of average federal
spending for each Medicaid recipient. At this time, Congress and the President
are trying to reach an accord on budget legislation, which in its final form
will likely impact federal spending for Medicaid.
In August 1996, HCFA, after completing its study of reasonable market
prices, proposed a 40% reduction in oxygen reimbursement rates. HCFA has not yet
issued this proposal for Administration approval for publication for notice and
comment, but is expected to do so in connection with efforts to restrain federal
spending. If approved, the reduction would have a material adverse effect on the
Company's business by significantly decreasing the Company's revenues from its
respiratory therapy services, which represented approximately 72.0% of the
Company's pro forma consolidated revenues during each of 1995 and the nine
months ended September 30, 1996. Recent HCFA regional office action, which
became effective December 1, 1996, imposes reductions in reimbursement rates and
delivery restrictions on aerosol medications, and prohibits DME suppliers from
billing for prescription products unless they are licensed as pharmacies.
Congress is also considering establishing a prospective payment system
("PPS") for home health services. The proposal would lower cost limits over the
short-run and implement a per-episode PPS for home health not later than 1999.
Currently, HCFA is running a demonstration project to test per episode
reimbursement for home health services.
The Company is unable to predict whether the proposed Medicare
prospective payment system, the Medicaid block grant program, or the DMERCs
draft policy will be enacted or what final form such legislation might take.
Furthermore, the Company cannot predict what additional government regulations,
if any, affecting its business may be enacted in the future, how existing or
future laws and regulations might be interpreted, or whether the Company will be
able to comply with such laws and regulations in its existing or future markets.
In addition, the level of net revenues and profitability of the Company, like
those of other health care providers, will be affected by the continuing efforts
of payors to contain or reduce the costs of health care by lowering
reimbursement rates, increasing case management review of services, negotiating
reduced contract pricing, and capitalization arrangements.
Employees
On a pro forma basis as of October 31, 1996, the Company had 103
full-time and 16 part-time employees. Management believes that the
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Company's employee relationships are good. None of the Company's employees are
represented by a labor union.
Properties
The Company has a total of 22 leased facilities in Michigan and
Wisconsin pursuant to leases that expire on various dates through 2001 or
continue on a month-to-month basis. The Company believes that these leases can
be renegotiated as they expire or that alternative properties can be leased on
acceptable terms. The Company also believes that these facilities are adequate
for its current operations and for foreseeable future operations. Certain of the
leases are with the former owners of the Acquired Companies and may be on terms
less favorable to the Company than those currently available to the Company
elsewhere. The Company's corporate headquarters following the consummation of
the Offering will be located at Blue Water's offices in New Baltimore, Michigan
in a 15,500 square foot facility with a lease that expires in November 2000,
with one four-year renewal option.
Insurance
Home health care providers are subject to lawsuits alleging negligence,
product liability or other similar legal theories. The Company also distributes
industrial gas products, such as acetylene, which have been the subject of
lawsuits arising from industrial and other accidents. The Acquired Companies
maintain traditional general liability insurance, professional liability
insurance and excess liability coverage. The Company believes that the policies
are adequate for its operations and is currently evaluating obtaining new
policies on a corporate level. However, there can be no assurance that claims
will be covered by insurance or that the Company will be able to obtain
insurance on terms acceptable to the Company. See "Risk Factors -- Potential
Liability."
Legal Proceedings
Although the Acquired Companies have been engaged in routine litigation
incidental to their businesses, there are no material legal proceedings to which
any of the Acquired Companies or the Company is a party or to which any of their
properties is subject.
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MANAGEMENT
Executive Officers and Directors
The executive officers and current and proposed directors of the
Company are as follows:
Name Age Position
Thomas H. White........... 49 President, Chief Executive Officer and Director
Frank E. McGeath.......... 52 Chief Financial Officer
Richard M. Andzel......... 39 Director
J. Edward Beck, Jr........ 48 Director*
- -----------------------------
*Effective upon the completion of the Offering.
Thomas H. White. Mr. White, who has over twenty years of experience in
the home health care industry, has served as President and Chief Executive
Officer of the Company since August 1996 and was appointed as a director in
October 1996. From May 1995 to November 1995, Mr. White was a consultant to
American HomePatient. From 1988 through April 1995, when it was acquired by
American HomePatient, Mr. White served as President of Conpharma Home Health
Care, Inc., a home health care provider. At the time of sale, Conpharma had over
450 employees in 35 branches located in six states and approximately $35 million
in annual sales. From 1983 though 1989, Mr. White worked in various positions,
including Senior Vice President, Vice President and General Manager for Beverly
Home Health, Inc. and subsequently for Primedica, Inc. when it acquired Beverly
in 1987. Mr. White was a private investor and a consultant to the health care
industry from November 1995 to July 1996. Mr. White received his M.B.A. in 1972
and his B.B.A. in 1970 from Western Michigan University.
Frank E. McGeath. Mr. McGeath, who has over twenty years of financial
and accounting experience, was appointed Chief Financial Officer of the Company
effective on December 1, 1996. From 1994 through November 1996, Mr. McGeath was
Chief Financial Officer of ComfortCare of Michigan, Inc., a home health care
provider. From 1989 to 1993, Mr. McGeath served as Vice President and Chief
Financial Officer of Visiting Nurse Association, Inc. From 1986 to 1989, Mr.
McGeath served as Vice President, Controller and Chief Financial Officer of
Radius Health Care System, Inc. and DMC Clinics, Inc., subsidiaries of The
Detroit Medical Center. Mr. McGeath is a certified public accountant and served
in various accounting capacities with Price Waterhouse for over ten years. Mr.
McGeath holds M.B.A. and B.B.A. degrees from Western Michigan University.
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Richard M. Andzel. Mr. Andzel was appointed as a director in
October 1996. Mr. Andzel is currently Vice President of The Morgenthau
Group, Vice President of The Morgenthau Group Investment Corporation and
Vice President of Morgenthau Bridge Financing Corp. From 1992 to early
1995, Mr. Andzel was engaged in the venture capital business. From 1985 to
1992, Mr. Andzel was a senior executive with United Group Association, a
health and life small business insurer. When Mr. Andzel resigned in 1992, he
was in charge of seven western states and was responsible for over 350 agents
and managers. Mr. Andzel is a director of Digital Communications, Inc. and
U.S. Digital.
J. Edward Beck, Jr. will be appointed as a director of the Company
effective upon the completion of the Offering. He is currently the President
and Chief Executive Officer of Bitrek Corporation, a manufacturer of
fabricated pipe fittings, a position he has held since 1985. During 1983 and
1984, Mr. Beck served as a senior advisor to the Assistant Secretary, U.S.
Department of Treasury. Mr. Beck is an attorney and was engaged in private
legal practice from 1972 to 1983. Mr. Beck holds B.A. and J.D. degrees
from Dickinson College and received an M.B.A. from Mt. St. Mary's College. Mr.
Beck is a director of Dauphin Deposit Corporation.
Board of Directors
Following the consummation of the Offering, the Company intends to add
two additional directors, bringing the total number of directors to five. These
directors will serve for a term expiring at the annual meeting of stockholders
in 1997 or until their respective successors are elected and qualified. It is
anticipated that one of the additional directors will be a nominee of the
Underwriter and will not be an officer or employee of the Company. See
"Underwriting." At each annual meeting of stockholders, the stockholders will
elect a new Board of Directors for a one year term. Pursuant to the Certificate
of Incorporation of the Company, the Board of Directors have the power to elect
to classify the Board into three classes, with only one-third of the directors
coming up for election each year, although the Board currently has no plans to
do so. See "Description of Capital Stock -- Delaware Law and Certificate of
Incorporation and By-Law Provisions."
Committees and Relationships. The Board of Directors will establish an
Audit Committee and a Compensation Committee. The Audit Committee will review
the Company's accounting practices, internal accounting controls and financial
results and oversees the engagement of the Company's independent auditors. The
Compensation Committee will review and recommends to the Board of Directors the
salaries, bonuses and other forms of compensation for executive officers of the
Company and administers various compensation and benefit plans. The Board of
Directors does not intend to maintain a nominating committee or a committee
performing similar functions.
Directors' Compensation. The Company reimburses its directors for their
expenses in attending Board or committee meetings, and beginning upon the
completion of the Offering, will pay directors a fee of $1,000 per day for
attending Board or committee meetings.
Directors Option Plan. The Company's Non-Employee Directors Stock
Option Plan ("Directors Option Plan") provides for the grant of options
exercisable for up to 50,000 shares of
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Common Stock. Under the Directors Option Plan, each non-employee director is
entitled to an automatic grant of an option to purchase up to 7,500 shares of
Common Stock on the later of the date of the consummation of the Offering or the
date such director is elected to the Board at the fair market value on the date
of grant. These options vest as to 25% of the shares on the grant date, with the
remaining 75% vesting ratably over three years commencing one year from the
grant date.
In addition, each outside director, and each person who is subsequently
elected as an outside director, will be granted an option at each annual meeting
of stockholders to purchase 2,500 shares at an exercise price equal to the fair
market value on the date of grant. One third of these options will vest annually
commencing one year after the grant date.
Executive Compensation and Employment Arrangements
Prior to the completion of the Offering, the Company's only business
was to identify and evaluate potential acquisition candidates, negotiate the
terms of the Acquisitions and the Offering and to arrange for the financing of
the Acquisitions. The Company did not pay any compensation to any executive
officer during 1995. The Company did pay management fees to MBFC for
administrative and other services during 1995 and 1996 totaling $341,500. See
"Certain Transactions."
In July 1996, the Company entered into an employment agreement to
employ Mr. White as President and Chief Executive Officer. The agreement has an
initial term through December 31, 1998, and unless the Board of Directors
notifies Mr. White otherwise at least 90 days prior to the end of the initial or
subsequent term, the term of the agreement automatically renews annually for
succeeding one year periods. Mr. White's agreement provides for an initial
annual base salary of $150,000, and he will be entitled to bonuses calculated in
accordance with the Company's incentive compensation plans and policies. Mr.
White's base salary will automatically increase to $175,000 for 1997 and to
$200,000 for 1998. Mr. White is also entitled to quarterly bonuses of $7,500 per
quarter through December 31, 1997 and may receive performance bonuses as
determined by the Compensation Committee. As of November 30, 1996, Mr. White had
$62,500 in accrued salary and bonuses. In conjunction with the Offering, Mr.
White will receive a grant of options for 275,000 shares of Common Stock at an
exercise price equal to the Offering Price. See "<C151>1996 Stock and Incentive
Plan."
The agreement provides that in the event of the termination of
employment without cause (as defined in the employment agreement), Mr. White
would be paid when and as due, the greater of the total salary payable to him
for the remainder of the term of the agreement or for 12 months. The agreement
also contains provisions for health insurance and other employee benefits as
provided by the Company to its senior executive officers and provides for a
covenant not to compete during the term of the agreement and for 12 months
thereafter. After the termination of Mr. White's employment, a court may refuse
to enforce or only partially enforce the covenant not to compete.
In connection with his engagement as the Company's President and Chief
Executive Officer, Mr. White purchased a total of 370,000 shares of Common Stock
from the Company's founding stockholders for nominal consideration. Of these
shares, 270,000 shares are subject to the performance earn-out discussed under
"Shares Eligible for Future Sale."
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On December 1, 1996, Frank E. McGeath was appointed as the Chief
Financial Officer of the Company at an annual salary of $105,000, with annual
bonus payable at the discretion of the Company's Board of Directors. Mr. McGeath
also will be eligible to participate in the Company's health insurance and
benefit plans. Although there is no employment contract between the Company and
Mr. McGeath, the Company has agreed to provide a severance payment equal to six
months of salary in the event Mr. McGeath's employment is terminated without
just cause. In addition, the Company has granted stock options to Mr. McGeath to
purchase 75,000 shares of Common Stock at an exercise price of $0.25 per share.
These options are subject to the performance restrictions on vesting described
under "-- 1996 Stock and Incentive Plan."
1996 Stock and Incentive Plan
In October 1996, the Board of Directors adopted the Company's 1996
Stock and Incentive Plan (the "1996 Plan"). The 1996 Plan was approved by the
Company's stockholders in November 1996. The primary reason for adopting the
1996 Plan was to ensure that the Company will be able to provide equity-based
compensation to its key employees.
Purposes. The purpose of the 1996 Plan is to attract and retain
outstanding individuals as officers and employees and to motivate such
individuals to achieve the long-term performance goals of the Company by
providing incentives to such individuals in the form of stock ownership or
monetary payments based on the value of the Common Stock. To achieve this
purpose, the 1996 Plan permits grants of incentive stock options ("ISOs"),
options not intended to qualify as ISOs ("nonqualified options"), stock
appreciation rights ("SARs"), restricted and unrestricted stock awards and
performance awards, and combinations of the foregoing (all referred to as
"Awards").
Number of Shares. The 1996 Plan permits Awards to be granted for a
total of 550,000 shares of Common Stock. Shares issuable under Awards that
terminate unexercised, shares issuable under Awards that are payable in stock or
cash but are paid in cash, and shares issued but later forfeited will be
available for future Awards under the 1996 Plan.
Eligible Recipients. All employees of the Company are eligible to
receive Awards under the 1996 Plan.
Administration. The 1996 Plan is administered by the Compensation
Committee, which determines, among other things and subject to certain
conditions, the persons eligible to receive Awards, the persons who actually
receive Awards, the type of each Award, the number of shares of Common Stock
subject to an Award, the date of grant, exercise schedule, vesting schedule and
other terms and conditions of each Award, whether to accelerate the exercise or
vesting schedule or waive any other term or condition of an Award, whether to
amend or cancel an Award, and the form of any instrument used under the 1996
Plan. The Compensation Committee has the right to adopt rules for the
administration of the 1996 Plan, settle all controversies regarding the 1996
Plan and any Award, and construe and correct defects and omissions in the 1996
Plan and any Award. The 1996 Plan may be amended, suspended or terminated by the
Board of Directors, subject to certain conditions, provided that
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<PAGE>
stockholder approval will be required whenever necessary for the 1996 Plan to
continue to satisfy the requirements of certain securities and tax laws, rules
and regulations.
The Company has issued options to purchase an aggregate of 275,000
shares of Common Stock (the "Performance Options") to Thomas H. White. The
Performance Options are exercisable at the Offering Price and vest as follows:
(i) 50% of the options become exercisable upon the Company achieving earnings
per share ("EPS") as shown in the Company's financial statements for the year
ended December 31, 1997 of not less than $0.30; and (ii) any remaining options
become exercisable upon the Company achieving EPS for the year ended December
31, 1998 of not less than $0.60. Also, in any year, 100% of the Performance
Options will vest upon the Company achieving EPS of not less than $1.25 in any
year. Notwithstanding, the options become exercisable on December 31, 2004.
Savings Incentive Plan
The Company intends to establish a profit sharing plan qualified under
Section 401(k) of the Internal Revenue Code. All employees of the Company who
have completed one year of service will be eligible to participate in the plan.
Subject to certain limitations on individual contributions and allocations and
Company deductions, the plan will allow participants to defer up to 15% of their
pay on a pre-tax basis. The plan also may allow the Company to make
discretionary matching contributions equal to a portion of the amount a
participant defers, up to 6% of the participant's pay. All participants will be
fully vested in their contributions. Company contributions will vest 20% per
year over five years.
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CERTAIN TRANSACTIONS
In connection with its formation in June 1995, the Company issued a
total of 743,700 shares of Common Stock to the four founding stockholders of
the Company in a private transaction for nominal consideration. In April
1996, the Company authorized and in September 1996 issued a total of 248,640
shares of Common Stock to the IRA accounts of such persons in a private
transaction for nominal consideration.
In May 1996, the founding stockholders of the Company sold a total of
370,000 shares to Thomas H. White, currently the President and Chief Executive
Officer and a Director of the Company, for nominal consideration.
In June 1995, the Company entered into loan and securities purchase
agreements (the "Loan Agreements") with the Morgenthau Bridge Funds, whereby the
Morgenthau Bridge Funds have loaned the Company $1.5 million to provide funding
for the deposits and other expenses incurred in connection with the Acquisitions
and the Offering. Advances pursuant to the Loan Agreements bear interest at the
rate of 18% per annum, and will be due in full by December 31, 1997. It is the
intention of the Company to repay the loans with a portion of the proceeds of
the Offering. Gregory A. Poloni, Richard M. Andzel and Anthony R. Morgenthau,
each of whom is a founding stockholder of the Company and a beneficial owner of
over five percent of the Company's Common Stock, are officers and owners of
MBFC, the general partner or manager of the Bridge Funds. Amy E. Parker, another
founding stockholder of the Company, was, until October 1996, affiliated with
MBFC and received compensation from MBFC in such capacity. Through their
ownership of MBFC, Messrs. Poloni, Andzel and Morgenthau and Ms. Parker have
received compensation associated with raising the Morgenthau Bridge Funds and
may receive additional compensation dependent on the financial results of the
funds, which are presently unknown. In connection with the September Bridge,
Morgenthau & Associates, Inc., a registered broker-dealer of which Anthony R.
Morgenthau is the President, received placement fees of $40,000.
During the period from June 1995 to October 17, 1996, the Company paid
management fees to MBFC totaling $341,500 for services rendered and $65,000 for
reimbursement of travel and other expenses incurred in connection with the
formation and organization of the Company, investigating and evaluating
potential acquisition candidates and arranging and negotiating the Acquisitions
and the Offering.
In connection with the Loan Agreements, the Company issued warrants to
the Morgenthau Bridge Funds to purchase 214,000 shares of Common Stock at an
exercise price of $0.10 per share. These warrants were exercised in September
1996. The exercise price of the warrants was paid through the application of
$21,400 in accrued and unpaid interest to the exercise price. The Company also
granted the Bridge Funds certain demand and piggyback registration rights
covering the underlying Common Stock. See "Description of Capital Stock --
Registration Rights."
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<PAGE>
The Company has adopted a policy that all transactions between the
Company and its executive officers, directors, holders of 5% or more of the
shares of any class of its Common Stock and affiliates thereof, will contain
terms no less favorable to the Company than could have been obtained by it in
arms-length negotiations with unaffiliated persons and will be approved by a
majority of outside directors of the Company not having any interest in the
transaction.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information known to the Company
with respect to the beneficial ownership of the Common Stock as of November 30,
1996, and as adjusted to reflect the Acquisitions and the sale of the shares of
Common Stock offered hereby, by (i) each person known by the Company to be the
beneficial owner of more than five percent of the Common Stock, (ii) each of the
Company's directors and director nominees, (iii) each of the Company's executive
officers and (iv) all directors and executive officers as a group. Except as
otherwise indicated below, the beneficial owners of the Common Stock listed
below have sole investment and voting power with respect to such shares.
<TABLE>
<CAPTION>
Percent Owned
----------------------------------
Name and Address of Beneficial Shares Before the After the
Owner(1)(2) Beneficially Offering and Offering and
Owned (3) Acquisitions Acquisitions
- ----------------------------------------------------- ---------------- ---------------- -----------------
<S><C>
Thomas H. White(4)............................. 370,000 32.1 9.4
Frank E. McGeath............................... -- -- --
Richard M. Andzel(5)(6)(7)(8).................. 279,246 24.2 7.1
J. Edward Beck................................. -- -- --
Anthony R. Morgenthau(5)(6)(7)(8).............. 279,246 24.2 7.1
Gregory A. Poloni(5)(6)(7)(8).................. 291,158 25.2 7.4
Amy E. Parker(8)(9)........................... 271,475 23.5 6.9
Executive Officers and Directors
as a Group (4 persons)....................... 649,246 56.3 16.5
</TABLE>
- ------------------------
(1) Except as otherwise shown, the address of each person listed above
is c/o of the Company, 3333 West Commercial Blvd., Suite 203, Fort
Lauderdale, Florida 33309.
(2) The following persons (the "Selling Stockholders") have granted the
Underwriter an option to purchase up to a total of 49,750 additional
shares of Common Stock: Amy E. Parker (5,000), Forrest R. McPherson
(5,000), Jeffrey P. Schuler (2,500), Phillip A. Markiewiez (2,000),
Mark J. Heller (2,500), Stephen F. Lovelace (1,250), Robert E. Thomas
(5,000), Steven Brown (2,500), T.N. Chroman, Trustee (2,500), Charles
L. Horn (5,000), John Farias, Jr., Trustee (5,000), Jacob Becher
(1,500), Michael Morris (2,500), Maxwell Ira Tuman, Trustee (2,500),
and James T. Hamilton (5,000).
(3) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment
power with respect to the shares.
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<PAGE>
(4) Of these shares, 270,000 shares are subject to the performance earn-out
discussed under "Shares Eligible for Future Sale."
(5) Includes 214,000 shares issued to the Morgenthau Bridge Funds. Each of
Messrs. Poloni, Andzel and Morgenthau may be deemed to have indirect
beneficial ownership of such shares as a result of their positions with
MBFC.
(6) The address of Messrs. Poloni, Andzel and Morgenthau is c/o The
Morgenthau Group, Inc., 504 Cathedral Street, Baltimore, Maryland
21201.
(7) Includes 35,790, 11,371 and 11,371 shares held by individual retirement
accounts for Gregory A. Poloni, Richard M. Andzel and Anthony R.
Morgenthau, respectively.
(8) Includes 34,000, 34,000, 34,000 and 153,000 shares beneficially owned
by Messrs. Poloni, Andzel and Morgenthau and Ms. Parker, respectively,
which are subject to the performance earn-out discussed under "Shares
Eligible for Future Sale."
(9) The address of Ms. Parker is 1150 NW 93rd Terrace, Plantation, Florida
33322. Includes 74,370 shares held by an individual retirement account
for the benefit of Ms. Parker.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company currently consists of
10,500,000 shares, of which 10,000,000 shares have been designated Common Stock,
par value $0.01 per share, and 500,000 shares have been designated Preferred
Stock, par value $0.01 per share. The following summary description of the
capital stock of the Company is qualified in its entirety by reference to the
Company's Certificate of Incorporation and By-Laws, as amended, copies of which
are exhibits to the Registration Statement of which this Prospectus is a part.
Common Stock
As of November 30, 1996, there were 1,153,125 shares of Common Stock
outstanding and held of record by 27 stockholders. Based upon the number of
shares outstanding as of that date and after giving effect to the issuance of
771,875 shares to the Acquired Companies and the issuance of the 2,000,000
shares of Common Stock offered by the Company hereby, there will be 3,925,000
shares of Common Stock outstanding.
Holders of Common Stock are entitled to one vote for each share held on
all matters submitted 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
any 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 any outstanding Preferred Stock.
Holders of Common Stock, as such, have no preemptive, subscription, redemption
or conversion rights. The outstanding shares of Common Stock are, and the shares
offered by the Company in the Offering will be, when issued and paid for, fully
paid and nonassessable. The rights, preferences and privileges of holders of
Common Stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of Preferred Stock which the Company may
designate and issue from time to time in the future.
Preferred Stock
The Board of Directors is authorized, subject to certain limitations
prescribed by law, without further stockholder approval, to issue from time to
time up to an aggregate of 500,000 shares of Preferred Stock in one or more
series and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions on the shares of each such series
thereof, including the dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption (including sinking fund provisions),
redemption prices, liquidation preferences and the number of shares constituting
any series. The issuance of Preferred Stock may have the effect of delaying,
deterring or preventing a change in control of the Company.
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<PAGE>
Delaware Law and Certain Certificate of Incorporation and By-Law Provisions
The Company is subject to the provisions of Section 203 of the General
Corporation Law of the State of Delaware (the "Delaware GCL"). Section 203
prohibits a publicly-held Delaware corporation 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 business combination is approved in a prescribed manner.
"Business combination" includes mergers, asset sales and other transactions
either caused by the interested stockholder or resulting in a financial benefit
to the interested stockholder which is not shared pro rata with the other
stockholders of the Company. Subject to certain exceptions, an "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within three years did own, 15% or more of a corporation's voting stock. The
statute contains provisions enabling a corporation to avoid the statute's
restrictions if stockholders holding a majority of a corporation's voting stock
approve an amendment to the corporation's certificate of incorporation or
by-laws to avoid the restrictions. The Company has not and does not currently
intend to "elect out" of the application of this statute.
The Company's Certificate of Incorporation contains certain provisions
permitted under the Delaware GCL which eliminate the personal liability of
directors for monetary damages for a breach of the director's fiduciary duty,
except for: (i) breach of a director's duty of loyalty; (ii) acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law; (iii) unlawful payments of dividends, stock purchases or stock
redemptions; and (iv) any transaction from which the director derives any
improper personal benefit. The Company's Certificate of Incorporation and
By-Laws also contain provisions indemnifying the Company's directors, officers
and employees to the fullest extent permitted by the Delaware GCL. The Company
believes that these provisions will assist the Company in attracting and
retaining qualified individuals to serve as directors, officers and employees.
The Certificate of Incorporation provides that a director's liability shall be
eliminated or limited to the fullest extent permitted by the Delaware GCL, as
amended from time to time.
The Company's Certificate of Incorporation empowers the Board of
Directors to reclassify the Board into three classes as nearly equal in number
as possible with staggered three-year terms. See "Management -- Executive
Officers and Directors." The classification of the Board of Directors could make
it more difficult for a third party to acquire, or discourage a third party from
attempting to acquire, control of the Company. The Board of Directors currently
has no plans to reclassify the Board.
Registration Rights
Pursuant to the terms of a Loan and Securities Purchase Agreements
among the Company and the Morgenthau Bridge Funds, the funds are entitled to
certain registration rights with respect to the 214,000 shares of Common Stock
issued in connection with the Bridge Financing. Subject to the lock-up agreement
in favor of the Underwriter, at any time after June 30, 1997, the holders of
registration rights may demand, under certain circumstances, that the Company
effect one registration of their shares of Common Stock for resale. The Company
generally is not required to effect more than one such demand registration.
Investors in the September Bridge have the right to have up to 50,000 shares of
Common Stock included in the shares subject to the over-allotment option. The
Morgenthau Bridge Funds and the investors in
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<PAGE>
the September Bridge also have certain "piggyback" registration rights
with respect to any eligible registration statement the Company proposes
to file with the Securities and Exchange Commission ("SEC") to register any
of its securities, either for its own account or for the account of other
stockholders, subject to certain pro rata reductions in the case of an
underwritten offering to the extent the managing underwriter determines that
inclusion of all or a portion of the shares requested by the holders would
adversely affect the distribution of the securities to be sold by the
Company. The Company must bear all expenses related to the registration of
such shares, except for underwriting discounts and selling commissions.
In connection with the Acquisitions, the Company has granted the
sellers of the Acquired Companies certain piggyback registration rights for the
771,875 shares issued in the Acquisitions with respect to any eligible
registration statement that the Company files with the SEC. The Company also has
granted the Underwriter certain registration rights in connection with the
Underwriter's Warrants. See "Underwriting."
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is Continental
Stock Transfer and Trust Company.
57
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no market for the Common Stock.
Future sales of substantial amounts of Common Stock in the public market could
adversely affect market prices prevailing from time to time. Sales of
substantial amounts of Common Stock of the Company in the public market after
the restrictions lapse could adversely affect the prevailing market price and
the ability of the Company to raise equity capital in the future.
Upon completion of the Offering, the Company will have a total of
3,925,000 shares of Common Stock outstanding (assuming no exercise of the
Underwriter's over-allotment option). Of these shares, the 2,000,000 shares
offered hereby (assuming no exercise of the Underwriter's over-allotment option)
will be freely tradable without restriction or registration under the Securities
Act by persons other than "affiliates" of the Company as defined in Rule 144
under the Securities Act. The remaining 1,925,000 shares outstanding are
"restricted shares" as defined in Rule 144 under the Securities Act (the
"Restricted Shares").
The Company's officers and directors, and certain other stockholders,
including the sellers of the Acquired Companies, who in the aggregate will hold
approximately 1,925,000 shares upon the completion of the Offering, have agreed
(the "Lock-Up Agreements") that they will not, without the written consent of
the Underwriter, sell, offer, hypothecate, make any short sale of, pledge,
transfer or otherwise dispose of, directly or indirectly, any shares of Common
Stock or securities convertible into or exchangeable for shares of Common Stock
owned by them or with respect to which any of them have the power of disposition
during a 18 month period following the date of this Prospectus. In addition, a
total of 525,000 Restricted Shares owned by the Company's founding stockholders
and members of management are subject to performance earn-outs restricting their
sale as follows: (i) 50% of the shares may be sold upon the Company achieving
EPS for the year ended December 31, 1997 of not less than $0.30 per share; and
any remaining shares may be sold upon the Company achieving EPS for the year
ended December 31, 1998 of not less than $0.60 per share. Also, in any year,
subject to Rule 144, all of the shares may be sold upon the Company achieving
EPS of not less than $1.25 in any year. Notwithstanding, all of the shares may
be sold on or after December 31, 2004. Subject to meeting the performance
earn-out, approximately 270,485 shares will be eligible for sale under Rule 144
upon expiration of the Lock-Up Agreements and the remainder of the Restricted
Shares will become eligible for sale under Rule 144 upon the expiration of their
respective two-year holding periods.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted securities
for at least two years, including persons who may be deemed "affiliates" of the
Company, would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of 1% of the number of shares of Common
Stock then outstanding (approximately 40,000 shares upon completion of the
Offering) or the average weekly trading volume of the Common Stock during the
four calendar weeks preceding the filing of a Form 144 with respect to such
sale. Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements, and to the availability of current public information
about the Company. In addition, a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a
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<PAGE>
sale, and who has beneficially owned the shares proposed to be sold for at
least three years, will be entitled to sell such shares under Rule 144(k)
immediately after the Offering without regard to the volume limitations,
manner of sale provisions, public information requirements or notice
requirements.
A total of 600,000 shares of Common Stock are reserved for issuance
upon the exercise of options that may be granted under the 1996 Plan and the
Directors Option Plan. The Company intends to file a registration statement on
Form S-8 to register the Common Stock issued or reserved for issuance under the
plans. Shares of Common Stock issued after the effective date of such
registration statement and the shares of Common Stock outstanding on the date of
such registration statement as a result of option exercises, other than shares
held by affiliates of the Company, will be eligible for resale in the public
market without restriction subject to the agreements described in the preceding
paragraph. See "Management --Board of Directors --Directors Option Plan" and "--
1996 Stock and Incentive Plan."
59
<PAGE>
UNDERWRITING
The Underwriter has agreed to purchase from the Company, subject to the
terms and conditions of the Underwriting Agreement between the Company and the
Underwriter, the number of shares of Common Stock set forth opposite its name.
The Underwriting Agreement provides that the obligations of the Underwriter are
subject to certain conditions precedent and that the Underwriter shall be
obligated to purchase all of the Shares if any of the Shares are purchased. The
underwriting discount set forth on the cover page of this Prospectus will be
allowed to the Underwriter at the time of delivery to the Underwriter of the
Shares so purchased.
Number of
Shares
to be
Name of Underwriter Purchased
H. J. Meyers & Co., Inc...............
----------
Total.......................... 2,000,000
The Underwriter has advised the Company that it proposes to offer the
Shares to the public at an offering price estimated to be $5.50 per Share and
that the Underwriter may allow certain dealers who are members of the National
Association of Securities Dealers, Inc. ("NASD") a concession of not in excess
of $0.__ per share. After commencement of the Offering, the public offering
price and concession may be changed.
The Company and the Selling Stockholders have granted to the
Underwriter an option, exercisable during the 30-day period from the date of
this Prospectus, to purchase up to a maximum of 300,000 additional shares on the
same terms set forth above. The Underwriter may exercise such right only to
satisfy over-allotments in the sale of the shares.
The Company has agreed to pay to the Underwriter a non-accountable
expense allowance equal to 3.0% of the total proceeds of the Offering, or
$330,000 ($379,500 if the Underwriter exercises the over-allotment option in
full). In addition to the Underwriter's commission and the Underwriter's
non-accountable expense allowance, the Company is required to pay the costs of
qualifying the shares of Common Stock, under federal and state securities laws,
together with legal and accounting fees (including $46,315 payable to the
Underwriter's counsel as reimbursement for its fees in connection with the
representation of an underwriter in a proposed offering that was not completed),
printing and other costs in connection with the Offering, estimated to total
approximately $705,000.
At the closing of the Offering, the Company will issue to the
Underwriter for nominal consideration the Underwriter Warrant to purchase for
investment a maximum of 200,000 shares of Common Stock. The Underwriter Warrant
will be exercisable for a four-year period commencing one year from the date of
this Prospectus. The exercise price of the Underwriter Warrant is equal to 120%
of the Offering Price. The Underwriter Warrant will not be transferable prior to
its exercise date except to officers of the Underwriter and members of the
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<PAGE>
selling group and officers and partners thereof. The Underwriter Warrant will
contain anti-dilution provisions. The Underwriter Warrant does not entitle the
Underwriter to any rights as a stockholder of the Company until such warrant is
exercised and the share of Common Stock are purchased thereunder. The
Underwriter Warrant and the shares of Common Stock thereunder may not be offered
for sale except in compliance with the applicable provisions of the Securities
Act. The Company has agreed that, if subsequent to the Offering it shall cause
to be filed with the SEC either an amendment to the Registration Statement of
which this Prospectus is a part or a separate registration statement, the
Underwriter shall have the right during the five-year period commencing on the
date of this Prospectus to include in such amendment or Registration Statement
the Underwriter Warrant and the shares of Common Stock issuable upon its
exercise at no expense to the Underwriter. Additionally, the Company has agreed
that upon written request by a holder or holders of 50% or more of the
Underwriter Warrant which is made during the exercise period of the Underwriter
Warrant, the Company will on two separate occasions, register the Underwriter's
Warrant and the shares of Common Stock issuable upon exercise thereof. The
initial such registration will be at the Company's expense and the second such
registration will be at the expense of the holder(s) of the Underwriter Warrant.
For the period during which the Underwriter Warrant is exercisable, the
holder or holders will have the opportunity to profit from a rise in the market
value of the Company's Common Stock, with a resulting dilution in the interests
of the other stockholders of the Company. The holder or holders of the
Underwriter Warrant can be expected to exercise it at a time when the Company
would, in all likelihood, be able to obtain any needed capital from an offering
of its unissued Common Stock on terms more favorable to the Company than those
provided for in the Underwriter Warrant. Such facts may materially adversely
affect the terms on which the Company can obtain additional financing. To the
extent that the Underwriter realizes any gain from the resale of the Underwriter
Warrant or the securities issuable thereunder, such gain may be deemed
additional underwriting compensation under the Securities Act.
The Company has agreed to enter into a one-year consulting agreement
with the Underwriter pursuant to which the Underwriter agrees to perform
consulting services related to corporate finance and other financial service
matters, upon the request of the President of the Company, and will make
available qualified personnel for this purpose and devote such business time and
attention to such matters as it shall determine is required. The consulting fee
of $72,000 will be payable, in full, on the closing date of the Offering.
The Company has agreed to engage a public relations firm mutually
acceptable to the Underwriter and the Company. The Company has also agreed to
maintain a relationship with such public relations firm for a minimum period of
24 months and on such other terms as are acceptable to the Underwriter.
The Company has also agreed that, for a period of two years from the
closing of the Offering, if it participates in any merger, consolidation or
other transaction which the Underwriter has brought to the Company (including an
acquisition of assets or stock for which it pays, in whole or in part, with
shares of the Company's Common Stock or other securities), and the transaction
is consummated within 36 months of the closing of the Offering, then it will pay
for the Underwriter's services an amount equal to 5.0% of the first $2,000,000
of value paid
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<PAGE>
or value received in the transaction and 2.0% of any consideration above
$2,000,000. The Company has also agreed that if, during this two-year
period, someone other than the Underwriter brings such a merger, consolidation
or other transaction to the Company, and if the Company in writing retains the
Underwriter for consultation or other services in connection therewith, then
upon consummation of the transaction, the Company will pay to the Underwriter as
a fee the appropriate amount as set forth above or as otherwise agreed between
the Company and the Underwriter.
Holders of all of the Company's capital stock outstanding prior to the
Offering are expected to be subject to lock-up agreements under which the
holders of such shares will agree not to sell or dispose of any shares owned by
them prior to this Offering, or subsequently acquired under any option, warrant
or convertible security owned prior to this Offering, for a period of 18 months
after the date of this Prospectus without the prior written consent of the
Underwriter.
The Company has agreed that, for a period of 12 months from the date of
this Prospectus, it will not sell any securities, with the exception of the
shares of Common Stock issued upon exercise of currently outstanding options,
warrants or other convertible securities, without the Underwriter's prior
written consent, which consent shall not be unreasonably withheld. In addition,
for a period of 24 months from the date of this Prospectus, the Company will not
sell or issue any securities pursuant to Regulation S under the Securities Act
without the Underwriter's prior written consent.
The Company has agreed that, for a period of three years from the date
of this Prospectus, it will allow a non-voting observer designated by the
Underwriter and acceptable to the Company to receive notice of and be invited to
attend all meetings of the Company's Board of Directors. In addition, the
Company has agreed that for a period of three years from the date of this
Prospectus, the Underwriter, at its election and in lieu of an observer, shall
have the right to cause the Company to use its best efforts to elect one
designee of the Underwriter to the Board of Directors.
The Underwriting Agreement provides for reciprocal indemnification
between the Company and the Underwriter against certain liabilities in
connection with the Registration Statement, including liabilities under the
Securities Act.
The Underwriter has advised the Company that the Underwriter does not
intend to confirm sales to any account over which they exercise discretionary
authority.
Prior to the Offering, there has been no public market for the shares
of Common Stock. The initial public offering price has been negotiated among the
Company and the Underwriter. Among the factors considered in determining the
initial public offering price of the Common Stock, are prevailing market
conditions, estimates of the business potential and earnings prospects of the
Company, an assessment of the Company's management and the consideration of the
above factors in relation to market valuation of companies in related
businesses.
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LEGAL MATTERS
The validity of the Common Stock being offered hereby will be passed
upon for the Company by Whiteford, Taylor & Preston L.L.P., Baltimore, Maryland.
Certain legal matters will be passed upon for the Underwriters by Shereff,
Friedman, Hoffman & Goodman, LLP, New York, New York.
EXPERTS
The historical financial statements of the Company and the Acquired
Companies as of December 31, 1995 for each of the two years in the period ended
December 31, 1995 included in this Prospectus have been audited by Ernst & Young
LLP, independent auditors, as set forth in their reports thereon appearing
elsewhere herein, and are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company is not currently subject to the reporting requirements of
the Securities Exchange Act of 1934, as amended. The Company has filed with the
SEC a Registration Statement on Form SB-2 (the "Registration Statement") under
the Securities Act of 1933, as amended, with respect to the Common Stock offered
hereby. This Prospectus, which constitutes part of the Registration Statement,
omits certain of the information contained in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and such Common Stock, reference is made to the Registration Statement
and to the exhibits and schedules filed therewith. Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. The
Registration Statement, including exhibits and schedules thereto, may be
inspected by anyone without charge at the SEC's principal office in Washington,
D.C., and copies of all or any part of the Registration Statement may be
obtained from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of certain fees prescribed by the SEC. The
SEC maintains a Web site at http://www.sec.gov containing reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC.
63
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
LIFE CRITICAL CARE CORPORATION:
Report of Independent Auditors.........................................................................F-3
Financial Statements:
Balance Sheets as of December 31, 1995 and (Unaudited) September 30, 1996........................F-4
Statements of Operations for the period from June 19, 1995 (Date of Inception) to
December 31, 1995 and (Unaudited) for the Nine Months Ended September 30, 1996................F-5
Statements of Shareholders' Equity (Deficit) for the period from June 19, 1995
(Date of Inception) to December 31, 1995 and (Unaudited) for the Nine Months
Ended September 30, 1996......................................................................F-6
Statements of Cash Flows for the period from June 19, 1995 (Date of Inception) to
December 31, 1995 and (Unaudited) for the Nine Months Ended September 30, 1996................F-7
Notes to Financial Statements.....................................................................F-8
BLUE WATER MEDICAL SUPPLY, INC. AND BLUE WATER
INDUSTRIAL PRODUCTS, INC.
Report of Independent Auditors........................................................................F-14
Combined Financial Statements:
Combined Balance Sheets as of December 31, 1995 and (Unaudited) September 30,
1996.........................................................................................F-15
Combined Statements of Operations for the Years Ended December 31, 1994 and
1995 and (Unaudited) for the Nine Months Ended
September 30, 1995 and 1996..................................................................F-16
Combined Statements of Shareholders' Equity for the Years Ended December 31,
1994 and 1995 and (Unaudited) for the Nine Months Ended September 30, 1996...................F-17
Combined Statements of Cash Flows for the Years Ended December 31, 1994 and 1995
and (Unaudited) for the Nine Months Ended September 30, 1995 and 1996........................F-18
Notes to Combined Financial Statements...........................................................F-19
GREAT LAKES HOME MEDICAL, INC.
Report of Independent Auditors........................................................................F-24
Financial Statements:
Balance Sheets as of December 31, 1995 and (Unaudited)
September 30, 1996...........................................................................F-25
<PAGE>
Statements of Operations for the Years Ended December 31, 1994 and 1995 and
(Unaudited) for the Nine Months Ended
September 30, 1995 and 1996..................................................................F-26
Statements of Shareholders' Equity for the Years Ended
December 31, 1994 and 1995 and (Unaudited) for the
Nine Months Ended September 30, 1996.........................................................F-27
Statements of Cash Flows for the Years Ended December 31,
1994 and 1995 and (Unaudited) for the Nine Months
Ended September 30, 1995 and 1996............................................................F-28
Notes to Financial Statements....................................................................F-29
ABC MEDICAL SUPPLY, INC.:
Report of Independent
Auditors...........................................................................................F-33
Financial Statements:
Balance Sheets as of December 31, 1995 and (Unaudited) September 30,
1996.........................................................................................F-34
Statements of Operations for the Years Ended December 31, 1994 and 1995 and
(Unaudited) for the Nine Months Ended September 30, 1995 and
1996.........................................................................................F-35
Statements of Shareholders' Equity for the Years Ended December 31, 1994
and 1995 and (Unaudited) for the Nine Months Ended September 30, 1995
and
1996.........................................................................................F-36
Statements of Cash Flows for the Years Ended December 31, 1994 and 1995 and
(Unaudited) for the Nine Months Ended September 30, 1995 and
1996.........................................................................................F-37
Notes to Financial
Statements...................................................................................F-38
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Introduction to Unaudited Pro Forma Condensed Consolidated
Financial Statements.........................................................................F-42
Unaudited Pro Forma Condensed Consolidated Balance Sheet
as of September 30, 1996.....................................................................F-43
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the
Nine Months ended September 30, 1996.........................................................F-44
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the
Year Ended December 31, 1995.................................................................F-45
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements.........................................................................F-46
F-2
<PAGE>
Report of Independent Auditors
The Board of Directors
Life Critical Care Corporation
We have audited the accompanying balance sheet of Life Critical Care Corporation
as of December 31, 1995, and the related statements of operations, shareholders'
equity (deficit), and cash flows for the period from June 19, 1995 (date of
inception) to 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 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 the Company at December 31,
1995, and the results of its operations and cash flows for the period from June
19, 1995 (date of inception) to December 31, 1995, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
August 23, 1996, except paragraph 1 of
Note 6 for which the date is
August 29, 1996
F-2
<PAGE>
Life Critical Care Corporation
Balance Sheets
</TABLE>
<TABLE>
<CAPTION>
December 31 September 30
1995 1996
--------------------------------------
<S> <C> (Unaudited)
Assets
Current assets:
Cash $ 23,158 $ 252,254
Note receivable, affiliate - 30,000
Deferred costs 245,426 576,842
Deposits 250,000 200,000
-------- ---------
Total current assets 518,584 1,059,096
Organization costs, net of accumulated amortization of $73 in
1995 and $292 in 1996 1,387 1,168
Deferred financing cost - 25,000
--------- ----------
Total assets $519,971 $1,085,264
======================================
Liabilities and shareholders' equity (deficit)
Current liabilities:
Accounts payable and accrued expenses $ 59,400 $ 437,334
Accrued interest 12,618 155,041
Loan payable to affiliate 15,000 -
Notes payable - 495,000
--------- ---------
Total current liabilities 87,018 1,087,375
Notes payable to affiliates 700,879 1,500,000
Shareholders' equity (deficit):
Preferred stock, $.01 par value, 500,000 shares authorized, no
shares issued and outstanding - -
Common stock, $.01 par value, 10,000,000 shares authorized,
743,700 at December 31, 1995 and 1,256,340 at September 30, 1996 shares
issued and outstanding (net of loans receivable from shareholders for
common stock of $7 at December 31, 1995)
- 12,563
Additional paid-in capital, net of loans receivable from shareholders for
common stock of $663 at December 31, 1995
- 103,947
Accumulated deficit (267,926) (1,618,621)
--------------------------------------
Total shareholders' equity (deficit) (267,926) (1,502,111)
--------------------------------------
Total liabilities and shareholders' equity (deficit) $519,971 $1,085,264
======================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
Life Critical Care Corporation
Statements of Operations
For the Period from June 19, 1995 (Date of Inception)
to December 31, 1995 and (Unaudited) for the Nine Months
Ended September 30, 1996
<TABLE>
<CAPTION>
1995 1996
-------------------------------------
(Unaudited)
<S> <C>
Operating expenses:
General and administrative $ 20,049 $ 187,273
Management fee 225,000 116,500
Professional fees 10,259 143,229
-------------------------------------
Operating loss (255,308) (447,002)
Forfeiture of deposit -- 700,000
Interest and financing expense 12,618 203,693
-------------------------------------
Net loss (267,926) (1,350,695)
=====================================
Loss per common share $ (.49) $ (1.76)
=====================================
Weighted-average shares outstanding 546,392 769,659
=====================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Life Critical Care Corporation
Statements of Shareholders' Equity (Deficit)
<TABLE>
<CAPTION>
Additional
Paid-in Shareholder Accumulated
Common Stock Capital Loans Deficit Total
-----------------------------------------------------------------------------------------
Number of
Shares Amount
-----------------------------
<S> <C>
Balance at June 19, 1995
(Date of Inception) 670 $7 $ 663 $(670) $ - $ -
Net loss - - - - (267,926) (267,926)
-----------------------------------------------------------------------------------------
Balance at December 31,
1995 670 7 663 (670) (267,926) (267,926)
Payment for common stock
(Unaudited) - - - 670 - 670
Compensation expense on
sale of common stock to
management
(Unaudited) - - 59,200 - - 59,200
Exercise of stock purchase
warrants (Unaudited) 214,000 2,140 19,260 - - 21,400
Issuance of stock
(Unaudited) 248,640 2,486 (246) - - 2,240
1,110 for one stock split
(Unaudited) 743,030 7,430 (7,430) - - -
Issuance of stock in
connection with bridge
financing (Unaudited) 50,000 500 32,500 - - 33,000
Net loss (Unaudited) - - - - (1,350,695) (1,350,695)
-----------------------------------------------------------------------------------------
Balance at September 30,
1996 (Unaudited) 1,256,340 $12,563 $103,947 $ - $(1,618,621) $(1,502,111)
=========================================================================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
Life Critical Care Corporation
Statements of Cash Flows
For the Period from June 19, 1995 (Date of Inception)
to December 31, 1995 and (Unaudited) for the Nine
Months Ended September 30, 1996
<TABLE>
<CAPTION>
1995 1996
------------------------------------
<S> <C> (Unaudited)
Operating activities
Net loss $(267,926) $(1,350,695)
Adjustments to reconcile net loss to net cash used in operating
activities:
Amortization 73 219
Forfeiture of deposit - 700,000
Stock compensation expense - 59,200
Financing expense - 28,000
Changes in operating assets and liabilities:
Accounts payable and accrued expenses 59,400 377,934
Accrued interest 12,618 163,823
------------------------------------
Net cash used in operating activities (195,835) (21,519)
Investing activities
Payment of organization and acquisition costs (211,999) (125,519)
Deposits made (250,000) (650,000)
------------------------------------
Net cash used in investing activities (461,999) (775,519)
Financing activities
Proceeds from notes payable 700,879 1,294,121
Proceeds from issuance of common stock - 7,910
Payment of deferred offering costs (34,887) (205,897)
Payment of deferred financing costs - (25,000)
Proceeds (payment) of loans to/from affiliates 15,000 (45,000)
------------------------------------
Net cash provided by financing activities 680,992 1,026,134
------------------------------------
Net increase in cash 23,158 229,096
Cash at beginning of period - 23,158
------------------------------------
Cash at end of period $ 23,158 $252,254
====================================
Supplemental information
Cash paid for interest $ - $ 11,870
====================================
</TABLE>
See accompanying notes.
F-7
<PAGE>
Life Critical Care Corporation
Notes to Financial Statements
(Information with respect to the nine-month period
ended September 30, 1996 is unaudited)
1. Description of Business
Life Critical Care Corporation (the Company) was formed on June 19, 1995. The
Company acquires and manages providers of health care products and services,
primarily in the Midwest.
Basis of Presentation
The financial statements of the Company as of September 30, 1996, and for the
nine-month period ended September 30, 1996, and all information subsequent to
December 31, 1995, are unaudited. All adjustments and accruals (consisting only
of normal recurring adjustments) have been made which, in the opinion of
management, are necessary for a fair presentation of the financial position and
operating results of the Company for the interim period presented.
The interim financial statements are condensed and do not include all the
information and disclosures necessary for a full interim financial statement
presentation.
2. Summary of Significant Accounting Policies
Organization Costs and Deferred Costs
Organization costs are amortized on a straight-line basis over five years.
Deferred costs arise from a planned initial public offering which will be netted
against offering proceeds upon completion of the offering and from the planned
acquisitions (Note 9) which will be applied to the purchase price. Deferred
financing costs will be amortized on a straight-line basis over the term of the
pending bank loan.
Income Taxes
The Company uses the liability method of accounting for income taxes, as set
forth in the Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." 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.
F-8
<PAGE>
Life Critical Care Corporation
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Fair Value of Financial Instruments
The Company's financial instruments include a note receivable, accounts payable,
accrued expenses, and loans and notes payable. The fair values of all financial
instruments were not materially different from their carrying values.
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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Net Loss and Pro Forma Net Loss Per Common Share
Pro forma net loss per common share and historical net loss per common share (as
discussed below) are computed based upon the weighted-average number of common
shares outstanding. Common equivalent shares are not included in the pro forma
and historical per share calculations since the effect of their inclusion would
be antidilutive, except that common equivalent shares issued during the 12-month
period prior to the proposed public offering have been included in the pro forma
calculation as if they were outstanding for all periods presented using the
treasury stock method and an assumed initial public offering price of $5.50 per
share.
3. Related Party Transactions
In August 1995, the Company entered into two promissory notes due December 31,
1997, to affiliates for borrowings up to $750,000 on each note. The notes accrue
interest at 18% per year which is payable quarterly commencing December 31,
1995. Any unpaid interest accrues to the notes. Borrowings on the notes were
$700,879 and $1,500,000 at December 31, 1995 and September 30, 1996,
respectively.
In the period ended December 31, 1995, the Company paid a $225,000 management
fee to an affiliate for personnel, office supplies, insurance and other services
provided by the affiliate.
On May 19, 1996, certain shareholders of the Company sold 370,000 shares of
Common Stock to the Chief Executive Officer (CEO) for $.01 per share. The
Company has recorded compensation expense of $59,200 in connection with this
transaction.
F-9
<PAGE>
Life Critical Care Corporation
Notes to Financial Statements (continued)
3. Related Party Transactions (continued)
In conjunction with the September 1996 bridge financing (Note 9), commissions
and fees of $70,000 were paid to an affiliate. It was subsequently agreed that
$30,000 would be repaid to the Company in December 1996. Accordingly, a note
receivable in the amount of $30,000 has been recorded at September 30, 1996. The
note is non-interest bearing.
4. Common Stock Warrants
In connection with the issuance of the promissory notes in August 1995, the
Company issued common stock purchase warrants for 214,000 shares. These warrants
have an exercise price of $.10 per share and are exercisable commencing March
15, 1996, and expire upon the earlier of December 31, 1998, or two years from
the date all sums under the respective notes have been paid. All warrants were
outstanding at December 31, 1995. At December 31, 1995, 214,000 shares of common
stock have been reserved for future issuance in connection with these warrants.
These warrants were exercised in September 1996 through the conversion of
accrued interest of $21,400.
In conjunction with a planned public offering of common stock, warrants to
purchase an aggregate of 200,000 of common stock at an exercise price equal to
120% of the initial public offering price per share will be sold to the managing
underwriter of the initial public offering. The warrants will be exercisable for
a period of four years beginning one year from the effective date of the initial
public offering.
5. Stock Options
On October 16, 1996, the Board of Directors adopted the 1996 Stock and Incentive
Plan (the Plan) for employees. The maximum number of shares issuable under the
Plan is 550,000. The Plan is administered by a committee consisting of two or
more outside directors appointed by the board of directors of the Company.
The Plan provides for granting of Incentive Stock Options (ISOs) and
Non-Qualified Stock Options (NSOs). The exercise price shall be determined by
the committee; however, such exercise price shall not be less than the fair
value of the common stock on the date of grant. The term of the options shall be
determined by the committee, and in the case of ISOs, shall not exceed ten
years.
In addition, the Board of Directors adopted the 1996 Non-employee Directors
Stock Option Plan. (Directors Plan). This plan will be effective upon the
effective date of a planned initial public offering. The Directors Plan provides
for issuance of a maximum number of 50,000 shares. Under the Directors Plan,
each outside director will be automatically granted 7,500 shares on the
F-10
<PAGE>
Life Critical Care Corporation
Notes to Financial Statements (continued)
5. Stock Options (continued)
date of their initial election to the board of directors. The options vest 50%
as of the date of the first annual meeting following date of grant and 50% as of
the date of the second annual meeting. In addition, on the date of the annual
meeting each outside director will be granted 2,500 shares or a lesser number of
shares prorated for the number of months the director has served on the board of
directors since the most recent annual meeting. These options vest as of the
date of the first annual meeting following the date of grant. All options under
the Directors Plan have a ten-year term.
In November 1996, options to purchase 75,000 shares of common stock were granted
to the chief financial officer of the Company at an exercise price of $.25 per
share. The options expire ten years from the date of grant and vest upon the
earlier of the Company achieving certain earnings per share levels, as specified
in the option agreement, or December 31, 2004.
6. Capital Stock
All common share and per share amounts in the financial statements and notes to
financial statements have been restated to reflect a 1,110 for 1 stock split
effective August 29, 1996.
In conjunction with the pending initial public offering, 28,215 shares of common
stock were returned by the founding shareholders to the Company for no
consideration in October 1996. These shares were retired and the transaction had
no impact on stockholders'equity.
In addition, 75,000 shares of common stock were donated to the Company by the
founding shareholders to be held and reissued upon the exercise by the Chief
Financial Officer of options to purchase common stock granted in connection with
his employment with the Company (Note 5). These shares will be held in treasury
until the options are exercised.
All common share and per share amounts in the financial statements and notes to
financial statements have been restated to reflect a 1,110 for 1 stock split
effective August 1996.
7. Income Taxes
The Company has net operating loss carryforwards for tax purposes of
approximately $270,000 at December 31, 1995, which begin to expire in 2010.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Deferred tax asset at
December 31, 1995, of $100,000 relates primarily to
F-11
<PAGE>
Life Critical Care Corporation
Notes to Financial Statements (continued)
7. Income Taxes (continued)
the net operating loss carryforward for income tax purposes and has been offset
by a valuation allowance in the same amount. Based on the Internal Revenue Code
and changes in the ownership of the Company, utilization of the net operating
loss carryforward may be subject to annual limitations.
8. Commitments
The Company has entered into an employment agreement with its CEO which provides
for annual base compensation of $150,000 through December 31, 1996, and
automatic increases to $175,000 in 1997 and $200,000 in 1998. Under the
agreement, the CEO is entitled to quarterly bonuses of $7,500 through December
31, 1997. Additional bonuses of up to 50% of base compensation may be granted at
the discretion of the Board of Directors.
The agreement also provides for the granting of options to purchase 100,000
shares of Common Stock upon the completion of the proposed initial public
offering. These options will vest over five years and will have an exercise
price equal to the initial public offering price.
9. Subsequent Events
In 1996, the Company has entered into a definitive stock purchase agreement and
three asset purchase agreements with home medical equipment suppliers. In
connection with these purchase agreements, deposits totaling $250,000 and
$800,000 at December 31, 1995 and September 30, 1996, respectively, have been
paid by the Company. In September 1996, the Company terminated its stock
purchase agreement, forfeiting a $700,000 deposit. This forfeiture is reflected
in the statement of operations for the nine months ended September 30, 1996.
The transactions proposed by the asset purchase agreements are to close
concurrent with the effective date of the planned initial public offering. The
aggregate purchase price of $18,277,300 is to be paid $14,032,000 in cash and
$4,245,300 in common stock of the Company to be issued to the sellers. The cash
portion of the purchase price will be funded through the proceeds of the planned
initial public offering and a $6 million term loan, which the Company expects to
negotiate with a lender.
These agreements are contingent upon the Company completing the initial public
offering, and one of the asset purchase agreements contains a contingent payment
clause in the event the fair value of the stock of the Company has declined by
greater than 15% by the second anniversary of the closing date of the asset
purchase.
F-12
<PAGE>
Life Critical Care Corporation
Notes to Financial Statements (continued)
9. Subsequent Events (continued)
In September 1996, the Company entered into bridge loan agreements and received
proceeds from the loans totaling $495,000. The loans accrue interest at the rate
of 12% per annum and interest and principal are due the earlier of June 30, 1997
or three days after the closing of a qualified initial public offering of the
Company's common stock. In connection with the loans, 50,000 shares of common
stock were purchased by the parties to the bridge loans at a purchase price of
$0.10 per share. The shares were estimated to have a fair market value of $0.66
per share. Accordingly, financing expenses of $28,000 have been recorded by the
Company.
F-13
<PAGE>
Report of Independent Auditors
The Board of Directors
Life Critical Care Corporation
We have audited the accompanying combined balance sheet of Blue Water Medical
Supply, Inc. and Blue Water Industrial Products, Inc. as of December 31, 1995
and the related combined statements of operations, shareholders' equity, and
cash flows for the years ended December 31, 1994 and 1995. 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of the Companies at
December 31, 1995, and the results of their operations and their cash flows for
the years ended December 31, 1994 and 1995, in conformity with generally
accepted accounting principles.
ERNST & YOUNG, LLP
Chicago, Illinois
June 28, 1996
F-14
<PAGE>
Blue Water Medical Supply, Inc. and
Blue Water Industrial Products, Inc.
Combined Balance Sheets
<TABLE>
<CAPTION>
December 31 September 30
1995 1996
------------------------------------
<S> <C> (Unaudited)
Assets
Current assets:
Cash $ 149,940 $ 250,050
Trade accounts receivable, less allowance for doubtful accounts of
$242,493 in 1995 and $263,088 in 1996 797,493 875,762
Advances to shareholders 609,265 978,765
Inventories 374,530 403,356
Prepaid expenses and other assets 45,224 127,056
---------- ----------
Total current assets 1,976,452 2,634,989
Property and equipment, net 903,088 855,508
Other assets 103,306 89,842
--------- ----------
Total assets $2,982,846 $3,580,339
========== ==========
Liabilities and shareholders' equity Current liabilities:
Line of credit $ 364,000 $ 810,000
Accounts payable 553,192 376,857
Accrued expenses 74,799 145,567
Current portion of long-term debt and capital lease obligations
240,504 27,132
--------- ----------
Total current liabilities 1,232,495 1,359,556
Long-term debt, less current portion 79,037 4,665
Capital lease, less current portion 87,824 -
Shareholders' equity:
Common stock, $1 and $10 par value:
50,000 and 5,000 shares authorized, 3,000 and
600 issued and outstanding, Blue Water
Industrial Products, Inc. and Blue Water
Medical Supply, Inc., respectively
9,000 9,000
Additional paid-in capital 39,650 39,650
Retained earnings 1,534,840 2,167,468
--------- ---------
Total shareholders' equity 1,583,490 2,216,118
--------- ---------
Total liabilities and shareholders' equity $2,982,846 $3,580,339
========== ==========
</TABLE>
See accompanying notes.
F-15
<PAGE>
Blue Water Medical Supply, Inc. and
Blue Water Industrial Products, Inc.
Combined Statements of Operations
<TABLE>
<CAPTION>
Year Ended Nine Months
December 31 Ended September 30
1994 1995 1995 1996
-------------------------------------------------------------------------
(Unaudited)
<S> <C>
Net sales $1,818,952 $2,001,952 $1,508,953 $1,496,918
Rental revenue 2,954,148 3,287,730 2,361,868 2,711,137
--------- --------- --------- ---------
4,773,100 5,289,682 3,870,821 4,208,055
Cost of revenues 1,632,018 1,752,968 1,245,944 1,273,035
--------- --------- --------- ---------
Gross profit 3,141,082 3,536,714 2,624,877 2,935,020
Selling, general and administrative expenses 2,623,294 2,858,809 2,153,525 2,237,481
--------- --------- --------- ---------
Income from operations 517,788 677,905 471,352 697,539
Other (income) expense:
Interest income (14,102) (15,548) (11,934) (11,973)
Interest expense 85,638 82,110 45,749 81,607
Other (income) expense, net (52,334) (60,070) (32,753) (37,099)
----------- ---------- ----------- -----------
19,202 6,492 1,062 32,535
---------- ---------- ---------- ----------
Income before income taxes 498,586 671,413 470,290 665,004
Income taxes 39,252 47,639 27,731 32,376
---------- ---------- --------- ----------
Net income $ 459,334 $ 623,774 $442,559 $ 632,628
=========== =========== ======== ===========
Pro forma data (unaudited):
Pro forma net income adjusted
only for income taxes $299,152 $402,848 $282,174 $399,002
======== ======== ======== ========
Pro forma net income adjusted for
compensation differential and
income taxes $472,898 $459,302
======== ========
</TABLE>
See accompanying notes.
F-16
<PAGE>
Blue Water Medical Supply, Inc. and
Blue Water Industrial Products, Inc.
Combined Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Additional
Common Additional Retained
Stock Paid-In Capital Earnings Total
-------- --------------- ---------- ------------
<S> <C>
Balance at January 1, 1994 $9,000 $39,650 $ 684,908 $ 733,558
Net income - - 459,334 459,334
Shareholder distributions - - (233,176) (233,176)
--------- ---------- --------- -----------
Balance at December 31, 1994 9,000 39,650 911,066 959,716
Net income - - 623,774 623,774
--------- ---------- ---------- ----------
Balance at December 31, 1995 9,000 39,650 1,534,840 1,583,490
Net income (Unaudited) - - 632,628 632,628
--------- ---------- ----------- -----------
Balance at September 30, 1996 (Unaudited)
$9,000 $39,650 $2,167,468 $2,216,118
====== ======= ========== ==========
</TABLE>
See accompanying notes.
F-17
<PAGE>
Blue Water Medical Supply, Inc. and
Blue Water Industrial Products, Inc.
Combined Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31 September 30
1994 1995 1995 1996
----------------------------------------------------------------
<S> <C>
Operating activities (Unaudited)
Net income $459,334 $623,774 $442,559 $632,628
Adjustments to reconcile net income to:
Allowance for doubtful accounts 232,725 5,655 - 20,595
Depreciation and amortization 345,102 428,553 272,756 257,730
(Gain)/loss on sale of fixed assets (1,116) 6,932 953 (3,464)
Changes in operating assets and liabilities:
Receivables (463,202) (588,564) (581,646) (468,364)
Inventories 207,597 (208,190) (137,122) (28,826)
Prepaid expenses and other assets 16,379 62,038 (977) (68,369)
Accounts payable 70,142 286,527 51,616 (176,334)
Accrued expenses 149,449 (228,237) 12,334 70,768
----------------------------------------------------------------
Net cash provided by operating activities 1,016,410 388,488 60,473 236,364
Investing activities
Proceeds from sale of property and
equipment 23,499 2,500 1,500 3,464
Expenditures for property and equipment (543,929) (366,368) (150,269) (210,150)
----------------------------------------------------------------
Net cash used in investing activities (520,430) (363,868) (148,769) (206,686)
Financing activities
Net increase in line of credit - 131,959 151,959 446,000
Payments on long-term debt, including
capital leases (308,758) (275,915) (238,988) (375,568)
Proceeds from long-term debt 216,635 60,827 60,827 -
Shareholder distributions (233,176) - - -
----------------------------------------------------------------
Net cash provided by (used in)
financing activities (325,299) (83,129) (26,202) 70,432
----------------------------------------------------------------
Net increase (decrease) in cash 170,681 (58,509) (114,498) 100,110
Cash at beginning of period 37,768 208,449 208,449 149,940
----------------------------------------------------------------
Cash at end of period $ 208,449 $149,940 $93,951 $250,050
================================================================
Supplemental cash flow information:
Cash paid for interest $ 86,253 $ 82,110 $ 45,749 $ 81,607
================================================================
Equipment capitalized under lease
agreements $ - $128,735 $ 90,935 $ -
================================================================
</TABLE>
See accompanying notes.
F-18
<PAGE>
Blue Water Medical Supply, Inc. and
Blue Water Industrial Products, Inc.
Notes to Combined Financial Statements
(Information with respect to the nine-month periods
ended September 30, 1995 and 1996 is unaudited)
1. Description of Business
Blue Water Medical Supply, Inc. provides health care products and services
and rents health care equipment to patients in their homes or in an outpatient
setting primarily in the Midwest. These products and services, which are
typically prescribed by a physician, include respiratory therapy and other
home medical equipment and medical supplies. Blue Water Industrial Products,
Inc. is a retailer of health care products, primarily respiratory therapy
equipment.
Basis of Presentation
Blue Water Medical Supply, Inc. and Blue Water Industrial Products, Inc.
(collectively the Company) are affiliated companies with common ownership.
As such, these financial statements have been prepared on a combined basis.
All intercompany transactions and related balance sheet accounts have been
eliminated.
The financial statements of the Company as of September 30, 1996 and for the
nine-month periods ended September 30, 1995 and 1996, and all information
subsequent to December 31, 1995 are unaudited. All adjustments and accruals
(consisting only of normal recurring adjustments) have been made which, in the
opinion of management, are necessary for a fair presentation of the financial
position and operating results of the Company for the interim periods presented.
The interim financial statements are condensed and do not include all the
information and disclosures necessary for a full interim financial statement
presentation.
2. Summary of Significant Accounting Policies
Revenue Recognition
All of the Company's leases are classified as operating leases, and rental
income is reported as revenue ratably over the life of the lease; the lease
terms are primarily month-to-month. Sales revenue is recognized in total upon
the sale of the healthcare equipment and medical supplies.
F-19
<PAGE>
Blue Water Medical Supply, Inc. and
Blue Water Industrial Products, Inc.
Notes to Combined Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Inventories
Inventories, primarily consisting of medical supplies, are stated at the lower
of cost or market value determined on the first-in, first-out basis.
Property and Equipment
Property and equipment is stated at cost. Depreciation is calculated utilizing
the straight-line and accelerated methods over the estimated useful lives of the
assets. Leasehold improvements are amortized using the straight-line method over
the lesser of the lease term or the estimated useful life of the asset.
Amortization is included with depreciation.
Income Taxes
The shareholders of the Company have elected to be taxed under Subchapter S of
the Internal Revenue Code and, as such, the Company is not subject to federal
and certain state income taxes. Accordingly, the Company's taxable income or
loss is includable in the personal income tax returns of the shareholders.
Fair Value of Financial Instruments
The Company's financial instruments include trade accounts receivable, accounts
payable, accrued expenses and notes payable. The fair values of all financial
instruments were not materially different from their carrying values.
Cash and Cash Equivalents
All highly liquid financial instruments purchased with a maturity of three
months or less are considered to be cash equivalents.
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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
F-20
<PAGE>
Blue Water Medical Supply, Inc. and
Blue Water Industrial Products, Inc.
Notes to Combined Financial Statements (continued)
3. Property and Equipment
Property and equipment consists of the following at December 31, 1995:
Land $ 31,897
Building 194,932
Land, building and leasehold improvements 45,327
Equipment and furniture 2,140,602
Vehicles 787,747
Computer hardware and software 27,120
-------------------
3,227,625
Accumulated depreciation 2,324,537
===================
Net property and equipment $ 903,088
===================
Rental equipment of approximately $1,645,331 with related accumulated
depreciation of $1,196,369 at December 31, 1995 is included with equipment and
furniture.
4. Line of Credit
The Company has a $400,000 bank demand line of credit. Interest at prime plus
1% (8.5% at December 31, 1995) is payable monthly. Available borrowings at
December 31, 1995 were $36,000.
In 1996, the line of credit availability and borrowings were increased to
$810,000.
5. Long-Term Debt
The Company's long-term debt consisted of the following at December 31, 1995:
<TABLE>
<S> <C>
Bank Loans:
Secured computer equipment note, due in monthly installments of $1,493, including
interest to September 1996 $ 13,438
Secured installment business loan, payable in monthly installments of $4,333 plus
interest at prime plus .75% to October 1997 94,164
-------------------
107,602
Various vehicle installment loans payable in monthly installments totaling $9,043,
including interest 159,612
-------------------
267,214
Less current portion (188,177)
-------------------
$ 79,037
===================
</TABLE>
F-21
<PAGE>
Blue Water Medical Supply, Inc. and
Blue Water Industrial Products, Inc.
Notes to Combined Financial Statements (continued)
5. Long-Term Debt (continued)
The foregoing bank obligations, including the line of credit, are secured by the
Company's assets and are guaranteed by the shareholders.
The aggregate principal maturities of the long-term debt at December 31, 1995
are as follows:
1996 $188,177
1997 68,906
1998 10,131
-------------------
$267,214
===================
Except for three vehicle notes totaling $56,037, the above outstanding
installment loans and all capital leases were repaid in 1996 with borrowings on
the line of credit.
6. Leases and Commitments
Operating Leases
The buildings in which the Company conducts operations are leased from a
partnership the partners of which are the shareholders of the Company. Rent
expense was $299,831 and $313,860 for the years ended December 31, 1994 and
1995, respectively.
At December 31, 1995, the aggregate minimum lease commitments under all
noncancelable leases are as follows:
1996 $42,679
1997 15,625
-------------------
$58,304
===================
F-22
<PAGE>
Blue Water Medical Supply, Inc. and
Blue Water Industrial Products, Inc.
Notes to Combined Financial Statements (continued)
6. Leases and Commitments (continued)
Capital Leases
The Company has entered into capital lease agreements for office and computer
equipment. These agreements require monthly minimum lease payments totaling
$4,360 through 1999, and are collaterialized by the equipment. The Company has
recorded $103,000 in equipment at December 31, 1995 related to these leases.
Amortization is included in depreciation expense.
Future minimum payments at December 31, 1995 under the leases, including
interest are as follows:
1996 $52,327
1997 51,417
1998 27,753
1999 8,654
-------------------
140,151
Less current portion (52,327)
-------------------
$87,824
===================
7. Advances to Shareholders
Advances to shareholders include amounts paid to the shareholders to facilitate
the individual income tax payments. The amounts do not bear interest and are to
be repaid upon the closing of the proposed asset sale (Note 9).
8. Profit Sharing Plan
The Company maintains a defined contribution plan which covers substantially all
employees. Contributions to the plan are at the discretion of the Board of
Directors and totaled $150,866 in 1994. There were no contributions in 1995.
9. Subsequent Event
Subsequent to December 31, 1995, the Company and its shareholders have entered
into a definitive agreement to sell substantially all the assets of the Company.
F-23
<PAGE>
Report of Independent Auditors
The Board of Directors
Life Critical Care Corporation
We have audited the accompanying balance sheet of Great Lakes Home Medical, Inc.
as of December 31, 1995 and the related statements of operations, shareholders'
equity, and 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 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 Great Lakes Home Medical, Inc.
at December 31, 1995, and the results of its operations and its cash flows for
the years ended December 31, 1994 and 1995, in conformity with generally
accepted accounting principles.
ERNST & YOUNG, LLP
Chicago, Illinois
June 28, 1996
F-24
<PAGE>
Great Lakes Home Medical, Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31 September 30
1995 1996
-----------------------------------
<S> <C> (Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 651,200 $ 351,464
Trade accounts receivable, less allowance for doubtful accounts of
$138,887 in 1995 and $145,155 in 1996 625,909 654,156
Accounts receivable, other 162,578 160,000
Current portion of note receivable - 8,555
Inventories 106,509 106,509
Prepaid expenses and other assets 100 100
---------- ----------
Total current assets 1,546,296 1,280,784
Note receivable, less current portion - 40,916
Furniture and equipment, net 567,116 462,432
---------- ----------
Total assets $2,113,412 $1,784,132
========== ==========
Liabilities and shareholders' equity Current liabilities:
Accounts payable $ 65,001 $ 46,922
Accrued expenses 36,722 93,765
Current portion of noncompete liability 50,000 50,000
---------- ---------
Total current liabilities 151,723 190,687
Noncompete liability, less current portion 41,667 4,167
Shareholders' equity Common stock, $1 par value:
50,000 shares authorized, 3,000 issued and outstanding 3,000 3,000
Retained earnings 1,917,022 1,586,278
--------- ---------
Total shareholders' equity 1,920,022 1,589,278
--------- ---------
Total liabilities and shareholders' equity $2,113,412 $1,784,132
========== ==========
</TABLE>
See accompanying notes.
F-25
<PAGE>
Great Lakes Home Medical, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Year Ended Nine Months
December 31 Ended September 30
1994 1995 1995 1996
-------------------------------------------------------------------------
(Unaudited)
<S> <C>
Net sales $ 488,000 $ 462,044 $ 301,312 $ 336,635
Rental revenue 2,184,078 2,767,018 2,043,090 2,117,711
--------- --------- --------- ---------
2,672,078 3,229,062 2,344,402 2,454,346
Cost of revenues 677,488 694,637 517,384 502,479
--------- --------- --------- ---------
Gross profit 1,994,590 2,534,425 1,827,018 1,951,867
Selling, general, and administrative expenses 1,553,917 1,337,466 1,007,768 1,113,876
--------- --------- --------- ---------
Income from operations 440,673 1,196,959 819,250 837,991
Other (income) expense:
Interest income (9,572) (9,194) (6,392) (9,711)
Interest expense 2,595 5,405 2,678 -
Other (income)
expense, net 15,604 31,452 10,584 (5,062)
--------- --------- --------- -----------
8,627 27,663 6,870 (14,773)
--------- --------- --------- -----------
Income before income taxes 432,046 1,169,296 812,380 852,764
Income taxes 18,470 27,038 16,468 28,508
-------- --------- -------- ---------
Net income $413,576 $1,142,258 $ 795,912 $ 824,256
======== ========== =========== ===========
Pro forma data (unaudited):
Pro forma net income adjusted
only for income taxes $259,228 $701,578 $487,428 $511,658
======== ========= ======== ========
Pro forma net income adjusted for
compensation differential and
income taxes $766,378 $560,258
========= ========
</TABLE>
See accompanying notes.
F-26
<PAGE>
Great Lake Home Medical, Inc.
Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Common Retained
Stock Earnings Total
------------------------------------------------------
<S> <C>
Balance at January 1, 1994 $4,000 $1,850,588 $1,854,588
Net income - 413,576 413,576
Purchase of stock (1,000) (399,000) (400,000)
Shareholder distributions - (551,900) (551,900)
------------------------------------------------------
Balance at December 31, 1994 3,000 1,313,264 1,316,264
Net income - 1,142,258 1,142,258
Shareholder distributions - (538,500) (538,500)
------------------------------------------------------
Balance at December 31, 1995 3,000 1,917,022 1,920,022
Net income (Unaudited) - 824,256 824,256
Shareholder distributions (Unaudited) - (1,155,000) (1,155,000)
------------------------------------------------------
Balance at September 30, 1996 (Unaudited) $3,000 $1,586,278 $1,589,278
======================================================
</TABLE>
See accompanying notes.
F-27
<PAGE>
Great Lakes Home Medical, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31 September 30
1994 1995 1995 1996
----------------------------------------------------------------
(Unaudited)
<S> <C>
Operating activities
Net income $413,576 $1,142,258 $795,912 $824,256
Adjustments to reconcile net income to net
cash provided by operating activities:
Noncompete agreement 150,000 - - -
Payments on noncompete agreement (8,333) (50,000) (37,500) (37,500)
Allowance for doubtful accounts 24,489 (22,884) - 6,268
Depreciation and amortization 257,676 242,224 180,652 154,113
(Gain) loss on sale of fixed assets 4,490 2,617 2,619 (20,062)
Changes in operating assets and
liabilities:
Receivables (177,426) 6,011 84,340 (81,408)
Accounts payable (4,139) 13,959 14,648 (18,079)
Accrued expenses 6,752 (366) 22,422 57,043
-------- -------------- ----------- --------
Net cash provided by operating activities 667,418 1,333,819 1,063,093 884,631
Investing activities
Proceeds from assets sold 16,600 1,002 - 21,000
Change in investments 179,596 85,277 27,158 -
Expenditures for furniture and equipment (259,229) (193,594) (154,059) (50,367)
--------- --------- --------- --------
Net cash used in investing activities (63,033) (107,315) (126,901) (29,367)
Financing activities
Payments on long-term debt (4,211) (145,789) (145,789) -
Purchase of stock (250,000) - - -
Shareholder distributions (551,900) (538,500) (538,523) (1,155,000)
--------- --------- --------- -----------
Net cash used in financing activities (806,111) (684,289) (684,312) (1,155,000)
--------- --------- --------- -----------
Net increase (decrease) in cash and cash
equivalents (202,059) 542,215 251,880 (299,736)
Cash and cash equivalents at beginning
of period 311,044 108,985 108,985 651,200
------- ------- ------- -------
Cash and cash equivalents at end of
period $108,985 $ 651,200 $360,865 $351,464
======== =========== ======== ========
Supplemental information:
Cash paid for interest $ 1,745 $ 6,256 $ 3,528 $ -
======== =========== ======== ========
Note payable issued for stock purchase $150,000 $ - $ - $ -
======== =========== ======== ========
</TABLE>
See accompanying notes.
F-28
<PAGE>
Great Lakes Home Medical, Inc.
Notes to Financial Statements
(Information with respect to the nine-month periods
ended September 30, 1995 and 1996 is unaudited)
1. Description of Business
Great Lakes Home Medical, Inc. (the Company) provides health care products and
services and rents health care equipment to patients in their homes or in an
outpatient setting primarily in the Midwest. These products and services, which
are typically prescribed by a physician, include respiratory therapy and other
home medical equipment and medical supplies.
Basis of Presentation
The financial statements of the Company as of September 30, 1996 and for the
nine-month periods ended September 30, 1995 and 1996, and all information
subsequent to December 31, 1995 are unaudited. All adjustments and accruals
(consisting only of normal recurring adjustments) have been made which, in the
opinion of management, are necessary for a fair presentation of the financial
position and operating results of the Company for the interim periods presented.
The interim financial statements are condensed and do not include all the
information and disclosures necessary for a full interim financial statement
presentation.
2. Summary of Significant Accounting Policies
Revenue Recognition
All of the Company's leases are classified as operating leases, and rental
income is reported as revenue ratably over the life of the lease; the lease
terms are less than one year on substantially all of the leases. Sales revenue
is recognized in total upon the sale of health care equipment and medical
supplies.
Inventories
Inventories, primarily consisting of medical supplies, are stated at the lower
of cost or market value determined on the first in, first out basis.
F-29
<PAGE>
Great Lakes Home Medical, Inc.
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Furniture and equipment
Equipment is stated at cost. Depreciation is calculated utilizing the
straight-line and accelerated methods over the estimated useful lives of the
assets. Leasehold improvements are amortized using the straight-line method over
the lesser of the lease term or the estimated useful life of the asset.
Amortization is included with depreciation.
Income Taxes
The shareholders of the Company have elected to be taxed under Subchapter S of
the Internal Revenue Code and, as such, the Company is not subject to federal
and certain state income taxes. Accordingly, the Company's taxable income or
loss is includable in the personal income tax returns of the shareholders.
Cash and Cash Equivalents
All highly liquid financial instruments purchased with a maturity of three
months or less are considered to be cash equivalents.
Fair Value of Financial Instruments
The Company's financial instruments include trade accounts receivable, accounts
payable, accrued expenses, and a note payable. The fair values of all financial
instruments were not materially different from their carrying values.
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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
F-30
<PAGE>
Great Lakes Home Medical, Inc.
Notes to Financial Statements (continued)
3. Furniture and Equipment
Furniture and quipment consists of the following at December 31, 1995:
Equipment and furniture $1,483,027
Vehicles 196,265
Computer hardware and software 60,410
-------------------
1,739,702
Accumulated depreciation 1,172,586
-------------------
Net equipment $ 567,116
===================
Rental equipment of approximately $1,473,000 with related accumulated
depreciation of $995,100 at December 31, 1995 is included with equipment and
furniture.
4. Related Party Transactions
At December 31, 1994, the Company owed $145,789 to a former shareholder, due in
monthly installments at 7% interest through October 1999. In June 1995, the
Company paid this note in full. Interest expense on this note was $1,738 and
$4,916 for the years ended December 31, 1994 and 1995, respectively.
Great Lakes made payments of $8,333 and $50,000 during the years ended December
31, 1994 and 1995, respectively, to a former shareholder in connection with a
noncompete agreement (Note 7).
5. Common Stock
In October 1994, Great Lakes purchased 1,000 shares of common stock from a
shareholder for $400,000. These shares were subsequently canceled.
F-31
<PAGE>
Great Lakes Home Medical, Inc.
Notes to Financial Statements (continued)
6. Leases
The Company is obligated under various operating leases for its sales offices.
Rent expense was $88,064 and $65,906 for the years ended December 31, 1994 and
1995, respectively.
At December 31, 1995, the aggregate minimum lease commitments under all
noncancelable leases are as follows:
1996 $42,679
1997 15,625
------------------
$58,304
==================
7. Noncompete Agreement
In October 1994, the Company entered into a three-year noncompete agreement with
a former shareholder resulting in a $150,000 charge to 1994 selling, general and
administrative expense. The agreement calls for monthly payments of $4,167.
8. Subsequent Event
Subsequent to December 31, 1995, the Company and its shareholders have entered
into a definitive agreement to sell substantially all of the assets of the
Company.
F-32
<PAGE>
Report of Independent Auditors
The Board of Directors
Life Critical Care Corporation
We have audited the accompanying balance sheet of ABC Medical Supply, Inc. as of
December 31, 1995 and the related statements of operations, shareholders'
equity, and 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 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 ABC Medical Supply, Inc. at
December 31, 1995, and the results of its operations and its cash flows for the
years ended December 31, 1994 and 1995, in conformity with generally accepted
accounting principles.
ERNST & YOUNG, LLP
Chicago, Illinois
June 28, 1996
F-33
<PAGE>
ABC Medical Supply, Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31 September 30
1995 1996
-------------------------------------
<S> <C> (Unaudited)
Assets
Current assets:
Cash $ 483,096 $ 407,267
Trade accounts receivable, less allowance for doubtful accounts of
$79,200 in 1995 and 1996 754,137 478,578
Inventories 135,609 135,609
Prepaid expenses and other assets 51,380 56,365
-------------------------------------
Total current assets 1,424,222 1,077,819
Furniture and equipment, net 334,494 259,089
Other assets 6,416 6,000
-------------------------------------
Total assets $1,765,132 $1,342,908
====================================
Liabilities and shareholders' equity Current liabilities:
Accounts payable $ 46,845 $ 38,372
Accrued expenses 83,942 71,710
Current portion of long-term debt 21,201 -
------------------------------------
Total current liabilities 151,988 110,08212
Long-term debt, less current portion 6,098 14,988
Shareholders' equity
Common stock $1 par value; 50,000 shares authorized, 7,000 shares
issued and outstanding 7,000 7,000
Retained earnings 1,600,046 1,210,838
------------------------------------
Total shareholders' equity 1,607,046 1,217,838
------------------------------------
Total liabilities and shareholders' equity $1,765,132 $1,342,908
====================================
</TABLE>
See accompanying notes.
F-34
<PAGE>
ABC Medical Supply, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Year Ended Nine Months
December 31 Ended September 30
1994 1995 1995 1996
------------------------------------------------------------------------
(Unaudited)
<S> <C>
Net sales $ 340,332 $ 390,930 $ 290,198 $ 263,611
Rental revenue 2,261,871 2,567,898 1,916,712 1,959,431
----------- ---------- ---------- ----------
2,602,203 2,958,828 2,206,910 2,223,042
Cost of revenues 1,170,701 1,308,517 915,034 886,133
----------- ---------- ---------- ----------
Gross profit 1,431,502 1,650,311 1,291,876 1,336,909
Selling, general, and administrative expenses 1,431,987 1,291,068 1,007,561 1,008,156
----------- ---------- ---------- ----------
Income (loss) from operations (485) 359,243 284,315 328,753
Other (income) expense:
Interest income (14,529) (12,743) (8,562) (10,726)
Interest expense 9,443 2,619 1,430 635
Other (income) expense, net (4,626) (4,552) (3,400) (537)
----------- ---------- ---------- ----------
(9,712) (14,676) (10,532) (10,628)
----------- ---------- ---------- ----------
Income before income taxes 9,227 373,919 294,847 339,381
Income tax provision 20,438 15,763 10,563 13,000
----------- ---------- ---------- ----------
Net income (loss) $ (11,211) $ 358,156 $ 284,284 $ 326,381
============ ========== ========== ==========
Pro forma data (unaudited):
Pro forma net income adjusted
only for income taxes $5,536 $224,351 $176,908 $203,629
====== ======== ======== ========
Pro forma net income adjusted for
compensation differential and
income taxes $483,551 $419,629
======== ========
</TABLE>
See accompanying notes.
F-35
<PAGE>
ABC Medical Supply, Inc.
Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Common Retained Earnings
Stock Total
------------------------------------------------------
<S> <C>
Balance at January 1, 1994 $7,000 $1,253,101 $1,260,101
Net loss - (11,211) (11,211)
------------------------------------------------------
Balance at December 31, 1994 7,000 1,241,890 1,248,890
Net income - 358,156 358,156
------------------------------------------------------
Balance at December 31, 1995 7,000 1,600,046 1,607,046
Net income (Unaudited) - 326,381 326,381
Shareholder distributions (Unaudited) - (715,589) (715,589)
------------------------------------------------------
Balance at September 30, 1996 (Unaudited) $7,000 $1,210,838 $1,217,838
======================================================
</TABLE>
See accompanying notes.
F-36
<PAGE>
ABC Medical Supply, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31 September 30
1994 1995 1995 1996
------------------------------------------------------------------
(Unaudited)
<S> <C>
Operating activities
Net income (loss) $ (11,211) $358,156 $284,284 $326,381
Adjustments to reconcile net income
(loss) to net cash provided by
operations:
Allowance for doubtful accounts 187,019 - 79,856 49,705
Depreciation and amortization 188,456 168,448 136,526 109,528
Gain on sale of equipment (4,901) (4,552) (3,400) (551)
Changes in operating assets and
liabilities:
Receivables (62,071) (238,505) (188,599) 225,854
Inventories 9,012 1,797 - -
Prepaid expenses and other
assets 1,314 (49,360) 1,272 (4,569)
Accounts payable 27,448 (70,857) (93,581) (8,473)
Accrued expenses (23,826) 21,056 (30,884) (12,232)
------------------------------------------------------------------
Net cash provided by operating activities 311,240 186,183 185,474 685,643
Investing activities
Purchases of furniture and equipment (389,885) (26,582) (42,377) (46,072)
Proceeds from sale of equipment 234,944 32,631 31,500 12,500
------------------------------------------------------------------
Net cash provided by (used in) investing
activities (154,941) 6,049 (10,877) (33,572)
Financing activities
Proceeds from long-term debt 49,221 20,000 10,195 -
Payments of long-term debt (188,223) (24,101) (26,159) (12,311)
Shareholder distributions - - - (715,589)
------------------------------------------------------------------
Net cash provided by (used in) financing
activities (139,002) (4,101) (15,964) (727,900)
------------------------------------------------------------------
Net increase (decrease) in cash 17,297 188,131 158,633 (75,829)
Cash at beginning of period 277,668 294,965 294,965 483,096
------------------------------------------------------------------
Cash at end of period $294,965 $483,096 $453,598 $407,267
==================================================================
Supplemental cash flow information:
Cash paid for interest $ 9,443 $ 2,619 $ 1,430 $ 635
==================================================================
</TABLE>
See accompanying notes.
F-37
<PAGE>
ABC Medical Supply, Inc.
Notes to Financial Statements
(Information with respect to the nine-month periods
ended September 30, 1995 and 1996 is unaudited)
1. Business and Organization
ABC Medical Supply, Inc. (the Company) provides health care products and
services and rents health care equipment to patients in their homes or in an
outpatient setting. These products and services, which are typically prescribed
by a physician, include respiratory therapy and other home medical equipment and
medical supplies.
Basis of Presentation
The financial statements of the Company as of September 30, 1996 and for the
nine-month periods ended September 30, 1995 and 1996 and all information
subsequent to December 31, 1995 are unaudited. All adjustments and accruals
(consisting only of normal recurring adjustments) have been made which, in the
opinion of management, are necessary for a fair presentation of the financial
position and operating results of the Company for the interim periods presented.
The interim financial statements are condensed and do not include all the
information and disclosures necessary for a full interim financial statement
presentation.
2. Summary of Significant Accounting Policies
Revenue Recognition
All of the Company's leases are classified as operating leases, and rental
income is reported as revenue ratably over the life of the lease; the lease
terms are primarily on a month-to-month basis. Sales revenue is recognized in
total upon the shipment of health care equipment and medical supplies.
Inventories
Inventories, primarily consisting of medical supplies, are stated at the lower
of cost or market value determined on the first in, first out basis.
Furniture and Equipment
Furniture and Equipment is stated at cost. Depreciation is calculated
utilizing the straight-line and accelerated methods over the estimated useful
lives of the assets.
F-38
<PAGE>
ABC Medical Supply, Inc.
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Furniture and Equipment
Furniture and Equipment is stated at cost. Depreciation is calculated utilizing
the straight-line and accelerated methods over the estimated useful lives of the
assets. Leasehold improvements are amortized using the straight-line method over
the lesser of the lease term or the estimated useful life of the asset.
Amortization is included with depreciation.
Income Taxes
The shareholders of the Company have elected to be taxed under Subchapter S of
the Internal Revenue Code and, as such, the Company is not subject to federal
and certain state income taxes. Accordingly, the Company's taxable income or
loss is includable in the personal income tax returns of the shareholders.
Fair Value of Financial Instruments
The Company's financial instruments include accounts receivable, accounts
payable, accrued liabilities and long-term debt. The fair values of all
financial instruments were not materially different than their carrying values.
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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
3. Furniture and Equipment
Furniture and equipment consists of the following at December 31, 1995:
Equipment and furniture $1,030,053
Vehicles 167,579
Computer hardware and software 79,234
Leasehold improvements 9,910
-------------------
1,286,776
Accumulated depreciation 952,282
-------------------
Net furniture and equipment $ 334,494
===================
F-39
<PAGE>
ABC Medical Supply, Inc.
Notes to Financial Statements (continued)
3. Furniture and Equipment (continued)
Rental equipment of approximately $895,000 with related accumulated
depreciation of $685,000 at December 31, 1995 is included with the equipment and
furniture.
4. Debt
Debt is comprised of the following at December 31, 1995:
Telephone equipment note with monthly
ayments of $273, including interest,
through March 1998 $ 4,147
Computer software and voice mail loan with
monthly payment so $1,206, including
interest, through December 1996 13,688
Vehicle note with monthly payments of $424, including
interest through December 1998 9,464
-------------------
27,299
Less: Current portion (21,201)
-------------------
$ 6,098
===================
5. Benefit Plans
The Company sponsors a profit sharing plan that covers substantially all
employees. The Company may make discretionary contributions. The Company
contributed $22,500 to this plan during the year ended December 31, 1994. During
the year ended December 31, 1995, the Company did not contribute to this plan.
6. Leases
The Company is obligated under various operating leases for its sales offices.
Rent expense for all operating leases was $105,979 and $119,749 for the years
ended December 31, 1994 and 1995, respectively. Several of the leases are with a
Company owned by the shareholders. Rent paid to the related party was $36,840
and $59,940 for the years ended December 31, 1994 and 1995, respectively.
F-40
<PAGE>
ABC Medical Supply, Inc.
Notes to Financial Statements (continued)
6. Leases (continued)
At December 31 1995, the aggregate minimum lease commitments under all
noncancelable leases are as follows:
1996 $ 86,014
1997 42,409
1998 10,350
------------------
$138,773
==================
7. Subsequent Event
Subsequent to December 31, 1995, the Company and its shareholders have entered
into a definitive agreement to sell substantially all the assets of the Company.
F-41
<PAGE>
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL DATA
The following unaudited Pro Forma Condensed Consolidated Balance Sheets
as of September 30, 1996 and the Pro Forma Condensed Consolidated Statements of
Operations for the year ended December 31, 1995 and for the nine months ended
September 30, 1996 give effect (i) to the Acquisitions and (ii) the Offering and
the other financing transactions described under "Use of Proceeds." The
unaudited Pro Forma Condensed Consolidated Balance Sheet reflects such
transactions as if they had occurred as of September 30, 1996 and the unaudited
Pro Forma Condensed Consolidated Statements of Operations reflect such
transactions as if they had occurred as of January 1, 1995 and January 1, 1996,
respectively.
The pro forma financial statements have been prepared by the Company
based on the historical financial statements of the Company and the Acquired
Companies. These pro forma financial statements do not purport to be indicative
of the results that would have been obtained if the transactions had occurred on
the dates indicated or that may be realized in the future. The pro forma
financial statements should be read in conjunction with the Company's historical
financial statements and the notes thereto and the historical financial
statements of the Acquired Companies and the notes thereto included elsewhere in
this Prospectus.
The acquisition prices of the acquired companies are discussed below.
Blue Water
The purchase price of Blue Water is $6,166,050 comprised of
$5,494,500 in cash and $671,550 in Common Stock. The Company will not assume
debt or cash.
ABC
The purchase price of ABC is $5,500,000 comprised of
$3,700,000 in cash and $1,800,000 in Common Stock. The Company will not
assume debt or cash.
Great Lakes
The purchase price of Great Lakes is $6,611,250 comprised of
$4,837,500 in cash and $1,773,750 in Common Stock. The Company will not assume
debt or cash.
F-42
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PRO FORMA
LIFE CRITICAL AND OFFERING CONSOLIDATED
CARE BLUE WATER ABC GREAT LAKES ADJUSTMENTS PRO FORMA
<S><C>
ASSETS
Current Assets:
Cash ......................................... $252,254 $250,050 $407,267 $ 351,464 $(1,057,057) (1) $ 203,978
Trade accounts receivable, net................ - 875,762 478,578 654,156 - 2,008,496
Accounts receivable other..................... - 978,765 - 160,000 (978,765) (2) 160,000
Inventories................................... - 403,356 135,609 106,509 - 645,474
Prepaid expenses and other assets............. - 127,056 56,365 100 (150,000) (2) 33,521
Current portion of note receivable............ 30,000 - - 8,555 (30,000) (4) 8,555
Deposits...................................... 200,000 - - - (200,000) (3) -
Deferred costs................................ 576,842 - - - (576,842) (4) -
---------- ---------- ---------- ---------- ----------- -----------
Total current assets..................... 1,059,096 2,634,989 1,077,819 1,280,784 (2,992,664) 3,060,024
Property and equipment, net....................... - 855,508 259,089 462,432 (78,349) (2) 1,498,680
Note receivable, less current portion............. - - - 40,916 - 40,916
Other assets...................................... - 89,842 6,000 - (6,000) (2) 89,842
Goodwill, net..................................... - - - - 15,207,348 (5) 15,207,348
Organizational costs.............................. 1,168 - - - - 1,168
Deferred financing cost........................... 25,000 - - - 175,000 (6) 200,000
---------- ---------- ---------- ---------- ----------- -----------
Total assets.................................. $1,085,264 $3,580,339 $1,342,908 $1,784,132 $12,305,335 $20,097,978
========== ========== ========== ========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.............................. $437,334 $ 376,857 $ 38,372 $ 46,922 $ (437,334 (7) $462,151
Accrued expenses.............................. 155,041 145,567 71,710 93,765 (355,041) (7) 111,042
Line of credit................................ - 810,000 - - (810,000) (2) -
Current portion of long-term debt and capital
lease obligations........................... - 27,132 - - - 27,132
Current portion of non-complete liability..... - - - 50,000 (50,000) (2) -
Notes payable to affiliate.................... 495,000 - - - -
---------- ---------- ---------- ---------- ----------- -----------
(495,000) (7)
Total current liabilities................ 1,087,375 1,359,556 110,082 190,687 (2,147,375) 600,325
Long-term debt:
Long-term debt, less current portion.......... - 4,665 14,988 - (14,988) (2) 4,665
Non-compete liability, less current portion... - - - 4,167 (4,167) (2) -
Senior term loan.............................. - - - - 6,000,000 (8) 6,000,000
Subordinated debt............................. - - - - 2,000,000 (8) 2,000,000
Notes payable to affiliate.................... 1,500,000 - - - (1,500,000) (7) -
---------- ---------- ---------- ---------- ----------- -----------
Total long-term debt..................... 1,500,000 4,665 14,988 4,167 6,480,845 8,004,665
---------- ---------- ---------- ---------- ----------- -----------
Total liabilities........................ 2,587,375 1,364,221 125,070 194,854 4,333,470 8,604,990
Stockholders' equity:
Common stock.................................. 12,563 9,000 7,000 3,000 (19,000) (9) 12,563
Common stock, this Offering................... - - - - 20,000 (10) 20,000
Common stock, sellers......................... - - - - 4,245,300 (11) 4,245,300
Additional paid in capital.................... 103,947 39,650 - - 8,915,761 (12) 9,059,358
Retained earnings (deficit)................... (1,618,621) 2,167,468 1,210,838 1,586,278 (5,190,196)(13) (1,844,233)
---------- ---------- ---------- ---------- ----------- -----------
Total stockholders' equity............... (1,502,111) 2,216,118 1,217,838 1,589,278 7,971,865 11,492,988
---------- ---------- ---------- ---------- ----------- -----------
Total Liabilities and Stockholders' Equity........ $1,085,264 $3,580,339 $1,342,908 $1,784,132 $12,305,335 $20,097,978
========== ========== ========== ========== =========== ===========
</TABLE>
F-43
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1996
<TABLE>
<CAPTION>
Pro Forma Consolidated
Life Critical Blue Water ABC Great Lakes Adjustments Pro Forma
<S><C>
Net sales....................... $ - $1,496,918 $ 263,611 $ 336,635 $ - $2,097,164
Rental revenue.................. - 2,711,137 1,959,431 2,117,711 - 6,788,279
----------- ---------- ---------- ---------- --------- ----------
- 4,208,055 2,223,042 2,454,346 - 8,885,443
----------- ---------- ---------- ---------- --------- ----------
Cost of revenues................ - 1,273,035 886,133 502,479 (168,782)(1) 2,492,865
----------- ---------- ---------- ---------- --------- ----------
Gross profit.................... - 2,935,020 1,336,909 1,951,867 168,782 6,392,578
Selling, general and
administrative expenses...... 447,002 2,237,481 1,008,156 1,113,876 (359,002)(2) 4,447,513
----------- ---------- ---------- ---------- --------- ----------
Income from operations.......... (447,002) 697,539 328,753 837,991 527,784 1,945,065
Forfeiture of deposit 700,000 - - - 700,000
Other (income) expense:
Interest income.............. - (11,973) (10,726) (9,711) - (32,410)
Interest expense............. 203,693 81,607 635 - 402,065(3) 688,000
Other (income) expense, net.. - (37,099) (537) (5,062) 22,099(4) (20,599)
----------- ---------- ---------- ---------- --------- ----------
203,693 32,535 (10,628) (14,773) 424,164 634,991
----------- ---------- ---------- ---------- --------- ----------
Income before income taxes...... (1,350,695) 665,004 339,381 852,764 103,620 610,074
Income tax provision............ - 32,376 13,000 28,508 170,146(5) 244,030
----------- ---------- ---------- ---------- --------- ----------
Net income...................... ($1,350,695) $ 632,628 $326,381 $824,256 ($ 66,526) $ 366,044
=========== ========== ========== ========== ========= ==========
Earnings per common share....... $0.11
==========
Weighted average shares
outstanding................... 3,438,319
==========
</TABLE>
F-44
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
Life Pro Forma Consolidated
Critical Care Blue Water ABC Great Lakes Adjustments Pro Forma
<S><C>
Net sales........................... - $2,001,952 $ 390,930 $ 462,044 $ - $ 2,854,926
Rental revenue...................... - 3,287,730 2,567,898 2,767,018 - 8,622,646
--------- ---------- ---------- ---------- --------- -----------
- 5,289,682 2,958,828 3,229,062 - 11,477,572
--------- ---------- ---------- ---------- --------- -----------
Cost of revenues.................... - 1,752,968 1,308,517 694,637 (268,275)(1) 3,487,847
--------- ---------- ---------- ---------- --------- -----------
Gross profit........................ - 3,536,714 1,650,311 2,534,425 268,275 7,989,725
Selling, general and
administrative expenses.......... 255,308 2,858,809 1,291,068 1,337,466 (396,246)(2) 5,346,405
--------- ---------- ---------- ---------- --------- -----------
Income from operations.............. (255,308) 677,905 359,243 1,196,959 664,521 2,643,320
Other (income) expense:.............
Interest income................ - (15,548) (12,743) (9,194) - (37,485)
Interest expense............... 12,618 82,110 2,619 5,405 777,248(3) 880,000
Other (income) expense, net.... - (60,070) (4,552) 31,452 60,071(4) 26,901
--------- ---------- ---------- ---------- --------- -----------
12,618 6,492 (14,676) 27,663 837,319 869,416
--------- ---------- ---------- ---------- --------- -----------
Income before income taxes.......... (267,926) 671,413 373,919 1,169,296 (172,798) 1,773,904
Income tax provision................ - 47,639 15,763 27,038 619,122(5) 709,562
--------- ---------- ---------- ---------- --------- -----------
Net income........................... ($267,926) $ 623,774 $ 358,156 $1,142,258 ($791,920) $ 1,064,342
========= ========== ========== ========== ========= ===========
Earnings per common share........... $ 0.32
Weighed average shares outstanding.. 3,318,267
</TABLE>
F-45
<PAGE>
LIFE CRITICAL CARE CORPORATION
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Pro Forma Balance Sheet Adjustments
The accompanying unaudited Pro Forma Condensed Consolidated Balance
Sheet as of September 30, 1996, gives effect to the Offering, borrowings under
the Credit Facility and the simultaneous closing of the Acquisitions all as
described under "Use of Proceeds" as if such transactions had occurred on
September 30, 1996.
(1) Adjustments to reduce cash not acquired and record working
capital.
(2) Removes assets and liabilities that are not being acquired or
assumed by the Company.
(3) Removes assets that are allocated to the Acquisitions.
(4) Removes assets that have been either netted against the
Offering proceeds or applied to the purchase price of the
Acquisitions.
(5) Reflects recording of goodwill.
(6) Reflects recording of capitalized expenses associated with the
Credit Facility.
(7) Reflects liabilities that are paid with proceeds from the
Offering and the Credit Facility.
(8) Records the Credit Facility.
(9) Eliminates existing common stock of the Acquired Companies.
(10) Records shares issued in the Offering in the amount of
$20,000.
(11) Records Common Stock issued to the Sellers and the associated
additional paid-in-capital.
(12) Eliminates paid-in-capital of the Acquired Companies in the
amount of $39,650 and records the net proceeds from the
Offering less the par value in the amount of $8,955,411.
F-46
<PAGE>
(13) Eliminates existing retained earnings of the Acquired
Companies in the amount of $4,964,584 and records additional
expenses of the Company in the amount of $225,612.
Pro Forma Statements of Operations Adjustments
The accompanying unaudited Pro Forma Condensed Consolidated Statements
of Operations for the year ended December 31, 1995 and for the nine months ended
September 30, 1996 give effect to the Offering, borrowings under the Credit
Facility and the simultaneous closing of the Acquisitions all as described under
"Use of Proceeds" as if they occurred on January 1, 1995 and January 1, 1996,
respectively.
(1) Reflects an adjustment in the carrying value of the rental
equipment to the estimated fair market value (which is assumed
to be the net book value at the date of acquisition) and a
change in the estimated useful lives of the assets from 5 to 7
years to 4 years.
(2) Reflects adjustments to selling, general and administrative
expenses (i) to eliminate Compensation Differential (as
defined elsewhere in this Prospectus) in the amount of
$656,750 for the year ended December 31, 1995 and $541,500 for
the nine months ended September 30, 1996, (ii) to record the
amortization of goodwill in connection with the purchase using
the straight-line method over 40 years in the amount of
$377,938 and $284,722, respectively, (iii) to reflect an
adjustment in the carrying value of vehicles, office equipment
and other property to the estimated fair market value (which
is assumed to be the net book value at the date of
acquisition) and a change in the estimated useful lives of the
assets from 5-7 years to 4 years in the amount of $108,120 and
$101,587, respectively, (iv) to record compensation for
executive officers and expense reimbursement in the amount of
$345,000 and $227,232, respectively, (v) to reduce rent
expense of Blue Water to reflect the contractual future rate
in the amounts of $90,000 and $67,500, respectively, (vi) to
reflect the elimination
F-47
<PAGE>
of certain vehicle expenses related to the owners of Blue
Water which will not continue in the amounts of $12,965
and $9,724, respectively, (vii) to eliminate compensation of
certain terminated and non-replaced employees of Blue Water in
the amount of $29,247 for the year ended December 31, 1995,
(viii) to eliminate other non-recurring expenses,
including life insurance, in the amount of $37,102 and
$64,145, respectively, (ix) to record the amortization of
capitalized transaction expenses in connection with the
Credit Facility using the straight line method over 5 years
in the amounts of $40,000 and $30,000, respectively, (x) to
eliminate management fees paid to MBFC in the amounts of
$225,000 and $116,500, respectively.
(3) Reflects the elimination of interest expense related to debt
and/or capital leases that will be extinguished or not assumed
and records the interest related to the term portion of the
Credit Facility at an annual rate of 9.0% and the subordinated
debt portion at an annual rate of 17.0%
(4) Removes other income and expense that will not be recurring
because related assets/liabilities are not being assumed.
(5) Incremental adjustment in income tax provision assuming an
estimated effective tax rate of 40.0%.
F-48
<PAGE>
No dealer, salesperson or any other person has been authorized
to give any information or to make any representations 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 the solicitation of an offer to buy to any person in any
jurisdiction in which such offer or solicitation would be unlawful, or to
any person to whom it is unlawful to make such an offer or solicitation.
Neither the delivery of this Prospectus nor any offer or sale made hereunder
shall, under any circumstances, create any implication that there has been
no change in the affairs of the Company or that the information contained
herein is correct as of any time subsequent to the date hereof.
TABLE OF CONTENTS
Page
Prospectus Summary.........................
The Company................................
Risk Factors...............................
Use of Proceeds............................
Capitalization.............................
Dilution...................................
Dividend Policy............................
Selected Financial Data....................
Management's Discussion and Analysis
of Financial Condition and............
Results of Operations.................
Business...................................
Management.................................
Certain Transactions.......................
Principal and Selling Stockholders.........
Description of Capital Stock...............
Shares Eligible for Future Sale............
Underwriting...............................
Legal Matters..............................
Experts....................................
Additional Information.....................
Index to Financial Statements..............
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 is in addition to the obligations of dealers to deliver a Prospectus
when acting as Underwriters and with respect to their unsold allotments or
subscriptions.
__________ Shares
LIFE CRITICAL CARE
CORPORATION
COMMON STOCK
PROSPECTUS
H.J. MEYERS & CO., INC.
____________, 1996
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Section 145 of the General Corporation Law of the State of Delaware
(the "Delaware GCL") provides that the Registrant may indemnify any person,
including any officer or director, who was or is a party or who is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of the Registrant), by reason of the fact that he
is or was a director, officer, employee or agent of the Registrant or is or was
serving at the request of the Registrant as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise (collectively, "such Person"), against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement, actually and reasonably
incurred by such Person in connection with such action, suit or proceeding if
such Person acted in good faith and in a manner such Person reasonably believed
to be in or not opposed to the best interests of the Registrant and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful. In any threatened, pending or completed action or suit
by or in the right of the Registrant, the Registrant also may indemnify any such
Person against expenses (including attorneys' fees) actually and reasonably
incurred by such Person in connection with that action's or suit's defense or
settlement, if such Person acted in good faith and in a manner such Person
reasonably believed to be in or not opposed to the best interests of the
Registrant, except that no indemnification shall be made with respect to any
claim, issue or matter as to which such Person shall have been adjudged to be
liable to the Registrant, unless and only to the extent that a court shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such Person is fairly and reasonably
entitled to indemnity. Where such Person is successful on the merits or
otherwise in defense of any action or suit referred to above or in defense of
any claim, issue or matter therein, the Registrant shall indemnify such Person
against the expenses (including attorneys' fees) that such Person actually and
reasonably incurred.
The Registrant's Certificate of Incorporation provides that, to the
fullest extent permitted by the laws of the State of Delaware, no director or
officer of the Registrant shall be personally liable to the Registrant or its
stockholders for monetary damages for breach of fiduciary duty as a director or
officer. The Registrant's Certificate of Incorporation also provides that to the
fullest extent permitted by the Delaware GCL, as amended or interpreted, the
Registrant shall indemnify all persons whom it may indemnify pursuant thereto.
These provisions in the Certificate of Incorporation do not eliminate the duty
of care. In appropriate circumstances, equitable remedies such as injunctive or
other forms of non-monetary relief remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Registrant or its stockholders, for acts
or omissions not in good faith or involving intentional misconduct or knowing
violations of law, for actions leading to improper personal benefit to the
director and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under the Delaware GCL. These provisions also do
not affect a director's or officer's responsibilities
II-1
<PAGE>
under any other law, such as the federal or state securities laws or state or
federal environmental laws.
The Underwriting Agreement (a form of which is filed as Exhibit 1.1
hereto) will provide that the Underwriters will indemnify and hold harmless the
Registrant and each director, officer or controlling person of the Registrant
from and against any liability caused by any statement or omission in the
Registration Statement or Prospectus based upon certain information furnished to
the Registrant by the Underwriters for use in the preparation thereof.
II-2
<PAGE>
Item 25. Other Expenses of Issuance and Distribution.*
The following table sets forth a statement of all expenses payable by
the Registrant in connection with the registration, issuance and distribution of
the Common Stock offered hereby, other than the underwriting discount.
SEC Registration Fee.......................................$ 4,234
Accounting Fees and Expenses............................... 132,500
Legal Fees and Expenses.................................... 160,000
Underwriter's Expense Allowance............................ 372,000
Printing and Engraving Expenses............................ 50,000
Blue Sky Fees and Expenses................................. 60,000
NASD Filing Fee............................................ 1,897
Nasdaq Quotation Fee....................................... 25,000
Registrar and Transfer Agent Fees.......................... 5,000
Miscellaneous Fees and Expenses............................ 199,369
---------
Total.............................................$1,010,000
=========
* Except for the SEC registration fee, the NASD filing fee and the Nasdaq
quotation fee, all expenses are estimated.
Item 26. Recent Sales of Unregistered Securities.
The following share amounts and sales prices have been adjusted for a
1,110-for-one stock split of the Company's Common Stock, par value $0.01 per
share, effective on August 29, 1996.
On August 10, 1995, Registrant sold 743,700 shares of Common Stock, par
value $0.01 per share, for $0.01 per share to the four founders of the
Registrant in connection with the formation of the Registrant.
On August 12, 1995, the Registrant sold a $750,000 18%
Subordinated Note due December 31, 1997 for $750,000 to Morgenthau Bridge
Investment Limited Partnership.
On August 12, 1995, the Registrant sold a $750,000 18%
Subordinated Note due December 31, 1997 for $750,000 to Morgenthau Bridge
Loan LLC.
On April 8, 1996, the Registrant authorized the sale of and, on
September 30, 1996, the Registrant sold 248,640 shares of Common Stock, par
value $0.01 per share, for $0.01 per share to IRA accounts for the benefit of
the four founding stockholders of the Registrant.
On September 5, 1996, the founding stockholders of the Registrant sold
an aggregate of 370,000 shares of Common Stock, par value $0.01 per share, to
Thomas H. White for $0.01 per share.
During September and October 1996, the Registrant sold an aggregate
principal amount of $500,000 of 12% Subordinated Notes due December 31, 1997 and
50,000 shares of Common Stock, par value $0.01 per share, for $0.10 per share to
14 investors.
II-3
<PAGE>
The foregoing sales were exempt from registration under Section 4(2) of
the Securities Act as they did not involve a public offering. In issuing
securities under the exemption provided by Section 4(2) of the Securities Act,
the Registrant relied upon certain purchasers' status as an officer or director
of the Registrant and that each purchaser had such knowledge and experience in
financial and business matters that such person was capable of evaluating the
merits and risks of the investment.
Item 27. Exhibits.
Exhibit
Number Description
------- -----------
1.1 Form of Underwriting Agreement*
3.1 Restated Certificate of Incorporation*
3.2 Amended and Restated By-Laws*
4.1 Specimen form of Common Stock certificate of the
Company*
5.1 Opinion of Whiteford, Taylor & Preston L.L.P.
10.1 Loan and Securities Purchase Agreement, Stock
Warrant and Subordinated Note each dated August 12,
1995 between Life Critical Care and Morgenthau
Bridge Investment Limited Partnership *
10.2 Loan and Securities Purchase Agreement, Stock
Warrant and Subordinated Note each dated August 12,
1995 between Life Critical Care Corporation and
Morgenthau Bridge Loan LLC*
10.3 Asset Purchase Agreement dated January 22, 1996
between Life Critical Care and Blue Water Medical
Supply, Inc. and Blue Water Industrial Products, Inc.,
as amended*
10.4 Asset Purchase Agreement dated March 1, 1996 among
ABC Medical Supply, Inc., Timothy Dillon, Dennis
Phillips and Life Critical Care, as amended*
10.5 Asset Purchase Agreement dated March 1, 1996 among
Great Lakes Home Medical, Inc., Michael E. Belleau,
James Bickel, Thomas Mainhardt and Life Critical Care,
as amended*
10.6 Form of Lease Agreement between Life Critical Care
and Blue Water Land Development for 37885 Green
Street, New Baltimore, Michigan 48047*
10.7 Form of Lease Agreement between Life Critical Care
and Blue Water Land Development for 37280 Green
Street, New Baltimore, Michigan 48047*
II-4
<PAGE>
10.8 Form of Loan and Security Agreement between Life
Critical Care and certain investors*
10.9 Employment Agreement dated as of July 25, 1996
between Life Critical Care and its Chief Executive
Officer*
10.10.1 Form of Stock Escrow Agreement*
10.10.2 Amendment No. 1 to Stock Escrow Agreement
10.11 1996 Non-Employee Directors Stock Option Plan*
10.12 1996 Stock and Incentive Plan*
10.13 Form of 401(k) Plan**
10.14 Revolving Credit and Term Loan Agreement between Life
Critical Care and Manufacturers and Traders Trust Co.
10.15 Form of Underwriter's Warrant Agreement*
10.17 Form of Financial Consulting Agreement*
10.18 Form of Merger and Acquisition Agreement*
10.19 Form of Lock-Up Agreement
10.20 Form of Agreement of Management and Principal
Stockholders
10.21 Form of Mezzanine Loan Agreement between Life Critical
Care Corporation and Manufacturers and Traders Trust
Company
11.1 Statement Re: Computation of Per Share Earnings
23.1 Consent of Ernst & Young LLP
23.2 Consent of Proposed Director
23.3 Consent of Whiteford, Taylor & Preston L.L.P. (included
in Exhibit 5.1)
24.1 Power of Attorney (included as part of the signature
page of the Registration Statement)*
27.1 Financial Data Schedule
* Previously filed.
** To be filed by Amendment
II-5
<PAGE>
Item 28. 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
Underwriter 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 foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes 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-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Fort Lauderdale, State of
Florida, on December 6, 1996.
LIFE CRITICAL CARE CORPORATION
By: /s/ Thomas H. White
---------------------------
Thomas H. White,
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/THOMAS H. WHITE Principal Executive Officer, December 6, 1996
- --------------------------
THOMAS H. WHITE and Director
/S/FRANK E. McGEATH Chief Financial Officer December 6, 1996
- --------------------------
FRANK E. McGEATH (Principal Financial and
Accounting Officer)
/S/RICHARD M. ANDZEL Director December 6, 1996
- --------------------------
RICHARD M. ANDZEL
II-7
<PAGE>
EXHIBIT INDEX
.
Exhibit
Number Description
------- -----------
1.1 Form of Underwriting Agreement*
3.1 Restated Certificate of Incorporation*
3.2 Amended and Restated By-Laws*
4.1 Specimen form of Common Stock certificate of the
Company*
5.1 Opinion of Whiteford, Taylor & Preston L.L.P.
10.1 Loan and Securities Purchase Agreement, Stock
Warrant and Subordinated Note each dated August 12,
1995 between Life Critical Care and Morgenthau
Bridge Investment Limited Partnership *
10.2 Loan and Securities Purchase Agreement, Stock
Warrant and Subordinated Note each dated August 12,
1995 between Life Critical Care Corporation and
Morgenthau Bridge Loan LLC*
10.3 Asset Purchase Agreement dated January 22, 1996
between Life Critical Care and Blue Water Medical
Supply, Inc. and Blue Water Industrial Products, Inc.,
as amended*
10.4 Asset Purchase Agreement dated March 1, 1996 among
ABC Medical Supply, Inc., Timothy Dillon, Dennis
Phillips and Life Critical Care, as amended*
10.5 Asset Purchase Agreement dated March 1, 1996 among
Great Lakes Home Medical, Inc., Michael E. Belleau,
James Bickel, Thomas Mainhardt and Life Critical Care,
as amended*
10.6 Form of Lease Agreement between Life Critical Care
and Blue Water Land Development for 37885 Green
Street, New Baltimore, Michigan 48047*
10.7 Form of Lease Agreement between Life Critical Care
and Blue Water Land Development for 37280 Green
Street, New Baltimore, Michigan 48047*
10.8 Form of Loan and Security Agreement between Life
Critical Care and certain investors*
10.9 Employment Agreement dated as of July 25, 1996
between Life Critical Care and its Chief Executive
Officer*
II-8
<PAGE>
10.10.1 Form of Stock Escrow Agreement*
10.10.2 Amendment No. 1 to Stock Escrow Agreement
10.11 1996 Non-Employee Directors Stock Option Plan*
10.12 1996 Stock and Incentive Plan*
10.13 Form of 401(k) Plan**
10.14 Revolving Credit and Term Loan Agreement between Life
Critical Care and Manufacturers and Traders Trust Co.
10.15 Form of Underwriter's Warrant Agreement*
10.17 Form of Financial Consulting Agreement*
10.18 Form of Merger and Acquisition Agreement*
10.19 Form of Lock-Up Agreement
10.20 Form of Agreement of Management and Principal
Stockholders
10.21 Form of Mezzanine Loan Agreement between Life Critical
Care Corporation and Manufacturers and Traders Trust
Company
11.1 Statement Re: Computation of Per Share Earnings
23.1 Consent of Ernst & Young LLP
23.2 Consent of Proposed Director
23.3 Consent of Whiteford, Taylor & Preston L.L.P. (included
in Exhibit 5.1)
24.1 Power of Attorney (included as part of the signature
page of the Registration Statement)*
27.1 Financial Data Schedule
* Previously filed.
** To be filed by Amendment
II-9
WHITEFORD, TAYLOR & PRESTON
L.L.P.
SEVEN SAINT PAUL STREET
BALTIMORE, MARYLAND 21202-1626
410 347-8700
FAX 410 752-7092
210 WEST PENNSYLVANIA AVENUE
TOWSON, MARYLAND 21204-4515
TELEPHONE 410 832-2000
FAX 410 832-2015
-----
30 COLUMBIA CORPORATE CENTER
10440 LITTLE PATUXENT PARKWAY
COLUMBIA, MARYLAND 21044
TELEPHONE 410 884-0700
FAX 410-884-0719
-----
1025 CONNECTICUT AVENUE, NW
WASHINGTON, D.C. 20036-5405
TELEPHONE 202 659-6800
FAX 202 331-0573
-----
1317 KING STREET
ALEXANDRIA, VIRGINIA 22314-2928
TELEPHONE 703 836-5742
FAX 703 836-0265
December 4, 1996
Board of Directors
Life Critical Care Corporation
3333 W. Commercial Blvd.
Fort Lauderdale, Florida 33309
Re: Registration Statement on Form SB-2
1933 Act File No.: 333-14755
Gentlemen:
We have acted as counsel to Life Critical Care Corporation, a Delaware
corporation (the "Corporation"), in connection with a Registration Statement on
Form SB-2 (the "Registration Statement") filed by the Corporation under the
Securities Act of 1933, as amended (the "Act"), with respect to up to 2,300,000
shares of the common stock of the Corporation, par value $.01 per share (the
"Stock")(inclusive of up to 50,000 shares of Common Stock that may be sold by
cerrtain selling stockholders as part of the overallotment option granted to the
underwriter for the offering). In that capacity, we have reviewed the Restated
Certificate of Incorporation and Amended and Restated By-Laws of the
Corporation, the Registration Statement, the corporate action taken by the
Corporation that provides for the registration of the distribution of the Stock,
and such other materials and matters as we have deemed necessary for the
issuance of this opinion.
Based upon the foregoing, we are of the opinion that the Stock has been
duly authorized and, upon issuance under the terms set forth in the Registration
Statement and the receipt of the consideration therefor, will be validly issued,
fully paid and nonassessable.
We consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving this consent, we do not admit that we are
within the category of persons whose consent is required by Section 7 of the
Act.
Very truly yours,
WHITEFORD, TAYLOR & PRESTON L.L.P.
STOCK ESCROW AGREEMENT
THIS AGREEMENT has been made on ______________, 19__, by and among
CONTINENTAL STOCK TRANSFER AND TRUST COMPANY having its principal office at 2
Broadway, New York, New York 10004 (the "Escrow Agent") and LIFE CRITICAL CARE
CORPORATION, a Delaware corporation, having its principal office at 37885 Green
Street, New Baltimore, Michigan 48047 (the "Company"), and each of the
stockholders of the Company listed on Schedule I annexed hereto (collectively,
the "Stockholders").
In consideration of the mutual covenants and promises hereinafter
contained, the parties agree as follows:
1. Escrow Deposit. Concurrently with the execution of this
Agreement, the Stockholders have delivered to the Escrow Agent, in the
respective numbers of shares set forth on Schedule I annexed hereto,
certificates representing an aggregate of 600,000 shares of the Common Stock,
$.01 par value, of the Company (the "Escrow Shares"). The Escrow Agent
hereby acknowledges receipt of the Escrow Shares and accepts its appointment
by the Stockholders to hold the Escrow Shares in escrow, upon the terms and
conditions set forth in this Agreement.
2. Term. The term of this Agreement and of the escrow provided
hereby (the "Escrow Period") shall commence on the date hereof and end on
December 31, 2004 (the "Termination Date"), unless sooner terminated as
hereinafter provided.
3. Release from Escrow.
(a) If the Company achieves earnings after taxes of at least
$0.30 per share for its fiscal year ending December 31, 1997, then 300,000 of
the Escrow Shares shall be released from escrow and returned to the
Stockholders.
(b) If the Company achieves earnings after taxes of at least
$0.60 per share for any fiscal year ending on or before December 31, 1998, then
all of the Escrow Shares then remaining shall be released from escrow and
returned to the Stockholders.
(c) If at any time prior to the Termination Date the Company
achieves earnings after taxes of at least $1.25 per share, then all of the
<PAGE>
Escrow Shares then remaining shall be released from escrow and returned to the
Stockholders.
(d) Whenever any Escrow Shares are required to be released from
escrow by the terms of this Section 3, the Company shall give written notice
thereof to the Escrow Agent and to H.J. Meyers & Co., Inc. If H.J. Meyers & Co.,
Inc. shall not have notified the Escrow Agent, within ten business days after
its actual receipt of such notice, that the requirements of this Section 3 for
the release of such Escrow Shares have not been satisfied, then the Escrow Agent
shall, as soon as reasonably practicable, deliver such Escrow Shares to the
Stockholders on a pro-rata basis in accordance with their respective deposits of
Escrow Shares set forth on Schedule I annexed hereto. Upon such delivery of all
of the Escrow Shares, this Agreement shall terminate.
(e) If all of the Escrow Shares have not been required to be
released from escrow by the terms of this Section 3 prior to the Termination
Date, then on the Termination Date the Escrow Agent shall deliver all of the
Escrow Shares remaining to the Stockholders on a pro-rata basis in accordance
with their respective deposits of Escrow Shares set forth on Schedule I annexed
hereto. Upon such delivery of all of the Escrow Shares remaining, this Agreement
shall terminate.
(f) For purposes of this Agreement, the Company's "earnings
after taxes" shall be determined by the independent certified public accountants
then regularly engaged by the Company, in accordance with generally accepted
accounting principles applied on a consistent basis, and when certified by such
accountants, such determination shall be conclusive and binding upon the
parties. The earnings after taxes and stock price levels required by this
Section 3 for release of the Escrow Shares shall be appropriately adjusted in
the event that the Company shall at any time pay a stock dividend on, or split
up, subdivide, combine or recapitalize, the Common Stock.
4. Disputes. In the event of any disagreement between the Stockholders
and the Company resulting in conflicting instructions to, or adverse claims or
demands upon, the Escrow Agent with respect to the release of the Escrow Shares,
the Escrow Agent shall be entitled to refuse to comply with any such
instruction, claim or demand unless instructed to the contrary by the
Stockholders and the Company jointly, and in so refusing the Escrow Agent shall
not be or become liable in any way to the Stockholders or to the Company for its
failure or refusal to comply with any such conflicting instructions or adverse
claims or demands, and it shall be entitled to continue so to refrain from
acting until such conflicting or adverse demands
2
<PAGE>
(a) shall have been resolved by agreement and the Escrow Agent shall have been
notified in writing thereof by the Stockholders and the Company, or (b) shall
have been finally determined by a court of competent jurisdiction.
5. Concerning the Escrow Agent. The parties understand and agree as
follows:
(a) The Escrow Agent is not a trustee for any party for any
purpose, and is merely acting as a depository and in a ministerial capacity
hereunder with the limited duties herein prescribed.
(b) The Escrow Agent has no responsibility in respect of the
Escrow Shares, or any instruction, certificate or notice delivered to it, other
than faithfully to carry out the obligations undertaken by it in this Agreement
and to follow the directions in such instruction or notice provided in
accordance with the terms hereof.
(c) The Escrow Agent shall not be liable for any action taken or
omitted by it in good faith and may rely upon and act in accordance with the
advice of its counsel without liability on its part for any action taken or
omitted in accordance with such advice. In any event, its liability hereunder
shall be limited to liability for gross negligence, willful misconduct or bad
faith on its part.
(d) The Escrow Agent may conclusively rely upon and act in
accordance with any certificate, instruction, notice, letter, facsimile
transmission, telegram, cablegram, or other written instrument believed by it to
be genuine and to have been signed by the proper party or parties.
(e) The Company agrees (i) to pay the Escrow Agent's reasonable
fees and to reimburse it for its reasonable expenses, including attorneys fees,
incurred in connection with its duties hereunder, and (ii) to save harmless,
indemnify and defend the Escrow Agent for, from and against any loss, damage,
liability, judgment, cost and expense whatsoever, including counsel fees
suffered or incurred by it, by reason of, or on account of, any
misrepresentation made to it or its status or activities as Escrow Agent under
this Agreement, except for any loss, damage, liability, judgment, cost or
expense resulting from gross negligence, willful misconduct or bad faith on the
part of the Escrow Agent. The obligation of the Escrow Agent to deliver the
Escrow Shares to the Stockholders shall be subject to the prior satisfaction,
upon demand of the Escrow Agent, of the Company's obligations so to save
harmless, indemnify and defend the Escrow Agent, and to reimburse the Escrow
Agent or otherwise pay its fees and expenses hereunder.
3
<PAGE>
(f) The Escrow Agent shall not be required to defend any legal
proceeding which may be instituted against it in respect of the subject matter
of this Agreement unless it is (i) requested so to do by the Stockholders or the
Company and (ii) indemnified, to the Escrow Agent's satisfaction, by the party
requesting such defense against the cost and expense of such defense. If any
such legal proceeding is instituted against it, the Escrow Agent agrees promptly
to give notice of such proceeding to the Stockholders and the Company. The
Escrow Agent shall not be required to institute legal proceedings of any kind.
(g) The Escrow Agent shall not, by act, delay, omission or
otherwise, be deemed to have waived any right or remedy it may have either under
this Agreement or generally unless such waiver is in writing, and no waiver
shall be valid unless it is in writing, signed by the Escrow Agent, and only to
the extent expressly therein set forth. A waiver by the Escrow Agent under the
terms of this Agreement shall not be construed as a bar to, or a waiver of, the
same or any other such right or remedy which it would otherwise have on any
other occasion.
(h) The Escrow Agent may resign as such hereunder by giving 30
days' written notice thereof to the Stockholders and the Company. Within 20 days
after receipt of such notice, the Stockholders and the Company shall furnish to
the Escrow Agent written instructions for the release of the Escrow Shares then
remaining to a substitute Escrow Agent which (whether designated by written
instructions from the Stockholders and the Company jointly, or in the absence
thereof by instructions from a court of competent jurisdiction to the Escrow
Agent) shall be a bank or trust company organized and doing business under the
laws of the United States or of any state thereof with a combined capital and
surplus of at least $5,000,000. Such substitute Escrow Agent shall thereafter
hold the Escrow Shares and otherwise act hereunder as if it were the Escrow
Agent originally named herein. The Escrow Agent's duties and responsibilities
hereunder shall terminate upon the release of all Escrow Shares then held in
escrow according to such written instruction or upon such delivery as herein
provided. This Agreement shall not otherwise be assignable by the Escrow Agent
without the prior written consent of the Stockholders and the Company.
6. Concerning the Escrow Shares. During the Escrow Period and while any
Escrow Shares are being held by the Escrow Agent pursuant to this Agreement: (a)
no Stockholder shall sell, assign, transfer, pledge, hypothecate or otherwise
dispose of any of the Escrow Shares deposited by him; (b) each Stockholder shall
promptly deliver to the Escrow Agent all stock certificates evidencing
additional shares of Common Stock which he
4
<PAGE>
may receive as the result of a stock dividend, split-up or similar transaction
in respect of the Escrow Shares; and (c) each Stockholder shall have the
sole power to vote the Escrow Shares deposited by him.
7. Notices. Each notice, instruction or other certificate required or
permitted by the terms hereof shall be in writing and shall be communicated by
personal delivery, telecopier, telex or registered or certified mail, return
receipt requested, to the parties hereto at the addresses set forth below, or at
such other address as any of them may designate by notice to each of the others:
If to the Company: Life Critical Care Corporation
37885 Green Street
New Baltimore, Michigan 48047
If to the Stockholders: c/o Thomas H. White
Life Critical Care Corporation
37885 Green Street
New Baltimore, Michigan 48047
If to the Escrow Agent: Continental Stock Transfer and Trust
Company
2 Broadway
New York, New York 10004
Attn.: Mr. William Seegraber
All notices, instructions or certificates given hereunder to the Escrow Agent
shall be effective upon receipt by the Escrow Agent. All notices given hereunder
by the Escrow Agent shall be effective and deemed received upon personal
delivery or transmission by telecommunication or, if mailed, five calendar days
after mailing by the Escrow Agent.
8. Modification. Except as provided by Section 5(h) hereof, this
Agreement may not be modified, altered or amended in any material respect or
canceled or terminated except with the consent of the Company, which consent
shall have been approved by the holders of a majority of the outstanding shares
of the Common Stock (excluding shares held by the Stockholders).
9. In General. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York applicable to agreements made
and to be performed entirely within such State, and shall be binding upon and
shall inure to the benefit of all parties hereto and their respective successors
in interest and assigns. Wherever used herein, the
5
<PAGE>
masculine pronoun shall include the feminine and the neuter, as
appropriate in the context. The Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, or
caused it to be executed by their duly authorized officers, on the day and year
first above written.
CONTINENTAL STOCK TRANSFER
AND TRUST COMPANY
By:________________________________
Name:
Title:
LIFE CRITICAL CARE CORPORATION
By:________________________________
Name:
Title:
___________________________________
Thomas H. White
___________________________________
Gregory A. Poloni
___________________________________
Anthony R. Morgenthau
___________________________________
Richard M. Andzel
___________________________________
Amy E. Parker
6
<PAGE>
SCHEDULE I
Name of Number of
Stockholder Escrow Shares
----------- -------------
Thomas H. White 305,132
Gregory A. Poloni 41,368
Anthony R. Morgenthau 51,000
Richard M. Andzel 51,000
Amy E. Parker 76,500
-------
Total 525,000
7
FIRST AMENDMENT
TO
STOCK ESCROW AGREEMENT
THIS FIRST AMENDMENT TO STOCK ESCROW AGREEMENT (this "Amendment") made
as of the 30th day of November, 1996, by and among Continental Stock Transfer
and Trust Company, Life Critical Care Corporation (the "Company") and each of
the stockholders of the Company listed on Schedule I annexed hereto.
RECITALS
The parties are parties to a Stock Escrow Agreement among them dated
November 25, 1996 (the "Agreement") and desire to amend the Agreement as set
forth herein.
NOW, THEREFORE, FOR AND IN CONSIDERATION OF the mutual entry into this
Amendment by the parties hereto, and for other good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged by each party hereto,
the parties hereto hereby agree as follows:
Section 1. Amendment of Agreement. The provisions of the Agreement
are hereby amended as follows:
1.1. Section 1 of the Agreement is amended by deleting
"600,000 shares" from the third line thereof and by inserting in lieu thereof
the following: "525,000 shares".
1.2. Section 3(a) is amended by deleting "300,000"
from the second line thereof and by inserting in lieu thereof the following:
"262,500".
1.3. Schedule I of the Agreement is hereby deleted and
replaced by Schedule I to this Amendment, attached hereto and hereby made a part
hereof.
Section 2. Effect of this Amendment. Except as hereinabove set forth,
the provisions of the Agreement shall hereafter remain in full force and effect.
Section 3. This Amendment may be executed in two or more counterparts,
all of which when taken together shall constitute one and the same original.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment the day
and year first above written.
CONTINENTAL STOCK TRANSFER
AND TRUST COMPANY
By: ______________________________
Name:
Title:
LIFE CRITICAL CARE CORPORATION
By: _______________________________
Name: Thomas H. White
Title: President
____________________________________
Thomas H. White
____________________________________
Gregory A. Poloni
____________________________________
Anthony R. Morgenthau
____________________________________
Richard M. Andzel
____________________________________
Amy E. Parker
-2-
<PAGE>
SCHEDULE I
to
FIRST AMENDMENT
to
STOCK ESCROW AGREEMENT
Name of Stockholder Number of Escrow Shares
Thomas H. White 270,000
Amy E. Parker 153,000
Gregory A. Poloni 34,000
Anthony R. Morgenthau 34,000
Richard M. Andzel 34,000
--------
TOTAL: 525,000
(DRAFT)
REVOLVING CREDIT AND TERM LOAN AGREEMENT
BETWEEN
LIFE CRITICAL CARE CORPORATION
AND
MANUFACTURERS AND TRADERS TRUST COMPANY
Dated as of ______, 1996
<PAGE>
TABLE OF CONTENTS
SECTION 1 DEFINITIONS
1.1 Defined Terms.....................................
1.2 UCC Definitions...................................
1.3 Other Definitional Provisions.....................
SECTION 2 AMOUNT AND TERM OF THE CREDIT.............................
2.1 Revolving Credit..................................
2.2 Term Loan.........................................
2.3 Interest and Pricing..............................
2.4 Prepayment........................................
2.5 Special Provisions Governing LIBOR Rate
Loans..........................................
2.6 Required Termination and Repayment of LIBOR
Rate Loans.....................................
2.7 Taxes.............................................
2.8 Fees..............................................
2.9 Method of Payment.................................
2.10 Use of Proceeds...................................
SECTION 3 - REPRESENTATION AND WARRANTIES
3.1 Financial Condition...............................
3.2 No Change.........................................
3.3 Corporate Existence; Compliance with Law
3.4 Corporate Power; Authorization; Enforceable
Obligations....................................
3.5 No Legal Bar......................................
3.6 No Material Litigation............................
3.7 No Default........................................
3.8 Ownership of Property; Liens......................
3.9 No burdensome Restrictions........................
3.10 Taxes.............................................
3.11 Federal Regulations...............................
3.12 Investment Company Act............................
3.13 Environmental Matters.............................
3.14 ERISA.............................................
3.15 Acquisition Agreements............................
3.16 Acquisitions......................................
3.17 Collateral Locations..............................
3.18 Licenses and Permits..............................
3.19 Initial Public Offering...........................
3.20 Registration Statement............................
3.21 Subsidiaries......................................
3.22 Pre-existing Indebtedness.........................
SECTION 4 - CONDITIONS PRECEDENT
4.1 Conditions to Extension of Credit.................
<PAGE>
4.2 Conditions to Subsequent Extension of Credit......
SECTION 5 - AFFIRMATIVE COVENANTS
5.1 Financial Statements..............................
5.2 Certificates; Other Information...................
5.3 Payment of Obligations............................
5.4 Conduct of Business and Maintenance of Existence..
5.5 Inspection of Property; Books and Records;
Discussions.....................................
5.6 Notices...........................................
5.7 Motor Vehicle Titles..............................
5.8 Corporate Standing................................
5.9 Discharge of Obligations..........................
5.10 Insurance.........................................
5.11 Fair Labor Standards Act..........................
5.12 Guarantees By Subsidiaries and Affiliates ........
SECTION 6 - NEGATIVE COVENANTS
6.1 Indebtedness......................................
6.2 Limitation on Liens...............................
6.3 Financial Condition...............................
6.4 Limitation on Contingent Obligations..............
6.5 Prohibition of Fundamental Changes................
6.6 Prohibition of Sale of Assets.....................
6.7 Loans, Advances and Investments...................
6.8 Compliance with ERISA.............................
6.9 Capital Expenditures..............................
6.10 Lease Obligations.................................
6.11 Dividends.........................................
6.12 Subsidiaries and Affiliates.......................
6.13 Ownership Interests...............................
6.14 Compensation......................................
6.15 Affiliate Transactions............................
SECTION 7 - EVENTS OF DEFAULT
7.1 Events of Default.................................
7.2 Effect of Event of Default........................
SECTION 8 - MISCELLANEOUS
8.1 Increased Costs/Capital Adequacy..................
8.2 Amendments, Waivers and Consents..................
8.3 Notices...........................................
8.4 No Waiver; Cumulative Remedies....................
8.5 Survival of Representations and Warranties........
8.6 Payment of Expenses and Taxes; Indemnity..........
8.7 Successors and Assigns............................
8.8 Counterparts......................................
8.9 Governing Law.....................................
8.10 Inconsistent Provisions...........................
8.11 Further Assurances................................
8.12 Waiver of Jury Trial..............................
<PAGE>
8.13 Consent to Jurisdiction...........................
8.14 Headings..........................................
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REVOLVING CREDIT AND TERM LOAN AGREEMENT
AGREEMENT dated as of ____________, 1996 by and between Life
Critical Care Corporation, a Delaware corporation, having its principal office
at 37885 Green Street, New Baltimore, Michigan 48047 (the `Borrower') and
MANUFACTURES AND TRADERS TRUST COMPANY, a New York banking corporation
having its principal office at One M&T Plaza, Buffalo, New York 14203 ("Bank").
WHEREAS, pursuant to an Asset Purchase Agreement dated as of March 1,
1996, as amended, the Borrower is acquiring substantially all of the assets of
ABC Medical Supply, Inc. (the "ABC Acquisition"); and
WHEREAS, pursuant to an Asset Purchase Agreement dated as of January
22, 1996, as amended, the Borrower is acquiring substantially all of the
assets of Blue Water Medical Supply, Inc. (the "Blue Water Acquisition"); and
WHEREAS, pursuant to an Asset Purchase Agreement dated as of March 1,
1996, as amended, the Borrower is acquiring substantially all of the
assets of Great Lakes Home Medical Supply, Inc. (the "Great Lakes
Acquisition"); and
WHEREAS, in connection with the Acquisitions, the Borrower is
simultaneously making an initial public offering of its capital stock; and
WHEREAS, in order to repay certain existing debt, to partially fund the
Acquisitions and to provide general working capital to the Borrower thereafter,
the Borrower has requested the Bank to make available a term loan in the amount
of six million dollars ($6,000,000) and a revolving credit facility in an
aggregate amount of four million dollars ($4,000,000); and
WHEREAS, the Bank, subject to the terms and conditions of this
Agreement, is willing to make available to the Borrower the requested term loan
and revolving credit facility.
NOW, THEREFORE, the Borrower and the Bank agree as follows:
SECTION 1 DEFINITIONS
1.1 Defined Terms. The following terms (whether or not
underscored) when used in this Agreement, including its preamble and recitals,
shall, except where the context otherwise requires, have the following meanings:
<PAGE>
"Affiliate": any Person (i) which directly or indirectly
controls, or is controlled by, or is under common control with the
Borrower, or (ii) forty (40) percent or more of the voting stock of which is
directly or indirectly beneficially owned or held by the Borrower, any current
shareholder of the Borrower or any member of such shareholder's immediate
family. The term "control" means the possession of the power to direct or cause
the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise.
"Acquisitions": the collective reference to the ABC
Acquisition, Blue Water Acquisition and Great Lakes Acquisition.
"Acquisition Agreements": the collective reference to the
asset purchase agreements for the Acquisitions.
"Agreement": this Revolving Credit and Term Loan
Agreement, as supplemented, amended or modified from time to time.
"Audited Statements": see Subsection 4.1.
"Authorized Officers": shall mean __________ of the
Borrower.
"Bank": Manufacturers and Traders Trust Company.
"Borrower": Life Critical Care Corporation., a Delaware
corporation.
"Business Day": (a) for all purposes other than as
covered by clause (b) below, any day excluding Saturday, Sunday and any
day on which Bank is authorized by law or other governmental action to close
and (b) with respect to all notices and determinations in connection with
LIBOR, any day which is a Business Day described in clause (a) and which is
also a day for trading by and between banks in U.S. dollar deposits in the
London interbank market.
"Capitalized Lease": any lease the obligations under which
have been, or in accordance with GAAP are required to be, recorded on the
books of the Borrower as a capital lease liability.
"Change in Control": (a) the acquisition after the date
hereof by any Person or Persons (other than the officers and directors referred
to in clause (b) of this subparagraph and their respective spouses and
children) acting in concert of beneficial ownership (within the meaning of
Rule 13d-3 of the Securities and Exchange Commission promulgated under the
Securities Exchange Act of 1934, as amended, or any successor, replacement
or analogous rule or provision of law) of 20% or more of the outstanding
shares of the Borrower's voting stock or (b) the officers and directors of the
Borrower that, collectively, on the date hereof, own in
2
<PAGE>
excess of 80% of the outstanding shares of the Borrower's voting stock,
shall cease to own in excess of 80% of the outstanding shares of the Borrower's
voting stock (for the purposes of this clause (b), voting stock owned by the
respective spouses and children of such officers and directors shall be
deemed to be owned by such officers and directors).
"Code": the Internal Revenue Code of 1986, as amended,
reformed or otherwise modified from time to time.
"Collateral": means all property which is subject or is to
be subject to the Lien granted by the Collateral Documents.
"Collateral Documents": the collective reference to the
Mezzanine Loan Agreements, the Security Agreement, the Shareholders
Pledge Agreement, the Subordination and Pledge Agreement and the
Environmental Indemnification Agreement.
"Consolidated" or "Consolidated Basis": the consolidation
of the accounts of the Borrower and its Subsidiaries in accordance with GAAP,
including principles of consolidation, consistent with those applied in the
preparation of the consolidated audited financial statements.
"Contingent Obligation": as to any Person, any obligation
of such Person guaranteeing or in effect guaranteeing any Indebtedness,
leases, dividends or other obligations ("primary obligations") of any other
Person (the "primary obligor") in any manner, whether directly or indirectly,
including, without limitation, any obligation of such Person, whether or not
contingent, (a) to purchase any such primary obligation or any property
constituting direct or indirect security therefor, (b) to advance or supply
funds (i) for the purchase or payment of any such primary obligation or (ii) to
maintain working capital or equity capital of the primary obligor or
otherwise to maintain the net worth or solvency of the primary obligor, (c) to
purchase property, securities or services primarily for the purpose of
assuring the owner of any such primary obligation of the ability of the
primary obligor to make payment of such primary obligation or (d) otherwise
to assure the owner of such primary obligation against loss in respect
thereof; provided, however, that the term Contingent Obligation shall not
include endorsements of instruments for deposit or collection in the ordinary
course of business.
"Contractual Obligation": as to any Person, any provision
of any security issued by such Person or of any mortgage, indenture, lease,
contract or other agreement, instrument or undertaking to which such Person is
or purports to be a party or by which it or any of its property is or purports
to be bound.
"Credit": all extensions of credit set forth in Section 2 of
this Agreement.
3
<PAGE>
"Debt Service Coverage Ratio": means for any Fiscal
Year or four (4) consecutive Fiscal Quarters, the ratio of:
(a) the sum for such Fiscal Year or four (4) Fiscal
Quarters, as the case may be, of Net Income
to
--
(b) aggregate current maturities of long-term debt of
the Borrower.
"Default": any Event of Default or any condition or
event which, after notice or lapse of time, or both, would become an Event of
Default.
"ERISA": the Employee Retirement Income Security Act of
1974, as amended, and any successor statute of similar import, together with
the regulations thereunder, in each case as in effect from time to time.
References to sections of ERISA shall be construed to also refer to any
successor sections.
"Event of Default": any of the events described in
Subsection 7.1.
"Fiscal Quarter": any quarter of a Fiscal Year.
"Fiscal Year": any period of twelve consecutive
calendar months ending on the last day of December.
"GAAP": the generally accepted accounting principles
applied in the preparation of the audited financial statements of the Borrower
as (a) shall be consistent with the then-effective principles promulgated or
adopted by the Financial Accounting Standards Board and its predecessors and
successors (other than any changes resulting from the implementation of
F.A.S.B. 96) and (b) shall be concurred in by the independent certified
public accountants certifying any financial statements of the Borrower.
"Governmental Authority": any nation or government, any
state or other political subdivision thereof, and any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government, and any corporation or other entity owned or
controlled (through stock or capital ownership or otherwise) by any of the
foregoing.
"Indebtedness": of any Person, at a particular time, means
all items which, in conformity with GAAP, would be classified as liabilities
on a balance sheet of such Person as at such time and which constitute (a)
indebtedness for borrowed money or the deferred purchase price of property
(including, without limitation, all notes payable and drafts accepted
representing extensions of credit and all obligations evidenced by bonds,
debentures, notes or other similar
4
<PAGE>
instruments, but excluding trade payables incurred in the ordinary course of
business payable within ninety days of the date thereof), (b) obligations
with respect to any conditional sale agreement or title retention agreement,
(c) indebtedness arising under acceptance facilities, in connection with
surety or other similar bonds, and the outstanding amount of all letters of
credit issued for the account of such Person and, without duplication, all
drafts drawn thereunder, (d) all liabilities secured by any security
interest in any property owned by such Person even though it has not assumed
or otherwise become liable for the payment thereof, (e) obligations under
Capitalized Leases, (f) obligations with respect to interest rate
protection agreements, and (g) any asserted withdrawal liability of such
Person or a commonly controlled entity to a Multi-employer Plan.
"Independent Public Accountant": refers to Ernst & Young
LLP or any other public accounting firm selected by the Borrower and
consented to by the Bank, such consent not to be unreasonably withheld.
"Initial Public Offering": The offering for public sale of
2,000,000 shares of the Borrower's common stock pursuant to the terms of the
Borrower's Registration Statement as filed with the Securities and Exchange
Commission on October 24, 1996, as amended from time to time.
"Interest Expense": means, for any period, the sum of the
aggregate interest expense of the Borrower for such period in respect of
Indebtedness of the Borrower, as determined in accordance with GAAP.
"Interim Statements": see Subsection 4.1.
"Investments": see Subsection 6.7.
"LIBOR": the reserve adjusted interest rate per annum
determined by Bank, applicable to any selected LIBOR Rate Period, equal to
(a) the average rate per annum which the offices of various leading banks
located in London, England offer for deposits in U.S. Dollars in the
London Interbank Eurodollar Market at approximately 10:00 a.m. (London time)
on a LIBOR Interest Determination Date in an amount approximately equal to the
amount of the applicable LIBOR Rate Loan; plus (b) the applicable LIBOR
Increment.
"LIBOR Increment ": with respect to (a) the Revolving
Credit Loan, 250 basis points and (b) the Term Loan, 275 basis points.
"LIBOR Interest Determination Date": a Business Day which
is two (2) Business Days prior to the commencement of each LIBOR Rate Period
during which the LIBOR rate will be applicable.
5
<PAGE>
"LIBOR Lending Office": the office of Bank (as designated
from time to time by Bank), whether or not outside the United States, which
shall be making or maintaining LIBOR Rate Loans of Bank hereunder.
"LIBOR Rate Loan": that portion of principal of the
Revolving Credit Loan and/or Term Loan Note from time to time unpaid and
bearing interest at the LIBOR.
"LIBOR Rate Period": the one (1) month, two (2) months,
three (3) months or six (6) months period selected by the Borrower pursuant
to Section 2.3 of this Agreement on which the LIBOR is in effect for a LIBOR
Rate Loan, but in no event may a LIBOR Rate Period extend beyond the Maturity
Date.
"Licenses": see Subsection 3.18.
"Lien": any mortgage, security interest, pledge,
hypothecation, assignment, deposit arrangement, encumbrance, lien
(statutory or other), or preference, priority or other security agreement
or preferential arrangement of any kind or nature whatsoever (including,
without limitation, any conditional sale or other title retention agreement,
any financing lease having substantially the same economic effect as any of the
foregoing, and the filing of any financing statement under the Uniform
Commercial Code or comparable law of any jurisdiction other than any financing
statement filed in connection with consignments or leases not intended as
security).
"Loan" or "Loans": individually and collectively any
amount of the Revolving Credit Loan and the Term Loan bearing interest as a
Prime Rate Loan or a LIBOR Rate Loan.
"Loan Documents": the collective reference to this
Agreement, the Revolving Credit Note, the Term Loan Note and the Collateral
Documents.
"Maturity Date": see Subsection 2.2.
"Mezzanine Loan": the six year term loan, in the principal
amount of $2,000,000, made by the Bank to the Borrower pursuant to the
Mezzanine Loan Agreement.
"Mezzanine Loan Agreements": The collective reference to
the Mezzanine Agreement, Mezzanine Loan Note and ancillary documents all
dated the date hereof pursuant to which the Bank is making the Mezzanine Loan
to the Borrower.
"Mezzanine Loan Note ": The Mezzanine Loan Note as defined
in the Mezzanine Loan Agreement.
6
<PAGE>
"Multi-employer Plan": has the meaning assigned to such term
under section 3(37) of ERISA.
"Net Income": means, with respect to any period, all
amounts which, in conformity with GAAP, would be included under net income on
an income statement of the Borrower for such period.
"Note" or "Notes": The Revolving Credit Note and/or the Term
Loan Note.
"Obligations": see Subsection 7.1 (e).
"PBGC": the Pension Benefit Guaranty Corporation and any
entity succeeding to any or all of its functions under ERISA.
"Person": any natural person, corporation, firm, trust,
partnership, business trust, joint venture, association, government,
governmental agency or authority, or any other entity, whether acting in an
individual, fiduciary, or other capacity.
"Plan": a "pension plan" as such term is defined in ERISA,
which is subject to Title IV of ERISA (other than a Multi-employer Plan) and to
which the Borrower or any corporation, trade or business that is, along with the
Borrower, a member of a controlled group of corporations or a controlled group
of trades or businesses (as described in sections 414(b) and 414(c),
respectively, of the Code or section 4001 of ERISA) may have any liability,
including any liability by reason of having been a substantial employer within
the meaning of section 4063 of ERISA at any time during the preceding five
years, or by reason of being--deemed to be a contributing sponsor under section
4069 of ERISA.
"Preexisting Loans": loans in the aggregate principal amount
of $_____________ , together with accrued interest thereon, made to the Borrower
by Morgenthau Bridge Investment LP, Morgenthau Bridge Loan LLC, certain
investors, and the Morgenthau Bridge Funds.
"Prime Rate": the rate of interest publicly announced by Bank
from time to time as its prime rate and is a base rate for calculating interest
on certain loans. The Prime Rate may or may not be the most favorable rate
charged by Bank to its customers from time to time.
"Prime Rate Loan": that portion of principal of the Revolving
Credit Loan and/or Term Loan Note from time to time unpaid and bearing interest
at the Prime Rate.
7
<PAGE>
"Prime Rate Option": the "Prime Rate Option" as defined in
Section 2.3.
"Principal Office": refers to the Bank's office at One M&T
Plaza, Buffalo, New York 14203.
"Rate Conversion Date": the date a Loan is continued as, or
converted to a Prime Rate Loan or a LIBOR Rate Loan pursuant to Subsection
2.3(d).
"Rate Option": the choice of applicable interest rates and
LIBOR Rate Periods offered to the Borrower pursuant to Section 2.3 of this
Agreement.
"Registration Statement": see Section 3.19.
"Reportable Event": any of the events set forth in Section
4043(b) of ERISA or the regulations thereunder.
"Requirement of Law": with respect to any matter or Person
means any law, rule, regulation, order, decree or other requirement having the
force of law relating to such matter or Person, and, where applicable, any
interpretation thereof by any authority having jurisdiction with respect thereto
or charged with the administration thereof.
"Revolving Credit Termination Date": , 1999.
"Security Agreement": see Subsection 5.1(c).
"Security Interest": see Subsection 5.1(c).
"Sellers": the collective reference to ABC Medical Supply,
Inc. Blue Water Medical Supply, Inc. and Great Lakes Home Medical, Inc.
"Subordinated Debt": any unsecured Indebtedness of the
Borrower, the payment of the principal of and interest (including post-petition
interest) on which is subordinated, on terms and conditions acceptable to the
Bank, to the prior payment in full of all Indebtedness and other obligations of
the Borrower to the Bank arising under this Agreement and the Collateral
Documents.
"Subsidiary": any corporation, limited liability company,
partnership, joint venture or other entity of which at least 50% of the voting
stock or other applicable ownership interest is owned by the Borrower, directly
or indirectly, including through one or more Subsidiaries.
8
<PAGE>
"Tangible Net Worth": at any time, all amounts which, in
accordance with GAAP, would be included under shareholders' equity on a balance
sheet of the Borrower at such time, excluding, however, any amounts representing
assets which would be classified as intangible assets in accordance with GAAP.
"Term Loan": see Subsection 2.1.
"Term Loan Note": see Subsection 2.3.
"Total Liabilities": at any time, all amounts which, in
accordance with GAAP, would be included as liabilities on a balance sheet of the
Borrower at such time.
"Total Senior Liabilities": at any time, all amounts which in
accordance with GAAP, would be included as liabilities on a balance sheet of the
Borrower other than Subordinated Debt at such time.
1.2 UCC Definitions. Unless otherwise defined in Section 1.1 or
elsewhere in this Agreement, capitalized words shall have the meanings set forth
in the New York Uniform Commercial Code as in effect on the date of this
Agreement.
1.3 Other Definitional Provisions.
(a) All terms defined in this Agreement shall have the defined meanings
when used in the Term Loan Note and the Collateral Documents or any certificate
or other document made or delivered pursuant hereto.
(b) As used herein and in the Term Loan Note, and any certificate or
other document made or delivered pursuant hereto, accounting terms not defined
in Subsection 1.1, and accounting terms partly defined in Subsection 1.1 to the
extent not defined, shall have the respective meanings given to them under GAAP.
(c) The words "hereof", "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement, and section, subsection,
schedule and exhibit references are to this Agreement unless otherwise
specified.
(d) The definitions of all terms defined in this Agreement shall be
equally applicable to both the singular and plural forms of the terms defined.
9
<PAGE>
SECTION 2 AMOUNT AND TERMS OF THE CREDIT
2.1 Revolving Credit.
(a) Amounts to be Loaned. Subject to the terms and conditions
of this Agreement and relying upon the representations and warranties herein set
forth, the Bank agrees to make loans (individually, a "Revolving Credit Loan"
and collectively, the "Revolving Credit Loans") to the Borrower from time to
time during the period from the date of this Agreement up to but not including
the Revolving Credit Termination Date in an aggregate principal amount which
does not exceed Four Million Dollars ($4,000,000) ("Revolving Credit").
(b) Commitment. The obligation of the Bank to make Revolving
Credit Loans hereunder is hereinafter referred to as the "Commitment". Each
Revolving Credit Loan which does not utilize the Commitment in full shall be in
an amount of not less than One Hundred Thousand Dollars ($100,000) and, if in an
amount greater than One Hundred Thousand Dollars ($100,000), shall be in whole
multiples of Ten Thousand Dollars ($10,000).
(c) Credit Termination. Within the limits of the Commitment
and subject to the terms of this Agreement, the Borrower may borrow, prepay
pursuant to Subsection 2.4, and reborrow under this Subsection 2.1; provided,
however, no further Revolving Credit Loans shall be made on or after the
Revolving Credit Termination Date, at which time the Revolving Credit must be
paid in full.
(d) Revolving Credit Note. All Revolving Credit Loans made by
the Bank under this Agreement shall be evidenced by, and repaid with interest in
accordance with, a single promissory note of the Borrower, in substantially the
form of Exhibit A annexed hereto and made a part hereof ("Revolving Credit
Note") with blanks appropriately completed.
The Bank is hereby authorized by the Borrower to endorse on
the schedule attached to the Revolving Credit Note or any continuation thereof
(the "Schedule") the date and amount of each Revolving Credit Loan, the Rate
Option applicable to such loan, the applicable interest periods, each payment or
prepayment received by the Bank on account of the Revolving Credit Loans, and
the outstanding principal balance of the aggregate of the Revolving Credit
Loans. The Bank's endorsements shall, in the absence of manifest error, be
conclusive as to the outstanding balance of the Revolving Credit Loans made by
the Bank; provided, however, that the failure to make such notation with respect
to any Revolving Credit Loan or payment shall not limit or otherwise affect the
obligations of the Borrower under this Agreement or the Revolving Credit Note.
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<PAGE>
(e) Notice and Manner of Borrowing. The Borrower shall give
the Bank prior notice of any requested Revolving Credit Loan under this
Agreement, specifying the amount of such loan to be advanced on a designated
date (the "Borrowing Date"), which shall be a Business Day.
(i) Prime Rate Loan. In the case of a Prime Rate Loan,
such notice shall be given not later than 1:00 p.m. (New York time) on the
Business Day on which the Advance is to be funded.
(ii) Libor Rate Loan. In the case of a Libor Rate Loan,
such notice shall be given not later than 12:00 Noon (New York time) two (2)
Business Days prior to the proposed commencement date of a LIBOR Rate Period.
(iii) Form of Notice. Such notice shall be in writing or
by telephone, thereafter confirmed in writing, and shall be a form acceptable to
the Bank and shall be executed by an Authorized Officer.
(iv) Availability of Funds. On the Borrowing Date or as
early as practically possible thereafter, and upon fulfillment of any applicable
conditions set forth in this Agreement, the Bank will make such Revolving Credit
Loan available to the Borrower in immediately available funds by crediting the
amount thereof to the Borrower's account with the Bank.
(v) No Liability for Good Faith Action. Bank shall not
incur any liability to the Borrower in (i) acting upon any notice referred to
above or upon any telephonic notice which Bank believes in good faith to have
been given by an Authorized officer or other person authorized to borrow on
behalf of the Company or (ii) for otherwise acting in good faith.
2.2 Term Loan.
(a) Amount. Subject to the terms and conditions of this
Agreement, and relying upon the representations and warranties herein set forth,
the Bank agrees to make a loan (the "Term Loan") to the Borrower on the date of
this Agreement in a principal amount of Six Million Dollars ($6,000,000).
(b) Term Loan Note. The Term Loan shall be evidenced by, and
repaid with interest in accordance with, a single promissory note (the "Term
Loan Note") of the Borrower in substantially the form of Exhibit B attached
hereto and made a part hereof, duly completed and with blanks appropriately
filled in. The Term Loan Note shall be dated as of the date of this Agreement
and the principal amount of the Term Loan Note will be repaid with interest
payments only for six (6) months from the date of this Agreement and then in
sixty-six (66) equal and consecutive monthly installments of $90,909.09 each
commencing 1997 with
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<PAGE>
subsequent installments being due on the first day of each calendar month
thereafter to and including (the "Maturity Date").
2.3 Interest and Pricing. The entire principal balance of the
Revolving Credit Note and Term Loan Note shall each bear interest until maturity
(whether by acceleration or otherwise) at the Prime Rate Option or the LIBOR
Rate Option as hereinafter provided:
(a) Prime Rate Option. Unless the Libor Rate Option is
validly selected and in effect pursuant to this Agreement with respect to
the Revolving Credit Note or the Term Loan Note, as the case may be, (i) the
entire unpaid principal balance of the Revolving Credit Note shall bear
interest at a per annum rate equal to the Prime Rate plus 1/2% and (ii) the
entire unpaid principal balance of the Term Loan Note shall bear interest at
a per annum rate equal to the Prime Rate plus 3/4%. The rate of interest on
all Prime Rate Loans shall change simultaneously with each change in the Prime
Rate.
(b) LIBOR Rate Option. Subject to the provisions of Sections
2.5 and 2.6, the Borrower may elect to have all or part of the unpaid principal
balance of the Revolving Credit Note and/or Term Loan Note made as a LIBOR Rate
Loan for a LIBOR Rate Period provided the amount of such LIBOR Rate Loan is not
less than $250,000 and for amounts greater than $50,000, in whole multiples of
$50,000 ("LIBOR Rate Option").
(c) Rate Conversions and Continuations. The Borrower may elect
to convert any portion of (i) a Prime Rate Loan to a LIBOR Rate Loan or (ii) a
LIBOR Rate Loan to a Prime Rate Loan by giving irrevocable notice of such
election to Bank by 12:00 noon (New York time) at least two (2) Business Days
prior to the requested Rate Conversion Date and, in the case of any LIBOR Rate
Loan, such conversion or continuation shall take place on the last day of the
applicable LIBOR Rate Period with respect to the Loan being so converted or
continued. Each such request to convert or continue shall include the Rate
Option selected, the requested Rate Conversion Date (which shall be a Business
Day) and the amount to be converted or continued (which shall be in a principal
amount of $250,000.00 or more and in whole multiples of $50,000.00 in the case
of conversion to or continuation as a LIBOR Rate Loan). If no Default or Event
of Default has occurred and is continuing at such time, such conversion or
continuation shall be made on the requested Rate Conversion Date, subject to the
limitations set forth in this Agreement.
Bank shall not incur any liability to the Borrower in acting upon any
telephonic notice which Bank believes to have been given by an Authorized
Officer or other person duly authorized to act on behalf of the Borrower or for
otherwise acting under this Section 2.3.
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<PAGE>
(d) Computation of Interest. Interest on the Notes shall be
computed on the basis of a 360-day year for the actual number of days elapsed,
which will result in a higher effective annual rate. Interest on the Revolving
Credit Note shall be payable monthly on the first day of each month and on the
Revolving Credit Termination Date. Interest on the Term Loan Note shall be
payable monthly on the first day of each month during the term of the Term Loan
Note, commencing the month following the date of this Agreement, and on the date
the Term Loan Note is paid in full. In the case of LIBOR Rate Loans, interest
shall also be payable on the last day of each applicable LIBOR Rate Period, if
earlier, and on any Rate Conversion Date.
(e) Default Rate. After maturity of any Loan, whether by
acceleration or otherwise, the Borrower shall pay interest at a per annum rate
equal to four percent (4%) plus the interest rate otherwise in effect thereon.
After maturity, interest shall be payable on demand. In no event shall the rate
of interest exceed the maximum rate permitted by applicable law. If the Borrower
pays interest in excess of the amount permitted by applicable law, such excess
shall be applied, first, in reduction of the principal balance of the Term Loan
Note or the Revolving Credit Note, as the case may be.
(f) Late Charge. Upon failure to make any payment of interest
or principal on the Notes within ten (10) days of the due date thereof, the
Borrower agrees to pay to Bank, upon demand by Bank, a late charge equal to five
percent (5%) of the amount of any such overdue amount of principal or interest.
The assessment and/or collection of late charges shall in no way impair the
right of Bank to pursue any other remedies hereunder.
2.4 Prepayment.
(a) Prime Rate Loans. Borrower shall have the right to prepay
at any time without premium all or any portion of the Prime Rate Loans, together
with interest on the principal so prepaid to the date of such prepayment. In the
case of the Term Loan Note, any partial prepayment shall be applied upon
installments of principal in inverse order of maturity. Borrower shall give to
the Bank not less than two (2) Business Day's prior notice of each prepayment,
specifying the aggregate amount to be repaid. Any permitted partial repayment of
principal shall be in the amount of $100,000 or a whole multiple thereof.
(b) LIBOR Rate Loans. The Borrower shall have the right to
prepay without premium all or any portion of the LIBOR Rate Loans on the
expiration day of the applicable LIBOR Rate Period. If any LIBOR Rate Loan is
prepaid at any other time, the Borrower shall, upon not less than ten (10) days
prior written notice, pay to Bank an amount equal to (i) the interest which
would have otherwise been payable on the amount prepaid during the remaining
term of the LIBOR Rate Period, less (ii) interest on the amount prepaid for such
term computed at an
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interest rate equal to the yield-to-maturity which could be obtained on United
States Treasury Obligations, purchased in the market at the time of prepayment,
having a remaining term and coupon rate comparable to the remaining term of the
LIBOR Rate Period, and comparable to the applicable interest rate, as determined
by Bank in good faith, and certified to the Borrower, such certificate to be
conclusive, absent manifest error. Any permitted partial prepayment of principal
shall be in the amount of $100,000.00 or a whole multiple thereof.
2.5 Special Provisions Governing LIBOR Rate Loans - Increased
costs.
(a) In the event that on any LIBOR Interest Determination
Date, Bank shall have determined (which determination shall be final, conclusive
and binding) that:
(1) by reason of conditions in the London interbank
market or of conditions affecting the position of Bank in such market occurring
after the date hereof, adequate fair means do not exist for establishing LIBOR,
or
(2) by reason of (i) any applicable law or governmental
rule, regulation, guideline or order (or any written interpretation thereof and
including any new law or governmental rule, regulation, guideline or order but
excluding any of the foregoing relating to taxes referred to in Section 2.7 of
this Agreement) or (ii) other circumstances affecting Bank or the London
interbank market or the position of Bank in such market (such as, but not
limited to, official reserve requirements), LIBOR does not represent the
effective pricing to Bank for U.S. dollar deposits of comparable amounts for the
relevant period due to such increased costs then, Bank shall give a notice by
telephone, confirmed in writing, to the Borrower of such determination.
(b) Thereafter, the Borrower shall pay to Bank upon written
request therefor, such additional amount as Bank in its sole discretion, shall
reasonably determine to be required to compensate Bank for such increased costs.
A certificate as to such additional amounts submitted to the Borrower by Bank
shall set forth in reasonable detail the calculation of such amounts and absent
manifest error, be final, conclusive and binding upon all parties hereto.
(c) In lieu of paying such additional amounts as
required by this Section, the Borrower may exercise the following options:
(1) If such determination relates only to a conversion
to a LIBOR Rate Loan then being requested by the Borrower pursuant to the terms
hereof, the Borrower may, on such LIBOR Interest Determination Date by giving
notice by telephone to Bank withdraw such request.
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(2) The Borrower may, by giving notice by telephone to
Bank require Bank to convert the LIBOR Rate Loan then being requested to a Prime
Rate Loan or to convert its outstanding LIBOR Rate Loan that is so affected into
a Prime Rate Loan at the end of the then current LIBOR Rate Period.
2.6 Required Termination and Repayment of LIBOR Rate Loans.
(a) In the event Bank shall have reasonably determined, at
any time (which determination shall be final, conclusive and binding), that the
making or continuation of any or all of LIBOR Rate Loans by Bank:
(1) has become unlawful by compliance by Bank in good
faith with any applicable law, governmental rule, regulation, guideline or
order, or
(2) would cause Bank severe hardship as a result of a
contingency occurring after the date of this Agreement which materially and
adversely affects the London interbank market (such as, but not limited to
disruptions resulting from political or economic events);
then, and in either such event, Bank shall on such
date (and in any event as soon as possible after making such determination) give
telephonic notice to the Borrower, confirmed in writing, of such determination,
identifying which of the LIBOR Rate Loans are so affected.
(b) The Borrower shall, upon the termination of the then
current LIBOR Rate Period applicable to each LIBOR Rate Loan so affected or, if
earlier, when required by law, repay each such affected LIBOR Rate Loan,
together with all interest accrued thereon.
(c) In lieu of the repayment required by Section 2.6(b), the
Borrower may exercise the following options:
(1) If the determination by Bank relates only to a LIBOR
Rate Loan then being converted by the Borrower pursuant to the terms hereof, the
Borrower may, on such date by giving notice by telephone to Bank, withdraw such
request for conversion.
(2) The Borrower may, by giving notice in writing or by
telephone to Bank, require Bank to convert the LIBOR Rate Loan then being
converted to a Prime Rate Loan or to convert any outstanding LIBOR Rate Loan or
LIBOR Rate Loans that are so affected into a Prime Rate Loan at the end of the
then current LIBOR Rate Period (or at such earlier time as repayment is
otherwise required to be made pursuant to Section 2.6(b)). Such notice shall
pertain only to the LIBOR Rate Loan or LIBOR Rate Loans outstanding or to be
outstanding during each such affected LIBOR Interest Rate.
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2.7 Taxes. If any taxes (other than taxes with respect to the
income of Bank), or duties of any kind shall be payable, or ruled to be payable,
by or to any taxing authority of or in the United States, or any foreign
country, or any political subdivision of any thereof, in respect of any of the
transactions contemplated by this Agreement (including, but not limited to,
execution, delivery, performance, enforcement, or payment of principal or
interest of or under the Revolving Credit Note, the Term Loan Note or this
Agreement, or the making of a LIBOR Rate Loan), by reason of any now existing or
hereafter enacted statute, rule, regulation or other determination (excluding
any taxes imposed on or measured by the net income of Bank), the Borrower will:
(a) pay on written request therefor all such taxes or
duties, including interest and penalty, if any,
(b) promptly furnish Bank with evidence of any such payment,
and
(c) indemnify and hold Bank and any holder or holders of the
Revolving Credit Note and the Term Loan Note harmless and indemnified against
any liability or liabilities with respect to or in connection with any such
taxes or the payment thereof or resulting from any delay or omission to pay such
taxes.
2.8 Fees. The Borrower shall pay the following fees to the Bank:
(a) Unused Revolving Credit Fee. The Borrower agrees to pay
to the Bank a fee ("Unused Revolving Credit Fee") on the average daily unused
portion of the Commitment from the date of this Agreement until the Revolving
Credit Termination Date at the rate of three eighths of one percent (3/8%) per
annum calculated on the basis of a year of 360 days, payable, in arrears, on the
first day of each quarter during the term of the Commitment, commencing on the
date of this Agreement and ending on the Revolving Credit Termination Date.
(b) Commitment Fee. The Borrower agrees to pay to the Bank,
by no later than the date of this Agreement, a commitment fee of (i) forty
thousand dollars ($40,000.00) with respect to the Revolving Credit Loan and (ii)
sixty thousand dollars ($60,000) with respect to the Term Loan, for a total fee
of one hundred thousand dollars ($100,000). The Bank acknowledges receipt of a
partial payment in the amount of twenty five thousand dollars ($25,000), leaving
a balance due from the Borrower to the Bank of seventy five thousand dollars
($75,000).
2.9 Method of Payment. The Borrower shall make each payment under
this Agreement, the Revolving Credit Note, and the Term Loan Note not later than
11:00 a.m. Eastern Time on the date when due in lawful money of the United
States to the Bank at its Principal Office in immediately available funds. The
Borrower hereby authorizes the Bank to charge from time to time against the
operating account of the Borrower with the Bank the amount of any such payment.
Whenever
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any payment to be made under this Agreement or under the Note shall be stated
to be due on a day other than a Business Day, such payment shall be made on the
next succeeding Business Day, and such extension of time shall in such case
be included in the computation of the payment of interest.
2.10 Use of Proceeds. The Borrower represents to and covenants with
the Bank that all proceeds of the Revolving Credit Loan and the Term Loan will
be used to (i) finance the Acquisitions, (ii) repay in full the Preexisting
Loans, and (iii) fund general working capital purposes.
SECTION 3 REPRESENTATIONS AND WARRANTIES
3.1 Financial Condition.
(a) The Borrower has heretofore delivered to the Bank [ ].
(b) All financial statements and other financial data which
have been or shall hereafter be furnished to the Bank for the purposes of or in
connection with this Agreement or any transaction contemplated hereby do and
will present fairly the financial condition of the Borrower, as the case may be,
as of the dates thereof and the results of its operations for the period(s)
covered thereby. All projections which have been or shall hereafter be furnished
to the Bank for the purposes of or in connection with this Agreement or any
transaction contemplated hereby have been, and will represent, management's best
estimate of future performance of the Borrower, based upon historical financial
information and reasonable assumptions of management.
3.2 No Change. There have been no material adverse changes in the
business, operations, property or financial or other condition of the Borrower
since _______________ , 1996.
3.3 Corporate Existence; Compliance with Law. The Borrower (a) is
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, (b) has the corporate power, authority and
legal right to own or lease and operate its property and to conduct the business
in which it is currently engaged, (c) is duly qualified as a foreign corporation
and in good standing under the laws of each jurisdiction where the failure so to
qualify and remain in good standing could materially and adversely affect the
ability of the Borrower to own or lease and operate its property or to conduct
the business in which it is currently engaged or will be engaged upon closing of
the Acquisitions, and (d) is in compliance with all Requirements of Law. The
Borrower has no equity or ownership interest in any Person.
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3.4 Corporate Power; Authorization; Enforceable Obligations. The
Borrower has the corporate power, authority and legal right to make, deliver and
perform this Agreement, the Revolving Credit Note, the Term Loan Note, and each
of the Collateral Documents, to borrow hereunder and has taken all necessary
corporate and shareholder action to authorize the borrowings on the terms and
conditions of this Agreement, the Revolving Credit Note, and the Term Loan Note.
No consent of any other Person and no authorization of, notice to, or other act
by or in respect of any Governmental Authority, is required in connection with
the borrowings hereunder, except for filings or recordings in public offices
necessary in connection with the Collateral Documents. This Agreement, the
Revolving Credit Note, the Term Loan Note and each of the Collateral Documents
have been duly executed and delivered on behalf of the Borrower and this
Agreement, the Revolving Credit Note, the Term Loan Note, and each of the
Collateral Documents constitute legal, valid and binding obligations of the
Borrower enforceable against the Borrower in accordance with their respective
terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the enforcement
of creditors' rights generally.
3.5 No Legal Bar. The execution, delivery and performance of this
Agreement, the Revolving Credit Note, the Term Loan Note, the Collateral
Documents, the borrowings hereunder and the use of the proceeds thereof, will
not violate any Requirement of Law or any Contractual Obligation of the Borrower
and will not result in, or require, the creation or imposition of any Lien on
any of its respective properties or revenues pursuant to any Requirement of Law
or Contractual Obligation.
3.6 No Material Litigation. No litigation, investigation or
proceeding of or before any arbitrator or Governmental Authority is pending or,
to the knowledge of the Borrower, threatened by or against the Borrower or any
of its properties or revenues (a) with respect to this Agreement, the Revolving
Credit Note, the Term Loan Note, the Collateral Documents or any of the
transactions contemplated hereby or thereby or (b) which, if adversely
determined, could have a material adverse effect on the business, operations,
property or financial or other condition of the Borrower.
3.7 No Default. The Borrower is not in default under or with
regard to any Contractual Obligation in any respect which could be materially
adverse to the business, operations, property or financial or other condition of
the Borrower, or which could materially adversely affect the ability of the
Borrower to perform its obligations under this Agreement, the Revolving Credit
Note, the Term Loan Note, or any of the Collateral Documents. No Default or
Event of Default has occurred.
3.8 Ownership of Property; Liens. The Borrower has good record and
marketable or insurable title in fee simple to or valid leasehold interests in,
all its
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real property, and good title to all its other property, and none of such
property is subject to any Lien, except as set forth on Schedule 3.8.
3.9 No Burdensome Restrictions. To the best of the Borrower's
knowledge, no Contractual Obligation of the Borrower and no Requirement of Law
materially adversely affects, or insofar as the Borrower may reasonably foresee
may so affect, the business, operations, property or financial or other
condition of the Borrower.
3.10 Taxes. The Borrower has filed or caused to be filed all tax
returns required to be filed, and has paid all taxes shown to be due and payable
on said returns or on any assessments made against it and all other taxes, fees
or other charges imposed on it by any Governmental Authority (other than those
the amount or validity of which is currently being contested in good faith by
appropriate proceedings and with respect to which reserves in conformity with
GAAP have been provided on the books of the Borrower); and no tax liens have
been filed and no assessments are being asserted with respect to any such taxes,
fees or other charges.
3.11 Federal Regulations. The Borrower is not engaged and will not
engage, principally or as one of its important activities, in the business of
extending credit for the purpose of 'purchasing" or "carrying" (as each such
term-is defined in Regulation U) any Margin Stock. No part of the proceeds of
the Revolving Credit Loan or the Term Loan hereunder will be used for any
purpose which violates, or which would be inconsistent with, the provisions of
the Regulations of the Board of Governors of the Federal Reserve System or of
the Investment Company Act of 1940, as amended.
3.12 Investment Company Act. The Borrower is not an "investment
company" or a company "controlled" by an "investment company", within the
meaning of the Investment Company Act of 1940, as amended.
3.13 Environmental Matters.
(a) The Borrower has duly complied with, and its business,
operations, assets, equipment, property, leaseholds, or other facilities are in
compliance with, the provisions of all federal, state and local environmental,
health and safety laws, codes and ordinances, and all rules and regulations
promulgated thereunder.
(b) The Borrower has been issued and will maintain all
required federal, state and local permits, licenses, certificates and approvals
relating to (i) air emissions, (ii) discharges to surface water or groundwater,
(iii) noise emissions, (iv) solid or liquid waste disposal, (v) the use,
generation, storage, transportation, or disposal of toxic or hazardous
substances or wastes (intended hereby and hereafter to include any and all such
materials listed in any federal, state, or local law, code
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or ordinance, and all rules and regulations promulgated thereunder, as hazardous
or potentially hazardous), or (vi) other environmental, health, or safety
matters.
(c) The Borrower has not received any notice of, and does not
know of or suspect, facts which might constitute any violations of any federal,
state or local environmental, health or safety laws, codes or ordinances, and
any rules or regulations promulgated thereunder with respect to its business,
operations, assets, equipment, property, leaseholds or other facilities.
(d) Except in accordance with a valid governmental permit,
license, certificate, or approval issued to the Borrower, there has been no
emission, spill, release, or discharge into or upon (i) the air, (ii) soils or
any improvements located thereon, (iii) surface water or groundwater, or (iv)
the sewer, septic system or waste treatment, storage or disposal system
servicing the premises, of any toxic or hazardous substances or wastes at or
from any premises owned or occupied by the Borrower.
(e) There is no complaint, order, directive, claim, citation,
or notice by any governmental authority or any person or entity pending with
respect to (i) air emissions, (ii) spills, releases, or discharges to soils or
improvements located thereon, surface water, groundwater or the sewer, septic
system or waste treatment, storage or disposal systems servicing the premises,
(iii) noise emissions, (iv) solid or liquid waste disposal, (v) the use,
generation, storage, transportation, or disposal of toxic or hazardous
substances or waste, or (vi) other environmental, health or safety matters
affecting the Borrower or its business, operations, assets, equipment, property,
leaseholds, or other facilities.
3.14 ERISA. The Borrower is in compliance with all applicable
provisions of ERISA. The Borrower has not (a) incurred any accumulated funding
deficiency within the meaning of ERISA, (b) incurred any material unfunded
vested liability under any Plan, (c) incurred any material liability to the PBGC
in connection with any Plan, or (d) engaged in a prohibited transaction within
the meaning of ERISA. No Reportable Event has occurred with respect to any Plan.
3.15 Acquisition Agreements. The Borrower has heretofore furnished
to the Bank true, complete and correct copies of the Acquisition Agreements, as
amended, including all schedules and exhibits thereto.
3.16 Acquisitions. As of the date of this Agreement, the Borrower has
consummated the Acquisitions in accordance with the terms of the Acquisition
Agreements.
3.17 Collateral Locations. All of the Borrower's assets are located
only at the locations set forth in Schedule 3.17 of this Agreement.
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3.18 Licenses and Permits. Each license, permit, consent,
certificate, certification, registration, declaration, approval, Medicare and
Medicaid participation agreements, and filing with any governmental body or
authority, or other person or entity required for or in connection with the
Borrower's business (collectively "Licenses"), is in full force and effect. The
Borrower has complied with, and its business, operations, assets, equipment,
property, leaseholds or other facilities are in compliance with all federal,
state, and local laws, codes and regulations relating to the maintenance of such
Licenses.
3.19 Initial Public Offering. On or before the date of this
Agreement, the Borrower has consummated its Initial Public Offering in
accordance with the terms of its Registration Statement on Form SB-2 as filed
with the Securities and Exchange Commission on October 24, 1996, together with
all amendments and exhibits thereto, (the "Registration Statement").
3.20 Registration Statement. The Borrower has heretofore furnished to
the Bank a true, complete and correct copy of the Registration Statement.
3.21 Subsidiaries. As of the date of this Agreement, the Borrower
has no Subsidiaries.
3.22 Preexisting Indebtedness. As of the date of this Agreement,
the Borrower has no Indebtedness other than the Preexisting Loans.
SECTION 4 CONDITIONS PRECEDENT
4.1 Conditions to Extension of Credit. The obligation of the Bank
to extend the Credit is subject to the satisfaction prior to or concurrently
therewith of the following conditions precedent:
(a) Notes. The Bank shall have received the Revolving Credit
Note and Term Loan Note conforming to the requirements hereof and executed by an
Authorized Officer.
(b) Opinions. The Bank shall have received the opinion of
legal counsel to the Borrower, dated the date of this Agreement and addressed to
the Bank, in form and substance satisfactory to the Bank. Such opinion shall
address, without limitation, such matters incident to the transactions
contemplated by this Agreement, the Revolving Credit Note, the Term Loan Note,
the Collateral Documents, the Acquisition Agreements, and the Initial Public
Offering as the Bank shall reasonably require.
(c) Security Agreement. The Borrower shall have executed and
delivered to the Bank the General Security Agreement ("Security Agreement") in
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the form of Exhibit C granting to the Bank a security interest (the "Security
Interest") in all of its equipment, inventory, accounts, chattel paper, general
intangibles, documents, and instruments, whether now owned or hereafter
acquired, including, without limitation, pursuant to the Acquisition Agreements,
wherever located, and any and all products and proceeds thereof, and shall
secure the payment of any and all indebtedness and liabilities, whether now
existing or hereafter incurred, of the Borrower to the Bank; and the Bank shall
have received appropriate financing statements to perfect the Security Interest,
which Security Interest shall be superior in priority to all other Liens.
(d) Environmental. The Borrower shall have executed and
delivered to the Bank an environmental indemnification agreement ("Environmental
Indemnification Agreement") in the form of Exhibit D.
(e) Mezzanine Loan. The Borrower shall have executed and
delivered to the Bank the Mezzanine Loan Agreements and the Borrower shall have
taken all other action deemed necessary and appropriate by the Bank to perfect
its rights under the Mezzanine Loan Agreements.
(f) Corporate Documents. The Bank shall have received a copy
(in form and substance satisfactory to the Bank) certified by the Secretary or
an Assistant Secretary of the Borrower of the resolutions of the Board of
Directors authorizing all borrowings herein provided for and the execution,
delivery and performance of this Agreement, the Revolving Credit Note, the Term
Loan Note, the Acquisition Agreements, the Initial Public Offering and the
Collateral Documents.
(g) Certificate of Incumbency. The Bank shall have received a
certificate (in form and substance satisfactory to the Bank) of the Secretary or
an Assistant Secretary of the Borrower as to the incumbency and signature of the
Officers of the Borrower ("Authorized Officers') authorized to sign, this
Agreement, the Term Loan Note, and the Collateral Documents and any certificate
or other document to be delivered pursuant to or in connection with this
Agreement.
(h) Termination of Security Interests. All holders of
existing security interests in assets of the Borrower, including, without
limitation, all assets acquired by the Borrower from the Sellers pursuant to the
Acquisition Agreements, shall have executed and delivered to the Bank WCC-3
Termination Statements in form and content acceptable to the Bank or shall have
otherwise taken action required by the Bank, to terminate such security
interests.
(i) Payment of Facility Fee. The Bank shall have received
payment in full of the Facilities Fee.
(j) Appraisals. The Bank shall have received appraisals of
all equipment and inventory of the Sellers to be acquired by the Borrower
pursuant to
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the Acquisition Agreements, prepared by an independent appraiser acceptable to
the Bank, which appraisals shall indicate a fair market value (in the case of
the equipment) and a liquidation value (in the case of inventory) in an amount
acceptable to the Bank. The Bank also shall have received a schedule of the
equipment, real estate, and leases acquired from the Sellers by the Borrower
which corresponds to the equipment appraisal.
(k) Financial Statements. The Bank shall have received and
approved a pro forma balance sheet of the Borrower, prepared by the Independent
Certified Public Accountant, which reflects (i) payment in full of the
Preexisting Loans, (ii) cash proceeds from the Initial Public Offering, (iii)
the assets and liabilities of the Borrower after closing of the Acquisitions
pursuant to the Acquisition Agreements, (iv) compliance with each applicable
financial covenant contained in this Agreement and (v) a financial condition
acceptable to the Bank, in its sole discretion.
(l) Acquisition Agreements. The Acquisition Agreements shall
be in form and substance satisfactory to the Bank, and the Borrower shall have
acquired the assets of the Sellers in accordance with the terms of each of the
Acquisition Agreements (with only those amendments, modifications or waivers
thereof which are acceptable to the Bank) immediately prior to the making of the
initial Loans hereunder.
(m) Initial Public Offering. The Bank shall have received
evidence satisfactory to the Bank of cash equity injection into the Borrower in
an amount of not less than eleven million dollars ($11,000,000) resulting from
its Initial Public Offering, said equity injection to be evidenced by in form
and content acceptable to the Bank.
(n) Payment of Preexisting Loans. The Bank shall have received
evidence satisfactory to the Bank of the payment in full of the Preexisting
Loans.
(o) Certificate of Insurance. The Bank shall have received
certificates of insurance, in form and content acceptable to the Bank,
evidencing the insurance required to be carried by the Borrower pursuant to
Subsection 5.10 hereof with endorsements, satisfactory to the Bank, designating
the Bank as loss payee and further designating that each such insurance policy
contains a notice of cancellation provision satisfactory to the Bank.
(p) Assignment of Life Insurance. The Borrower shall have
executed and delivered to the Bank a first lien perfected assignment of
$____________ of an acceptable life insurance policy on the life of Thomas H.
White (the Life Insurance Policy") and shall have delivered the original Life
Insurance Policy to the Bank, both in a form and content satisfactory to the
Bank.
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(q) All other documents and legal matters in connection with
the transactions contemplated by this Agreement and the Collateral Documents
shall be satisfactory in form and substance to the Bank. The Borrower shall have
delivered such further documents to the Bank and taken such further action
respecting this Agreement as the Bank shall reasonably request.
4.2 Conditions to Subsequent Extension of Credit. The obligation of the
Bank to make each Revolving Credit Loan is subject to the satisfaction prior to
or concurrently therewith of the following conditions precedent:
(a) The representations and warranties made by the Borrower
herein shall be true and correct on and as of the Borrowing Date for each of the
Revolving Credit Loans as if made on and as of such date (subject to any
modifications subsequently disclosed by the Borrower in writing to the Bank) and
the representations and warranties made by the Borrower which are contained in
any certificate, document or financial or other statement furnished at any time
under or in connection herewith are true and correct on and as of the date made.
(b) No Default or Event of Default shall have occurred and
be continuing on such date or after giving effect to the Revolving Credit Loan
to be made on such Borrowing Date.
(c) Guaranties. The Company shall have furnished to Bank the
written unlimited continuing guaranties of each Subsidiary of the Borrower
which may be established after the date of this Agreement, guarantying
payment of any and all indebtedness of Borrower to Bank.
Each borrowing by the Borrower hereunder shall constitute a representation and
warranty by the Borrower as of the date of each such borrowing that the
conditions in this Subsection have been satisfied.
SECTION 5 AFFIRMATIVE COVENANTS
The Borrower hereby agrees that, so long as the Revolving Credit Loan or the
Term Loan remains outstanding and unpaid or any other amount is owing to the
Bank hereunder or under the Collateral Documents, the Borrower shall [and shall
cause each of its Subsidiaries, to do the following]:
5.1 Financial Statements. Furnish or cause to be furnished to the
Bank:
(a) as soon as available, but in any event within ninety (90)
days after the end of each Fiscal Year of the Borrower, a copy of the audited
financial statements of the Borrower at and as of the end of such Fiscal Year,
certified without qualification or exception by the Independent Public
Accountants; and
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(b) as soon as available, but in any event not later than
forty-five (45) days after the end of each Fiscal Quarter of each Fiscal Year of
the Borrower, a copy of the unaudited balance sheet of the Borrower as of the
end of such Fiscal Quarter and the related unaudited statements of income and
retained earnings and cash flow, setting forth in each case in comparative form
the figures for the previous year.
All such financial statements to be true, complete and correct
in all material respects and be prepared in reasonable detail and in accordance
with GAAP applied consistently throughout the periods reflected therein (except
as approved by such accountants or officer, as the case may be, and disclosed
therein and that quarterly statements shall be prepared without footnotes in
accordance with GAAP).
5.2 Certificates; Other Information. Furnish to the Bank:
(a) upon the request of the Bank, concurrently with the
delivery of the financial statements referred to in Subsection 5.1(a), a
certificate of the Independent Public Accountants certifying such financial
statements stating that in making the examination necessary therefor no
knowledge was obtained of any Default or Event of Default, except as specified
in such certificate;
(b) concurrently with the delivery of the financial statements
referred to in Subsections 5.1 (a) and (b), a certificate of an Authorized
Officer (i) stating that, to the best of his or her knowledge, the Borrower
during such period has observed or performed all of its covenants and other
agreements, and satisfied every condition contained in this Agreement, the
Revolving Credit Note, Term Loan Note and the Collateral Documents to be
observed, performed or satisfied by it, and that such Authorized Officer has
obtained no knowledge of any Default or Event of Default except as specified in
such certificate, and (ii) showing in detail the calculations supporting such
statement in respect of the financial covenants contained in Subsection 7.3.
(c) within thirty (30) days after the end of each Fiscal Year
of the Borrower, a copy of the projections by the Borrower's management of the
operating budget and cash flow of the Borrower for the then current Fiscal Year,
such projections to be accompanied by a certificate of an Authorized Officer to
the effect that such projections have been prepared on the basis of sound
financial planning practice and that such Authorized Officer on the date he or
she renders such certificate has no reason to believe they are incorrect or
misleading in any material respect.
5.3 Payment of Obligations. Pay, discharge or otherwise satisfy at
or before maturity or before it becomes delinquent, as the case may be, all its
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Indebtedness, taxes and other obligations of whatever nature, except, in the
case of Indebtedness or taxes when the amount or validity thereof is currently
being contested in good faith by appropriate proceedings and reserves in
conformity with GAAP with respect thereto have been provided on the books of the
Borrower.
5.4 Conduct of Business and Maintenance of Existence. Continue to
engage in business of the same general type as now conducted by it, and
preserve, renew and keep in full force and effect its corporate existence and
take all reasonable action to maintain all rights, privileges, Licenses, and
franchises necessary or desirable in the normal conduct of its business.
5.5 Inspection of Property; Books and Records; Discussions. Keep
proper books of record and account in which full, true and correct entries in
conformity with GAAP and all Requirements of Law shall be made of all dealings
and transactions in relation to its business and activities; and permit
representatives of the Bank to visit and inspect any of its properties and
examine and make abstracts from any of its books and records at any reasonable
time and as often as may reasonably be desired, and to discuss the business,
operations, properties and financial and other condition of the Borrower with
officers and employees of the Borrower and with the Independent Public
Accountants.
5.6 Notices. Give notice to the Bank of each of the following
promptly after the Borrower knows or reasonably should know thereof:
(a) of the occurrence of any Default or Event of Default;
(b) of any (i) default or event of default under any
Contractual Obligation or Licenses of the Borrower which, if adversely
determined, could have a material adverse effect on the business, operations,
property or financial or other condition of the Borrower, or (ii) litigation,
investigation or proceeding which may exist at any time between the Borrower and
any Person or any Governmental Authority involving a claim against the Borrower
in an amount in excess of Fifty Thousand Dollars ($50,000), or, which, if
adversely determined, could have a material adverse effect on the business,
operations, property or financial or other condition of the Borrower;
(c) of the following events, as soon as possible and in any
event within 30 days after the Borrower knows or has reason to know thereof: (i)
the occurrence or expected occurrence of any Reportable Event with respect to
any Plan, or (ii) the institution of proceedings or the taking or expected
taking of any other action by PBGC or the Borrower to terminate or withdraw from
any Plan, and in addition to such notice, deliver to the Bank whichever of the
following may be applicable: (A) a certificate of the chief financial officer of
the Borrower setting forth details as to such Reportable Even with respect
thereto, together with a copy of any notice of such Reportable Event that may be
required to be filed with PBGC, or (B)
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any notice delivered by PBGC evidencing its intent to institute such
proceedings or any notice to PBGC that such Plan is to be terminated, as the
case may be;
(d) of any proposed withdrawal by the Borrower from any
Multi-employer Plan;
(e) of any materially adverse change in the business,
operations, property or financial or other condition of the Borrower;
(f) of any representation or warranty contained in this
Agreement or the Collateral Documents which was or has proven to be incorrect in
any material respect on or as of the date made or deemed made.
Each notice pursuant to this Subsection shall be accompanied by a statement of a
Authorized Officer setting forth details of the occurrence referred to therein
and stating what action the Borrower proposes to take with respect thereto. For
all purposes of clause (d) of this Subsection, the Borrower shall be deemed to
have all knowledge or knowledge of all facts attributable to the administrator
of such Plan.
5.7 Motor Vehicle Titles. Upon request of the Bank, make available
all title certificates for motor vehicles owned by the Borrower and cooperate
with the Bank in recording notice of the Bank's security interest granted
pursuant to the Security Agreement.
5.8 Corporate Standing. Maintain its existence in good standing,
and remain or become duly licensed or qualified and in good standing in each
jurisdiction in which the conduct of its business requires such qualification or
licensing.
5.9 Discharge of Obligations. Cause to be paid and discharged all
obligations when due and all lawful taxes, assessments and governmental charges
or levies imposed upon the Borrower or upon any property, real, personal or
mixed, belonging to the Borrower or upon any part thereof, before the same shall
become in default, as well as all lawful claims for labor, materials and
supplies, which if unpaid become a lien or charge upon the property or any part
of it. Notwithstanding the previous sentence, the Borrower shall not be required
to cause to be paid and discharged any obligation, tax assessment, charge, levy
or claim so long as its validity is contested in the normal course of business
and in good faith by appropriate and timely proceedings and the Borrower, sets
aside on its books adequate reserves with respect to each tax, assessment,
charge, levy or claim so contested.
5.10 Insurance. (a) Keep all its property so insurable insured at
all times with responsible insurance carriers satisfactory to Bank against fire,
theft and other risks in coverage, form and amount satisfactory to Bank; (b)
keep adequately
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insured at all times in reasonable amounts with responsible insurance carriers
against liability on account of damage to persons or property and under all
applicable worker's compensation laws; (c) promptly deliver to Bank certificates
of insurance or any of those insurance policies required to be carried pursuant
hereto, with appropriate endorsements designating Bank as its interests may
appear as a named insured and loss payee as requested by Bank; and (d) cause
each such insurance policy to contain a thirty (30) day notice of cancellation
or material change in coverage provision satisfactory to Bank.
5.11 Fair Labor Standards Act. Comply with the provisions of the
Fair Labor Standards Act of 1938, as amended.
5.12 Guarantees By Subsidiaries and Affiliates. If the Borrower
forms a Subsidiary or Affiliate with the Bank's prior written consent in
accordance with the provisions of Section 6.12, cause such Subsidiary or
Affiliate to execute and deliver to the Bank, within thirty (30) days of tits
organization, a Guaranty, Security Agreement, and Financial Statement in a form
and content acceptable to the Bank.
SECTION 6 NEGATIVE COVENANTS
The Borrower hereby agrees that, so long as the Revolving Credit Note
and the Term Loan Note remains outstanding and unpaid or any other amount is
owing to the Bank hereunder or under the Collateral Documents, the Borrower
shall not directly or indirectly:
6.1 Indebtedness. Create, incur, assume or suffer to exist any
Indebtedness without the prior written consent of the Bank except:
(a) Indebtedness to the Bank; and
(b) Indebtedness for Capitalized Leases to the extent
permitted under Subsection 6.9.
6.2 Limitation on Liens. Create, incur, assume or suffer to exist, any
Lien upon any of the Collateral, whether now owned or hereafter acquired,
except:
(a) Liens for taxes not yet due or which are being contested
in good faith and by appropriate proceedings if adequate reserves with respect
thereto are maintained on the books of the Borrower in accordance with GAAP;
(b) carriers', warehousemen's, mechanics', materialmen's,
repairmen's or other like Liens arising in the ordinary course of business which
are not overdue for a period of more than 30 days or which are being contested
in good faith and by appropriate proceedings;
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(c) pledges or deposits in connection with workmen's
compensation, unemployment insurance and other social security legislation;
(d) deposits to secure the performance of bids, trade
contracts (other than for borrowed money), leases, statutory obligations, surety
and appeal bonds, performance bonds and other obligations of a like nature
incurred in the ordinary course of business;
(e) Liens created or permitted under the terms of the Security
Agreement; and
(f) Liens created under Capitalized Leases to the extent
permitted under Subsection 6.9.
6.3 Financial Condition. Permit, as of the last day of any Fiscal
Quarter, its Debt Service Coverage Ratio measured for the four (4) preceding
fiscal quarters ending on such day to be less than 1.5:1.0.
6.4 Limitation on Contingent Obligations. Create, incur, assume or
suffer to exist any Contingent Obligations, except (a) existing Contingent
Obligations as set forth on Schedule 6.4 hereto and any renewal or refinancing
thereof provided the aggregate monetary liability of the Borrower for any such
renewed or refinanced Contingent Obligations does not exceed the applicable
aggregate monetary liability for such Contingent Obligation set forth in
Schedule 6.4.
6.5 Prohibition of Fundamental Changes. Make or permit to be made
any material change in the character or conduct of its business or operations,
including entering into any transaction of merger or consolidation or
amalgamation, or liquidation, winding up or dissolving itself (or suffer any
liquidation or dissolution), convey, sell, lease, transfer or otherwise dispose
of, in one transaction or a series of transactions, all or substantially all of
its business or assets or acquiring by purchase or otherwise all or
substantially all the business or assets of, or stock or other evidences of
beneficial ownership of, any Person, or making any material change in its
present method of conducting business, except:
(a) Borrower may merge or consolidate with any other Person
provided in each case that immediately after giving effect thereto, no Default
or Event of Default shall occur and be continuing and, in the case of any such
merger, the Borrower is the surviving corporation; and
(b) Borrower may acquire the assets or capital stock of other
Persons provided the aggregate purchase price (whether payable in cash or
otherwise) of all such asset and capital stock acquisitions in any Fiscal Year
shall not exceed ______________ Dollars ($_____00,000), provided, however, at
the time of
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any such acquisition no Default or Event of Default shall have occurred
and be continuing, and no Default or Event of Default shall occur as the
result of any such acquisition.
6.6 Prohibition on Sale of Assets. Sell, lease, assign, transfer
or otherwise dispose of any of its assets, excluding (i) obsolete or worn out
property and (ii) inventory disposed of in the ordinary course of business.
6.7 Loans Advances and Investments. Make or commit to make, any
advance, loan, extension of credit or capital contribution to, or purchase of
any stock, bonds, notes, debentures or other securities of, or make any other
investment in (by way of transfers of property, acquisitions of evidences of
indebtedness or otherwise), any Person (all such transactions being herein
called "Investments"), except:
[(a) trade credit extended in the ordinary course of
business in an amount not to exceed $--------------;]
(b) advance payments or deposits against purchases
made in the ordinary course of Borrower's business;
(c) (i) direct obligations of the United States or any agency
thereof with maturities of one year or less from the date of acquisition, (ii)
commercial paper of a domestic issuer rated at least "A-1" by Standard & Poor's
Corporation or "P-1" by Moody's Investors Services, Inc., (iii) time deposits
and certificates of deposit with maturities of one year or less from the date of
acquisition issued by the Bank or any commercial bank having capital and surplus
in excess of Five Hundred Million Dollars ($500,000,000), and (iv) repurchase
obligations within a term of not more than thirty (30) days for underlying
securities of the types described in clauses (i), (ii) and (iii) above and
entered into with any commercial bank meeting the qualifications specified in
clause (iii) above;
(d) existing Investments as set forth in Schedule 6.7;
6.8 Compliance with ERISA. (a) Terminate any Plan so as to result
in any material liability to PBGC, (b) engage in any "prohibited transaction"
(as defined in Section 4975 of the Internal Revenue Code of 1986, as amended)
involving any Plan which would result in a material liability for an excise tax
or civil penalty in connection therewith, (c) incur or suffer to exist any
material "accumulated funding deficiency" (as defined in Section 302 of ERISA),
whether or not waived, involving any Plan, or (d) allow or suffer to exist any
event or condition, which presents a material risk of incurring a material
liability to PBGC by reason of termination of any such Plan.
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6.9 Capital Expenditures. Make or be committed to make, directly
or indirectly, expenditures for fixed or capital assets (including, without
limitation, under Capitalized Leases) in excess of ______________
($____,000,000) in any Fiscal Year of the Borrower.
6.10 Lease Obligations. Enter into any agreement, or become liable
under any agreement, for the lease, hire or use of any real or personal
property, except that the Borrower may enter into any lease, other than a
Capitalized Lease, provided that immediately after giving effect thereto, the
aggregate annual lease obligations of the Borrower would not exceed ___________.
6.11 Dividends. Declare any dividends (other than dividends payable
solely in stock of the Borrower) on, or make any payment on account of, or set
apart assets for a sinking or other analogous fund for, the purchase,
redemption, retirement or other acquisition of any shares of any class of stock
of the Borrower, whether now or hereafter outstanding, or make any other
distribution in respect thereof, either directly or indirectly, whether in cash
or property or in obligations of the Borrower, or purchase or otherwise acquire
any shares of any class of stock of the Borrower from any person (such
declarations, payments, purchases, redemptions, retirements, acquisitions or
distributions being herein called "stock payments").
6.12 Subsidiaries and Affiliates. Organize, cause to organize, or
acquire or invest in, any Subsidiary or Affiliate, without the prior written
consent of the Bank.
6.13 Ownership Interests. Except with respect to the Initial Public
Offering, purchase or retire any of its capital stock or issue any capital
stock, or otherwise change the capital structure of the Borrower or change the
relative rights, preferences or limitations relating to any of its capital
stock.
6.14 Compensation. Pay, or obligate itself to pay, directly or
indirectly, any salaries, bonuses, dividends or other compensation to the
individuals who are executives of the Borrower in excess of $____________ in the
aggregate for all such individuals.
6.15 Affiliate Transactions. Directly or indirectly, enter into,
renew or extend any transaction (including, without limitation, the purchase,
sale, lease or exchange of property or assets, or the rendering of any service)
with any Affiliate (other than wholly owned Subsidiaries consented to by the
Bank pursuant to Section 6.12), except upon fair and reasonable terms no less
favorable to the Borrower or such Subsidiary than could be obtained, at the time
of such transaction or, if such transaction is pursuant to a written agreement,
at the time of the execution of the agreement providing therefore, in a
comparable arms' length transaction with a Person that is not an Affiliate.
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SECTION 7 EVENTS OF DEFAULT
7.1 Events of Default. The following shall be Events of Default
under this Agreement:
(a) Nonpayment. Borrower shall fail to pay any principal of,
or interest on, the Revolving Credit Note, the Term Loan Note or the Mezzanine
Loan Note when due in accordance with the terms thereof; or shall fail to pay,
within ten (10) days after written notice thereof from the Bank, any other
amount payable hereunder in accordance with the terms hereof; or
(b) Representations. Any representation or warranty made or
deemed made by the Borrower herein, in the Collateral Documents, or in the
Mezzanine Loan Agreements, or which is contained in any certificate, document or
financial or other statement furnished at any time under or in connection with
this Agreement or the Collateral Documents shall prove to have been incorrect in
any material respect on or as of the date made or deemed made; or
(c) Negative Covenants. The Borrower shall default in the
observance or performance of any covenant or agreement contained in Section 6 of
this Agreement; or
(d) Other Covenants. The Borrower shall default in the
observance or performance of any covenant or agreement contained in this
Agreement, the Collateral Documents or the Mezzanine Loan Agreements (and not
constituting an Event of Default under any of the other provisions of this
Section 7) and shall fail to fully cure such default within fifteen (15) days
after written notice thereof from the Bank; or
(e) Other Indebtedness. The Borrower shall (i) default in the
payment of principal of or interest on any Indebtedness in excess of ________
Dollars ($____00,000) (other than the Term Loan Note) or on any Contingent
Obligations relating to such Indebtedness in excess of _______ Thousand Dollars
($____0,000) (such Indebtedness and Contingent Obligations being herein called
the "Obligations") beyond the period of grace, if any, provided in the
instrument or agreement under which the Obligations were created; or (ii)
default in the observance or performance of any other agreement contained in any
such Obligation, or in any instrument or agreement evidencing, securing or
relating thereto, or any other event shall occur, the effect of which default or
other event is to cause, or permit the holder or holders of such Obligation (or
a trustee or agent on behalf of such holder or holders) to cause, such
Obligation to become due prior to its stated maturity; provided, however, such
default described in clause (i) or (ii) above shall not constitute an Event of
Default so long as the Borrower, in good faith, is contesting the collection or
enforcement of such Obligations by appropriate legal proceedings diligently
pursued; or
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(f) Insolvency Proceedings. (i) The Borrower or any Subsidiary
shall commence any case, proceeding or other action (A) under any existing or
future law of any jurisdiction, domestic or foreign, relating to bankruptcy,
insolvency, reorganization or relief of debtors, seeking to have an order for
relief entered with respect to it, or seeking to adjudicate it a bankrupt or
insolvent, or seeking reorganization, arrangement, adjustment, winding-up,
liquidation, dissolution, composition or other relief with respect to its debts,
or (B) seeking appointment of a receiver, trustee, custodian or other similar
official for it or for all or any substantial part of its assets, or the
Borrower shall make a general assignment for the benefit of its creditors; or
(ii) there shall be commenced against the Borrower or any Subsidiary any case,
proceeding or other action of a nature referred to in clause (i) above which (A)
results in the entry of an order for relief or any such adjudication or
appointment or (B) remains undismissed, undischarged or unbonded for a period of
60 days; or (iii) there shall be commenced against the Borrower any case,
proceeding or other action seeking issuance of a warrant of attachment,
execution, distraint or similar process against all or any substantial part of
its assets which results in the entry of an order for any such relief which
shall not have been vacated, discharged, or stayed or bonded pending appeal
within 60 days from the entry thereof; or (iv) the Borrower shall take any
action in furtherance of, or indicating its consent to, approval of, or
acquiescence in, any of the acts set forth in clause (i), (ii), or (iii) above;
or (v) the Borrower shall generally not, or shall be unable to, or shall admit
in writing its inability to, pay its debts as they become due; or
(g) Pension Default. (i) Any Person shall engage in any
"prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of
the Code) involving any Plan, (ii) any "accumulated funding deficiency" (as
defined in Section 302 of ERISA), whether or not waived, shall exist with
respect to any Plan, (iii) a Reportable Event shall occur with respect to, or
proceedings shall commence to have a trustee appointed, or a trustee shall be
appointed, to administer or to terminate, any Plan, which Reportable Event or
institution of proceedings is, in the reasonable opinion of the Bank, likely to
result in the termination of such Plan for purposes of Title IV of ERISA, and,
in the case of a Reportable Event, the continuance of such Reportable Event
unremedied for ten days after notice of such Reportable Event pursuant to
Section 4043(a), (c) or (d) of ERISA is given or the continuance of such
proceedings for ten days after commencement thereof, as the case may be, (iv)
any Plan shall terminate for purposes of Title IV of ERISA, or (v) any other
event or condition shall occur or exist; and in each case in clauses (i) through
(v) above, such event or condition, together with all other such events or
conditions, if any, could subject the Borrower to any tax, penalty or other
liabilities in the aggregate material in relation to the business, operations,
property or financial or other condition of the Borrower; or
(h) Judgments. One or more judgments or decrees shall be
entered against the Borrower involving in the aggregate a liability (not paid or
fully covered
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by insurance) of two hundred and fifty thousand dollars ($250,000) or more and
all such judgments or decrees shall not have been vacated, discharged, or stayed
pending appeal within sixty (60) days from the entry thereof; or
(i) Life Insurance. The Borrower fails to maintain in effect
at all times the Life Insurance Policy. The Borrower agrees that upon the death
of Thomas H. White, the Bank may apply the proceeds of the Life Insurance Policy
to the Loans as a mandatory prepayment, such application to be in a manner
determined in the Bank's sole discretion, and any application to the Revolving
Credit shall be a permanent reduction thereto.
(j) Collateral Documents. Any of the Collateral Documents
shall cease to be in full force and effect at any time.
7.2 Effect of Event of Default. Upon the occurrence of any Event
of Default specified in Subsection 7.1, all amounts owing under or evidenced by
this Agreement, the Revolving Credit Note, the Term Loan Note and the Collateral
Documents shall immediately become due and payable. Upon the occurrence and
during the continuance of any other Event of Default, the Bank may, by notice of
default to the Borrower, declare all amounts owing under or evidenced by this
Agreement, the Revolving Credit Note, the Term Loan Note and the Collateral
Documents to be due and payable forthwith, whereupon the same shall immediately
become due and payable. Any acceleration of payment pursuant to this Subsection
8.2 shall be without presentment, demand, protest or other notice of any kind,
all of which are hereby expressly waived, anything contained herein or in the
Revolving Credit Note or the Term Loan Note to the contrary notwithstanding.
SECTION 8 MISCELLANEOUS
8.1 Increased Costs/Capital Adequacy. In the event that at any
time or from time to time any Requirement of Law, or any interpretation or
application thereof, or compliance by the Bank with any request or directive
(whether or not having the force of law) from any central bank or monetary
authority or other governmental authority:
(a) does or shall subject the Bank to any tax of any kind
whatsoever, or change in the amount thereof, with respect to this Agreement, the
Revolving Credit Note, the Term Loan Note, the Mezzanine Loan Note, or change
the basis of taxation of payments to the Bank of principal, interest or any
other amount payable hereunder (except for changes in the rate of tax on the
overall net income of the Bank); or
(b) does or shall impose, modify or hold applicable or change
any reserve (including, without limitation, basic, supplemental, marginal and
emergency reserves), special deposit, compulsory loan or similar requirement
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against assets held by, or deposits or other liabilities in or for the account
of, advances or loans by, or other credit extended by, or any other acquisition
of funds or capital adequacy or maintenance requirement by the Bank; or
(c) does or shall impose on the Bank any other condition or
change;
and the result of any of the foregoing is to increase the cost to the Bank of
making or maintaining any of the Loans or to reduce any amount receivable
thereunder then, in any such case, the Borrower shall promptly pay the Bank,
upon its demand, such additional amount which will compensate the Bank for such
additional cost or reduced amount receivable. A certificate showing in
reasonable detail any additional amounts determined by the Bank to be payable
pursuant to this Subsection shall be submitted by the Bank to the Borrower and,
absent manifest error, shall be conclusive and binding on the Borrower.
8.2 Amendments, Waivers and Consents. No amendment or waiver of
any provision of this Agreement, the Revolving Credit Note, the Term Loan Note
or the Collateral Documents, nor consent to any departure by the Borrower
therefrom, shall in any event be effective unless the same shall be in writing
and signed by the Bank, and then such waiver or consent shall be effective only
in the specific instance and for the specific purpose for which given.
8.3 Notices. All notices, requests and demands required to be
given hereunder or under the Collateral Documents to or upon the respective
parties hereto or to the Collateral Documents to be effective shall, unless
otherwise expressly provided herein, be in writing or by telegraph and shall be
deemed to have been duly given or made, unless otherwise expressly provided
herein, two (2) days after deposited in the mail (certified or registered mail
return receipt requested, the failure to receive such return receipt having no
effect) or, in the case of telegraphic notice, when delivered to the telegraph
company, addressed as follows or to such address or other address as may be
hereafter designated in writing by the respective parties hereto and any future
holder of the Term Loan Note:
The Borrower: Life Critical Care Corporation
37885 Green Street
New Baltimore, Michigan 48047
Attn: President
The Bank: Manufacturers and Traders Trust
Company
One Fountain Plaza
Buffalo, New York 14203
Attn: Shelley C. Drake,
Vice President
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8.4 No Waiver; Cumulative Remedies. No failure to exercise and no
delay in exercising, on the part of the Bank, any right, power or privilege
hereunder, shall operate as a waiver thereof; nor shall any single or partial
exercise of any right, power or privilege hereunder preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
The rights and remedies herein provided are cumulative and not exclusive of any
rights or remedies provided by law.
8.5 Survival of Representations and Warranties. All
representations and warranties made hereunder and in any document, certificate
or statement delivered pursuant hereto or in connection herewith shall survive
the execution and delivery of this Agreement, the Revolving Credit Note, and the
Term Loan Note.
8.6 Payment of Expenses and Taxes; Indemnity. The Borrower agrees
(a) to pay or reimburse the Bank on demand for all its out of-pocket costs and
expenses incurred in connection with the preparation and execution of, and any
amendment, waiver, consent, supplement or modification to, this Agreement, the
Revolving Credit Note, the Term Loan Note, the Collateral Documents and any
other documents prepared in connection herewith, and the consummation of the
transactions contemplated hereby and thereby, including, without limitation, the
reasonable fees and disbursements of legal counsel to the Bank, (b) to pay or
reimburse the Bank on demand for all its costs and expenses incurred in
connection with the enforcement or preservation of any rights under this
Agreement, the Revolving Credit Note, the Term Loan Note, the Collateral
Documents and any such other documents, including, without limitation, fees and
disbursements of legal counsel to the Bank, (c) without limitation of the
provision of clause (a) of this subsection, to pay, indemnify, and to hold the
Bank harmless from, any and all recording and filing fees, intangibles taxes,
UCC and other title or lien searches, stamp and other taxes, if any, which may
be payable or determined to be payable in connection with the execution and
delivery of, or consummation of any of the transactions contemplated by, or any
amendment, supplement or modification of, or any waiver or consent under or in
respect of, this Agreement, the Revolving Credit Note, the Term Loan Note, the
Collateral Documents and any such other documents, and (d) to pay, indemnify,
and hold the Bank harmless from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements of any kind or nature whatsoever (including, without
limitation, counsel fees and disbursements in connection with any litigation,
investigation, hearing or other proceeding) with respect or in any way related
to the existence, execution, delivery, enforcement, performance of this
Agreement, the Revolving Credit Note, the Term Loan Note and the Collateral
Documents (all of the foregoing, collectively, the "Indemnified Liabilities"),
provided, that the Borrower shall not have any obligation hereunder with respect
to
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Indemnified Liabilities arising directly from the gross negligence or willful
misconduct of the Bank.
8.7 Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the Borrower, the Bank and their respective
successors and assigns, except that the Borrower may not assign or transfer any
of its rights under this Agreement without the prior written consent of the
Bank.
8.8 Counterparts. This Agreement may be executed by one or more
the parties to this Agreement on any number of separate counterparts and all of
said counterparts taken together shall be deemed to constitute one and the same
instrument.
8.9 Governing Law. This Agreement, the Revolving Credit Note, and
the Term Loan Note and the rights and obligations of the parties under this
Agreement, the Revolving Credit Note, and the Term Loan Note shall be governed
by, and construed and interpreted in accordance with, the internal laws of the
State of New York without regard to principles of conflicts of laws.
8.10 Inconsistent Provisions. The terms of this Agreement, the
Revolving Credit Note, the Term Loan Note and the Collateral Documents shall be
cumulative except to the extent they are specifically inconsistent with each
other, in which case the terms of this Agreement shall prevail.
8.11 Further Assurances. The Borrower hereby agrees that it will,
from time to time at its own expense, promptly execute and deliver all further
instruments, and take all further action, that may be necessary or appropriate
or that the Bank may reasonably request, in order to enable the Bank to exercise
and enforce their rights under this Agreement, the Revolving Credit Note, the
Term Loan Note and the Collateral Documents and otherwise to carry out the
intent of this Agreement and the Collateral Documents.
8.12 Waiver of Jury Trial. THE BANK AND THE BORROWER HEREBY
KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A
TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF,
UNDER, OR IN CONNECTION WITH, THIS AGREEMENT, THE REVOLVING CREDIT NOTE, THE
TERM LOAN NOTE OR ANY COLLATERAL DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF
DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN), OR ACTIONS OF THE BANK OR THE
BORROWER. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE BANK TO ENTER INTO
THIS AGREEMENT.
8.13 Consent to Jurisdiction. THE BORROWER AND BANK AGREE THAT ANY
ACTION OR PROCEEDING TO ENFORCE OR ARISING OUT OF
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THIS AGREEMENT, THE REVOLVING CREDIT NOTE, OR THE TERM LOAN NOTE MAY BE
COMMENCED IN THE SUPREME COURT OF NEW YORK IN ERIE COUNTY, OR IN THE DISTRICT
COURT OF THE UNITED STATES IN THE WESTERN DISTRICT OF NEW YORK, AND THE BORROWER
AND BANK WAIVE PERSONAL SERVICE OF PROCESS AND AGREE THAT A SUMMONS AND COMPLAIN
COMMENCING AN ACTION OR PROCEEDING IN ANY SUCH COURT SHALL BE PROPERLY SERVED
AND SHALL CONFER PERSONAL JURISDICTION IF SERVED BY REGISTERED OR CERTIFIED MAIL
TO THE BORROWER OR BANK, OR AS OTHERWISE PROVIDED BY THE LAWS OF THE SATE OF NEW
YORK OR THE UNITED STATES.
8.14 Headings. Headings to the sections of this Agreement are solely
for the convenience of the parties and are not an aid in the interpretation of
this Agreement or any part hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers as of
the day and year first above written.
LIFE CRITICAL CARE CORPORATION
By:_____________________________________
Name:
Title:
38
<PAGE>
MANUFACTURERS AND TRADERS
TRUST COMPANY
By: ______________________________________
Name:
Title:
39
LIFE CRITICAL CARE CORPORATION
LOCK-UP AGREEMENT
H.J. Meyers & Co., Inc.
as Representative of the Underwriters
1895 Mount Hope Avenue
Rochester, New York 14620
Ladies and Gentlemen:
The undersigned, a beneficial owner of shares of the common stock, par
value $0.01 per share (the "Common Stock"), of Life Critical Care Corporation, a
Delaware corporation (the "Company"), and/or warrants, options or rights to
purchase, or securities or debt convertible into, Common Stock, understands that
the Company has filed with the Securities and Exchange Commission a registration
statement on Form SB-2 (No. 333-14755) for the registration of shares of Common
Stock of the Company (the "Registration Statement") in connection with a
proposed public offering of such securities (the "Offering"). The undersigned
further understands that upon the effectiveness of the Registration Statement,
the Company and H.J. Meyers & Co., Inc., as representative (the
"Representative") for a group of underwriters including H.J. Meyers & Co., Inc.
(the "Underwriters") intends to enter into an underwriting agreement (the
"Underwriting Agreement") relating to the Offering.
In order to induce the Representative to act on behalf of the
Underwriters and to proceed with the Offering, and in consideration thereof, the
undersigned hereby agrees that, for a period of eighteen months following the
closing date of the Offering, the undersigned will not sell, assign,
hypothecate, pledge or otherwise dispose (either pursuant to Rule 144
promulgated under the Securities Act of 1933, as amended, or otherwise) of any
shares of Common Stock of the Company registered in the name of the undersigned
or beneficially owned by the undersigned or subsequently acquired through the
exercise of any options, warrants or any conversion of any convertible
securities of the Company (collectively, the "Securities"), without the prior
written consent of the Representative. In addition, before any transfer of
Securities may occur, the transferee thereof shall agree in writing to the terms
hereof.
In order to enable the Representative to enforce the aforesaid
covenants, the undersigned hereby consents to the placing of restrictive legends
on all certificates evidencing any Securities registered in the name of
<PAGE>
the undersigned or beneficially owned by the undersigned, the placement of
appropriate stop transfer orders with the transfer agent of the Company and the
noting of such restrictions on the transfer books and records of the Company.
This Agreement shall be binding on the undersigned and his, her or its
respective successors, heirs, personal representatives and assigns.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York, without giving effect to conflict of law
principles.
Dated:___________________ Very truly yours,
------------------------
Signature
------------------------
Printed Name
------------------------
Print Address
------------------------
Print Social Security Number
or Taxpayer I.D. Number
2
AGREEMENT OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS
________________, 19__
H.J. Meyers & Co., Inc.
As Representative of the
referenced Underwriters
1895 Mt. Hope Avenue
Rochester, New York 14620
Ladies and Gentlemen:
Pursuant to a certain Underwriting Agreement (the "Underwriting
Agreement") dated this date (the "Effective Date") between Life Critical Care
Corporation, a Delaware corporation (the "Company"), and you, as Representative
of the several Underwriters, including yourself, named therein (the
"Underwriters"), the Company proposes to sell to the Underwriters, pursuant to a
registration statement (File No. 333-14755) on Form SB-2 relating to the public
offering thereof (the "Offering"), shares of the common stock, $.01 par value,
of the Company (the "Shares"). Capitalized terms used in this Agreement and not
otherwise defined herein shall have the respective meanings given them by the
Underwriting Agreement.
To induce you to enter into the Underwriting Agreement, and in
consideration thereof, each of the undersigned, being an officer, director or
principal stockholder of the Company (each, an "Individual") agrees as follows:
Covenants. Each Individual, for himself individually and not
jointly, covenants and agrees with each Underwriter and the Company that:
(a) Restriction on Future Sales. For a period of 18 months following
the Effective Date, such Individual shall not, without your prior written
consent, sell, assign, hypothecate, pledge or otherwise dispose of, directly or
indirectly, any Shares now or hereafter owned by him (whether acquired through
option exercise or otherwise), and such Individual hereby agrees to permit all
certificates evidencing such Shares to be endorsed with the appropriate
restrictive legends, and consents to the placement of appropriate stop transfer
orders with the transfer agent for the Company.
(b) Certain Market Practices. Such Individual represents that he has
not taken, and agrees that he shall not take, directly or indirectly, any action
designed, or which might reasonably be expected, to cause or result in, or which
has constituted, the
<PAGE>
stabilization or manipulation of the price of the Shares to facilitate the sale
or resale thereof.
(c) Certain Representations. Such Individual shall not make any written
or oral representation in connection with the offering and sale of the Shares or
the Representative's Warrant which is not contained in the Prospectus, which is
otherwise inconsistent with or in contravention of anything contained in the
Prospectus, or which shall constitute a violation of the Securities Act of 1933,
as amended (the "Act"), the rules and regulations promulgated thereunder, the
Securities Exchange Act of 1934, as amended, or the rules and regulations
promulgated thereunder.
(d) Rule 144 Sales. For a period of three years following the First
Closing Date, you shall have the right to purchase for your own account, or to
sell for the account of such Individual, all securities of the Company sold by
such Individual pursuant to Rule 144 of the rules and regulations promulgated
under the Act.
2. Representations and Warranties. Each Individual, for himself
individually and not jointly, represents and warrants to, and agrees with, each
Underwriter and the Company (except that Individuals who are not party to the
Stock Escrow Agreement make no representations or warranties whatsoever with
respect to the Stock Escrow Agreement) as follows:
(a) Enforceability. This Agreement and the Stock Escrow Agreement have
been duly and validly executed and delivered by such Individual and, assuming
due execution thereof by you or the Company, as the case may be, constitutes
valid and binding obligations of such Individual, enforceable against him in
accordance with their respective terms.
(b) No Conflict. The compliance by such Individual with all of the
provisions of this Agreement and the Stock Escrow Agreement will not conflict
with or result in a breach of, any of the terms or provisions of, or constitute
a default under, or result in the creation or imposition of any lien, charge or
encumbrance pursuant to the terms of, any contract, indenture, mortgage, deed of
trust, loan agreement or other material agreement or instrument to which such
Individual is a party or by which he may be bound or to which any of his
property or assets are subject, nor will such action result in any violation of
the provisions of any statute, order, rule or regulation applicable to such
Individual of any court or governmental authority having jurisdiction over him
or his property.
(c) Stockholder Agreements; Registration Rights. Such Individual has no
rights with respect to the purchase, sale or registration of any Shares, except
as set forth on Schedule I hereto.
2
<PAGE>
(d) No NASD Affiliation. Such Individual has no direct or indirect
affiliation or association with any member of the National Association of
Securities Dealers, Inc.
3. Effectiveness. This Agreement shall become effective upon the
effectiveness, in accordance with its terms, of the Underwriting Agreement.
4. Termination. This Agreement shall terminate upon the termination by you
of the Underwriting Agreement in accordance with the terms of the Underwriting
Agreement.
5. In General.
(a) Survival. The respective covenants, representations and warranties
of the Individuals set forth in this Agreement shall survive delivery of and
payment for the Shares.
(b) Parties in Interest. This Agreement is made solely for the benefit
of the Underwriters and, to the extent expressed, the Individuals, any person
controlling an Underwriter, and their respective executors, administrators,
successors and assigns; and no other person shall acquire or have any right
under or by virtue of this Agreement. The term "successors and assigns" shall
not include any purchaser, as such, of Shares from an Underwriter.
(c) Gender. Wherever used herein, the masculine pronoun shall include
the feminine and the neuter, as appropriate in the context.
(d) Applicable Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of New York applicable to agreements
made and to be performed entirely within such State.
(e) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return this Agreement, whereupon it will become a
binding
3
<PAGE>
agreement among the Individuals, the Company and the Underwriters in accordance
with its terms.
Yours very truly,
MORGENTHAU BRIDGE INVESTMENT
LIMITED PARTNERSHIP
By: Morgenthau Bridge Financing Corp.,
General Partner
By: _________________________________
Richard M. Andzel, Vice President
MORGENTHAU BRIDGE LOAN LLC
By: Morgenthau Bridge Financing Corp.,
Manager
By: _________________________________
Richard M. Andzel, Vice President
_________________________________________
Thomas H. White
_________________________________________
Gregory A. Poloni
_________________________________________
Anthony R. Morgenthau
_________________________________________
Richard M. Andzel
_________________________________________
Amy E. Parker
Sterling Trust Company, Trustee, FBO
Gregory A. Poloni
By: _____________________________________
Name:
Title:
4
<PAGE>
Sterling Trust Company, Trustee, FBO
Anthony R. Morgenthau
By: _____________________________________
Name:
Title:
Sterling Trust Company, Trustee, FBO
Richard M. Andzel
By: _____________________________________
Name:
Title:
Sterling Trust Company, Trustee, FBO
Amy E. Parker
By: _____________________________________
Name:
Title:
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
H.J. MEYERS & CO., INC.
As Representative of the
referenced Underwriters
By: ________________________________
Name:
Title:
LIFE CRITICAL CARE CORPORATION
By: ________________________________
Name:
Title:
5
<PAGE>
Schedule I
Morgenthau Bridge Investment Limited Partnership and
Morgenthau Bridge Loan LLC (the "Bridge Funds") each have registration and
related rights under and pursuant to those certain Loan and Securities Purchase
Agreements each dated August 12, 1995 between each of the Bridge Funds and Life
Critical Care Corporation which have been subordinated pursuant to that certain
Letter Agreement dated November 15, 1996 from the Bridge Funds to H.J. Meyers &
Co. and the Company.
6
MEZZANINE CREDIT AGREEMENT
BETWEEN
LIFE CRITICAL CARE CORPORATION
AND
MANUFACTURERS AND TRADERS TRUST COMPANY
Dated as of , 1996
<PAGE>
MEZZANINE CREDIT AGREEMENT
AGREEMENT dated as of , 1996 by and between Life Critical Care
Corporation, a Delaware corporation, having its principal office at 37885 Green
Street, New Baltimore, Michigan 48047 (the "Borrower") and MANUFACTURERS AND
TRADERS TRUST COMPANY, a New York banking corporation having its principal
office at One M&T Plaza, Buffalo, New York 14203 ("Bank").
WHEREAS, pursuant to an Asset Purchase Agreement dated as of March 1,
1996, as amended, the Borrower is acquiring substantially all of the assets of
ABC Medical Supply, Inc. (the "ABC Acquisition"); and
WHEREAS, pursuant to an Asset Purchase Agreement dated as of January
22, 1996, as amended, the Borrower is acquiring substantially all of the
assets of Blue Water Medical Supply, Inc. (the "Blue Water Acquisition"); and
WHEREAS, pursuant to an Asset Purchase Agreement dated as of March
1, 1996, as amended, the Borrower is acquiring substantially all of the assets
of Great Lakes Home Medical Supply, Inc. (the "Great Lakes Acquisition");
and
WHEREAS, in connection with the Acquisitions, the Borrower is
simultaneously making an initial public offering of its capital stock; and
WHEREAS, in order to partially fund the Acquisitions and to provide
general working capital to the Borrower thereafter, the Borrower has requested
the Bank to make available a term loan in the amount of two million dollars
($2,000,000); and
WHEREAS, the Bank, subject to the terms and conditions of this
Agreement, is willing to make available to the Borrower the requested term loan.
NOW, THEREFORE, the Borrower and the Bank agree as follows:
SECTION 1 DEFINITIONS
1.1 Defined Terms. The following terms (whether or not underscored)
when used in this Agreement, including its preamble and recitals, shall, except
where the context otherwise requires, have the following meanings:
<PAGE>
"Affiliate": any Person (i) which directly or indirectly
controls, or is controlled by, or is under common control with the Borrower, or
(ii) forty (40) percent or more of the voting stock of which is directly or
indirectly beneficially owned or held by the Borrower, any current shareholder
of the Borrower or any member of such shareholderSs immediate family. The term
"control" means the possession of the power to direct or cause the direction of
the management and policies of a Person, whether through the ownership of
voting securities, by contract or otherwise.
"Acquisitions": the collective reference to the ABC
Acquisition, Blue Water Acquisition and Great Lakes Acquisition.
"Acquisition Aqreements": the collective reference to
the asset purchase agreements for the Acquisitions.
"Aqreement": this Mezzanine Credit Agreement, as
supplemented, amended or modified from time to time.
"Audited Statements": see Subsection 4.1.
"Authorized Officers": shall mean of the Borrower.
"Bank": Manufacturers and Traders Trust Company.
"Borrower": Life Critical Care Corporation., a Delaware
corporation.
"Business Day": (a) for all purposes other than as covered
by clause (b) below, any day excluding Saturday, Sunday and any day on which
Bank is authorized by law or other governmental action to close and (b) with
respect to all notices and determinations in connection with LIBOR, any day
which is a Business Day described in clause (a) and which is also a day for
trading by and between banks in U.S. dollar deposits in the London interbank
market.
"Capitalized Lease": any lease the obligations under which
have been, or in accordance with GAAP are required to be, recorded on the books
of the Borrower as a capital lease liability.
"Change in Control": (a) the acquisition after the date
hereof by any Person or Persons (other than the officers and directors
referred to in clause (b) of this subparagraph and their respective spouses
and children) acting in concert of beneficial ownership (within the meaning of
Rule 13d-3 of the Securities and Exchange Commission promulgated under the
Securities Exchange Act of 1934, as amended, or any successor, replacement or
analogous rule or provision of law) of 20% or more of the outstanding shares
of the Borrower's voting stock or (b) the officers and directors of the
Borrower that, collectively, on the date hereof, own in excess of 80% of the
outstanding shares of the Borrower's voting stock, shall cease to own in
excess of 80% of the outstanding shares of the Borrower's voting stock (for
the purposes of this clause (b),
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<PAGE>
voting stock owned by the respective spouses and children of such officers and
directors shall be deemed to be owned by such officers and directors).
"Code": the Internal Revenue Code of 1986, as amended,
reformed or otherwise modified from time to time.
"Collateral: means all property which is subject or is to
be subject to the Lien granted by the Collateral Documents.
"Collateral Documents": the collective reference to
the Revolving Credit and Term Loan Agreement, the Security Agreement, the
Shareholders Pledge Agreement, the Subordination and Pledge Agreement and the
Environmental Indemnification Agreement.
"Consolidated" or "Consolidated Basis": the consolidation
of the accounts of the Borrower and its Subsidiaries in accordance with GAAP,
including principles of consolidation, consistent with those applied in the
preparation of the consolidated audited financial statements.
"Contingent Obligation": as to any Person, any obligation of
such Person guaranteeing or in effect guaranteeing any Indebtedness, leases,
dividends or other obligations ("primary obligations") of any other Person
(the "primary obligor") in any manner, whether directly or indirectly,
including, without limitation, any obligation of such Person, whether or not
contingent, (a) to purchase any such primary obligation or any property
constituting direct or indirect security therefor, (b) to advance or supply
funds (i) for the purchase or payment of any such primary obligation or (ii)
to maintain working capital or equity capital of the primary obligor or
otherwise to maintain the net worth or solvency of the primary obligor, (c) to
purchase property, securities or services primarily for the purpose of
assuring the owner of any such primary obligation of the ability of the
primary obligor to make payment of such primary obligation or (d) otherwise to
assure the owner of such primary obligation against loss in respect thereof;
provided, however, that the term Contingent Obligation shall not include
endorsements of instruments for deposit or collection in the ordinary course
of business.
"Contractual Obligation": as to any Person, any provision
of any security issued by such Person or of any mortgage, indenture, lease,
contract or other agreement, instrument or undertaking to which such Person is
or purports to be a party or by which it or any of its property is or purports
to be bound.
"Credit": all extensions of credit set forth in Section 2 of
this Agreement.
"Debt Service Coveraqe Ratio": means for any Fiscal Year
or four (4) consecutive Fiscal Quarters, the ratio of:
(a) Net Income for such Fiscal Year or four (4)
Fiscal Quarters, as the case may be,
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<PAGE>
to
(b) aggregate current maturities of long-term debt
of the Borrower.
"Default": any Event of Default or any condition or event
which, after notice or lapse of time, or both, would become an Event of Default.
"ERISA": the Employee Retirement Income Security Act of
1974, as amended, and any successor statute of similar import, together with the
regulations thereunder, in each case as in effect from time to time. References
to sections of ERISA shall be construed to also refer to any successor sections.
"Event of Default": any of the events described in Subsection
7.1.
"Fiscal Ouarter": any quarter of a Fiscal Year.
"Fiscal Year": any period of twelve consecutive calendar
months ending on the last day of December.
"Fixed Rate": twelve percent (12%) per annum.
"GAAP": the generally accepted accounting principles applied
in the preparation of the audited financial statements of the Borrower as (a)
shall be consistent with the theneffective principles promulgated or adopted by
the Financial Accounting Standards Board and its predecessors and successors
(other than any changes resulting from the implementation of F.A.S.B. 96) and
(b) shall be concurred in by the independent certified public accountants
certifying any financial statements of the Borrower.
"Governmental Authority": any nation or government, any state
or other political subdivision thereof, and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government, and any corporation or other entity owned or controlled (through
stock or capital ownership or otherwise) by any of the foregoing.
"Indebtedness": of any Person, at a particular time, means
all items which, in conformity with GAAP, would be classified as liabilities on
a balance sheet of such Person as at such time and which constitute (a)
indebtedness for borrowed money or the deferred purchase price of property
(including, without limitation, all notes payable and drafts accepted
representing extensions of credit and all obligations evidenced by bonds,
debentures, notes or other similar instruments, but excluding trade payables
incurred in the ordinary course of business payable within ninety days of the
date thereof), (b) obligations with respect to any conditional sale agreement or
title retention agreement, (c) indebtedness arising under acceptance facilities,
in connection with surety or other similar bonds, and the outstanding amount of
all letters of credit
-4-
<PAGE>
issued for the account of such Person and, without duplication, all drafts
drawn thereunder, (d) all liabilities secured by any security interest in any
property owned by such Person even though it has not assumed or otherwise
become liable for the payment thereof, (e) obligations under Capitalized
Leases, (f) obligations with respect to interest rate protection agreements,
and (g) any asserted withdrawal liability of such Person or a commonly
controlled entity to a Multiemployer Plan.
"Independent Public Accountant": refers to Ernst & Young
LLP or any other public accounting firm selected by the Borrower and consented
to by the Bank, such consent not to be unreasonably withheld.
"Initial Public Offering": The offering for public sale of
2,000,000 shares of the Borrower's common stock pursuant to the terms of the
Borrower's Registration Statement as filed with the Securities and Exchange
Commission on October 24, 1996, as amended from time to time.
"Interest Expense": means, for any period, the sum of
the aggregate interest expense of the Borrower for such period in respect of
Indebtedness of the Borrower, as determined in accordance with GAAP.
"Interim Statements": see Subsection 4.1.
"Investments": see Subsection 6.7.
"Licenses": see Subsection 3.18
"Lien": any mortgage, security interest, pledge,
hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or
other), or preference, priority or other security agreement or preferential
arrangement of any kind or nature whatsoever (including, without limitation,
any conditional sale or other title retention agreement, any financing lease
having substantially the same economic effect as any of the foregoing, and the
filing of any financing statement under the Uniform Commercial Code or
comparable law of any jurisdiction other than any financing statement filed in
connection with consignments or leases not intended as security).
"Loan": any amount of the Mezzanine Term Loan bearing
interest at the Fixed Rate.
"Loan Documents": the collective reference to this
Agreement, the Mezzanine Term Loan Note and the Collateral Documents.
"Maturity Date": see Subsection 2.2.
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<PAGE>
"Mezzanine Term Loan": the six year term loan, in the
principal amount of $2,000,000, made by the Bank to the Borrower pursuant to
the Mezzanine Term Loan Agreement.
"Mezzanine Term Loan Aqreements": The collective reference to
this Agreement, Mezzanine Term Loan Note and ancillary documents all dated the
date hereof pursuant to which the Bank is making the Mezzanine Term Loan to the
Borrower.
"Mezzanine Term Loan Note": The Mezzanine Term Loan Note
as defined in this Agreement.
"Multiemplover Plan": has the meaning assigned to such term
under section 3(37) of ERISA.
"Net Income": means, with respect to any period, all
amounts which, in conformity with GAAP, would be included under net income on
an income statement of the Borrower for such period.
"Note": The Mezzanine Term Loan Note.
"Obligations": see Subsection 7.1(e).
"PBGC": the Pension Benefit Guaranty Corporation and
any entity succeeding to any or all of its functions under ERISA.
"Person": any natural person, corporation, firm,
trust, partnership, business trust, joint venture, association,
government, governmental agency or authority, or any other entity, whether
acting in an individual, fiduciary, or other capacity.
"Plan": a "pension plan", as such term is defined in ERISA,
which is subject to Title IV of ERISA (other than a Multiemployer Plan) and
to which the Borrower or any corporation, trade or business that is, along
with the Borrower, a member of a controlled group of corporations or a
controlled group of trades or businesses (as described in sections 414(b) and
414(c), respectively, of the Code or section 4001 of ERISA) may have any
liability, including any liability by reason of having been a substantial
employer within the meaning of section 4063 of ERISA at any time during the
preceding five years, or by reason of being deemed to be a contributing
sponsor under section 4069 of ERISA.
"Principal Office": refers to the Bank's office at One M&T
Plaza, Buffalo, New York 14203.
"Registration Statement": see Section 3.19.
"Reportable Event": any of the events set forth in Section
4043(b) of ERISA or the regulations thereunder.
"Requirement of Law": with respect to any matter or Person
means any law, rule, regulation, order, decree or other requirement having the
force of law relating to such matter or Person, and, where applicable, any
interpretation thereof by any
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<PAGE>
authority having jurisdiction with respect thereto or charged with the
administration thereof.
"Security Aqreement": see Subsection 5.1(c).
"Security Interest": see Subsection 5.1(c).
"Sellers": the collective reference to ABC Medical Supply,
Inc. Blue Water Medical Supply, Inc. and Great Lakes Home Medical, Inc.
"Subordinated Debt": any unsecured Indebtedness of the
Borrower, the payment of the principal of and interest (including post-petition
interest) on which is subordinated, on terms and conditions acceptable to the
Bank, to the prior payment in full of all Indebtedness and other obligations of
the Borrower to the Bank arising under this Agreement and the Collateral
Documents.
"Subsidiary": any corporation, limited liability company,
partnership, joint venture or other entity of which at least 50% of the voting
stock or other applicable ownership interest is owned by the Borrower,
directly or indirectly, including through one or more Subsidiaries.
"Tangible Net Worth": at any time, all amounts which, in
accordance with GAAP, would be included under shareholders' equity on a balance
sheet of the Borrower at such time, excluding, however, any amounts representing
assets which would be classified as intangible assets in accordance with GAAP.
"Total Liabilities": at any time, all amounts which, in
accordance with GAAP, would be included as liabilities on a balance sheet of the
Borrower at such time.
"Total Senior Liabilities": at any time, all amounts which
in accordance with GAAP, would be included as liabilities on a balance sheet
of the Borrower other than Subordinated Debt at such time.
1.2 UCC Definitions. Unless otherwise defined in Section 1.1 or
elsewhere in this Agreement, capitalized words shall have the meanings set forth
in the New York Uniform Commercial Code as in effect on the date of this
Agreement.
1.3 Other Definitional Provisions. (a) All terms defined in this
Agreement shall have the defined meanings when used in the Mezzanine Term Loan
Note and the Collateral Documents or any certificate or other document made or
delivered pursuant hereto.
(b) As used herein and in the Mezzanine Term Loan Note, and
any certificate or other document made or delivered pursuant hereto, accounting
terms not defined in Subsection 1.1, and accounting terms partly defined in
Subsection 1.1 to the extent not defined, shall have the respective meanings
given to them under GAAP.
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<PAGE>
(c) The words "hereof", "herein" and "hereunder" and words of
similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement, and section,
subsection, schedule and exhibit references are to this Agreement
unless otherwise specified.
(d) The definitions of all terms defined in this Agreement
shall be equally applicable to both the singular and plural forms of the terms
defined.
SECTION 2 AMOUNT AND TERMS OF THE CREDIT
2.1 Mezzanine Term Loan.
(a) Amount. Subject to the terms and conditions of this
Agreement, and relying upon the representations and warranties herein set forth,
the Bank agrees to make a loan (the "Mezzanine Term Loan") to the Borrower on
the date of this Agreement in a principal amount of Two Million Dollars
($2,000,000).
(b) Mezzanine Term Loan Note. The Mezzanine Term Loan shall
be evidenced by, and repaid with interest in accordance with, a single
promissory note (the "Mezzanine Term Loan Note") of the Borrower in
substantially the form of Exhibit B attached hereto and made a part hereof, duly
completed and with blanks appropriately filled in. The Mezzanine Term Loan Note
shall be dated as of the date of this Agreement and the principal amount of the
Mezzanine Term Loan Note will be repaid (i) with interest payments only in
arrears and at maturity and (ii) the entire principal balance due and payable on
________________ (the "Maturity Date").
2.2 Interest and Pricing. The entire principal balance of the
Mezzanine Term Loan Note shall bear interest until maturity (whether by
acceleration or otherwise) at the Fixed Rate.
(a) Computation of Interest. Interest on the Mezzanine Term
Loan Note shall be computed on the basis of a 360-day year for the actual number
of days elapsed, which will result in a higher effective annual rate. Interest
on the Mezzanine Term Loan Note shall be payable monthly on the first day of
each month during the term of the Mezzanine Term Loan Note, commencing the month
following the date of this Agreement, and on the date the Mezzanine Term Loan
Note is paid in full.
(b) Default Rate. After maturity of the Mezzanine Term Loan,
whether by acceleration or otherwise, the Borrower shall pay interest at a per
annum rate equal to four percent (4%) plus the interest rate otherwise in effect
thereon. After maturity, interest shall be payable on demand. In no event shall
the rate of interest exceed the maximum rate permitted by applicable law.
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<PAGE>
(c) Late Charge. Upon failure to make any payment of interest
or principal on the Mezzanine Term Loan Note within ten (10) days of the due
date thereof, the Borrower agrees to pay to Bank, upon demand by Bank, a late
charge equal to five percent (5%) of the amount of any such overdue amount of
principal or interest. The assessment and/or collection of late charges shall in
no way impair the right of Bank to pursue any other remedies hereunder.
2.3 Prepayment.
(a) Borrower shall have the right to prepay at any time after
______________ [3 years from date of Agreement] without premium all or any
portion of the Mezzanine Term Loan, together with interest on the principal so
prepaid to the date of such prepayment. Any partial prepayment shall be
applied upon installments of principal in inverse order of maturity. Borrower
shall give to the Bank not less than two (2) Business Day's prior notice of each
prepayment, specifying the aggregate amount to be repaid. Any permitted partial
repayment of principal shall be in the amount of $100,000 or a whole multiple
thereof.
2.4 Taxes. If any taxes (other than taxes with respect to the income of
Bank), or duties of any kind shall be payable, or ruled to be payable, by or to
any taxing authority of or in the United States, or any foreign country, or any
political subdivision of any thereof, in respect of any of the transactions
contemplated by this Agreement (including, but not limited to, execution,
delivery, performance, enforcement, or payment of principal or interest of or
under the xezzanine Term Loan Note or this Agreement by reason of any now
existing or hereafter enacted statute, rule, regulation or other determination
(excluding any taxes imposed on or measured by the net income of Bank), the
Borrower will:
(a) pay on written request therefor all such taxes or duties,
including interest and penalty, if any,
(b) promptly furnish Bank with evidence of any such payment,
and
(c) indemnify and hold Bank and any holder or holders of the
Mezzanine Term Loan Note harmless and indemnified against any liability or
liabilities with respect to or in connection with any such taxes or the payment
thereof or resulting from any delay or omission to pay such taxes.
2.5 Fees. The Borrower shall pay the following fees to the Bank:
(a) Annual Supplemental Fee. The Borrower agrees to pay to
the Bank a fee ("Annual Supplemental Fee") on the principal balance of the
Mezzanine Term Loan until the Maturity Date at the rate of seven percent (7%)
per annum calculated on the basis of a year of 360 days, payable, in arrears, on
the first day of each month during the term of this Agreement, commencing on the
date of this Agreement and ending on the Maturity Date. Notwithstanding the
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foregoing, the Borrower may defer payment of the Annual Supplemental Fee
otherwise due on , , and for up to three
years. If the Borrower elects to defer such payment, then the amount of the
Annual Supplemental Fee so deferred will be increased by an additional one
percent (1%) for each year such payment is deferred. For example, if payment
of the Annual Supplemental Fee for year one is deferred until the end of year
four, the amount of such Annual Supplemental Fee would be ten percent (10%).
Notwithstanding the foregoing, payment of the Annual Supplemental Fee due on
, , and may not be deferred.
(b) Commitment Fee. The Borrower shall pay to the
Bank, on the date of this Agreement, a commitment fee of forty thousand
dollars ($40,000.00) with respect to Mezzanine Term Loan.
2.6 Method of Payment. The Borrower shall make each payment under
this Agreement and the Mezzanine Term Loan Note not later than 11:00 a.m.
Eastern Time on the date when due in lawful money of the United States to the
Bank at its Principal Office in immediately available funds. The Borrower hereby
authorizes the Bank to charge from time to time against the operating account of
the Borrower with the Bank the amount of any such payment. Whenever any payment
to be made under this Agreement or under the Mezzanine Term Loan Note shall be
stated to be due on a day other than a Business Day, such payment shall be made
on the next succeeding Business Day, and such extension of time shall in such
case be included in the computation of the payment of interest.
2.7 Use of Proceeds. The Borrower represents to and covenants with
the Bank that all proceeds of the Mezzanine Term Loan will be used to (i)
finance the Acquisitions and (ii) fund general working capital purposes.
SECTION 3 REPRESENTATIONS AND WARRANTIES
3.1 Financial Condition. (a) The Borrower has heretofore delivered to
the Bank [ ].
(b) All financial statements and other financial data which
have been or shall hereafter be furnished to the Bank for the purposes of or in
connection with this Agreement or any transaction contemplated hereby do and
will present fairly the financial condition of the Borrower, as the case may be,
as of the dates thereof and the results of its operations for the period(s)
covered thereby. A11 projections which have been or shall hereafter be furnished
to the Bank for the purposes of or in connection with this Agreement or any
transaction contemplated hereby have been, and will represent, management's best
estimate of future performance of the Borrower, based upon historical financial
information and reasonable assumptions of management.
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3.2 No Change. There have been no material adverse changes in the
business, operations, property or financial or other condition of the Borrower
since _____________, 1996.
3.3 Corporate Existence; Compliance with Law. The Borrower
(a) is duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation, (b) has the corporate power,
authority and legal right to own or lease and operate its property and to
conduct the business in which it is currently engaged, (c) is duly qualified as
a foreign corporation and in good standing under the laws of each jurisdiction
where the failure so to qualify and remain in good standing could materially
and adversely affect the ability of the Borrower to own or lease and operate
its property or to conduct the business in which it is currently engaged or
will be engaged upon closing of the Acquisitions, and (d) is in compliance
with all Requirements of Law. The Borrower has no equity or ownership interest
in any Person.
3.4 Corporate Power; Authorization; Enforceable Obligations. The
Borrower has the corporate power, authority and legal right to make, deliver and
perform this Agreement, the Mezzanine Term Loan Note, and each of the
Collateral Documents, to borrow hereunder and has taken all necessary corporate
and shareholder action to authorize the borrowings on the terms and conditions
of this Agreement, and the Mezzanine Term Loan Note. No consent of
any other Person and no authorization of, notice to, or other act by or in
respect of any Governmental Authority, is required in connection with the
borrowings hereunder, except for filings or recordings in public offices
necessary in connection with the Collateral Documents. This Agreement, the
Mezzanine Term Loan Note and each of the Collateral Documents have been duly
executed and delivered on behalf of the Borrower and this Agreement, the
Mezzanine Term Loan Note, and each of the Collateral Documents constitute
legal, valid and binding obligations of the Borrower enforceable against the
Borrower in accordance with their respective terms, except as enforceability
may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting the enforcement of creditors' rights
generally.
3.5 No Legal Bar. The execution, delivery and performance of this
Agreement, the Mezzanine Term Loan Note, the Collateral Documents, the
borrowings hereunder and the use of the proceeds thereof, will not violate any
Requirement of Law or any Contractual Obligation of the Borrower and will not
result in, or require, the creation or imposition of any Lien on any of its
respective properties or revenues pursuant to any Requirement of Law or
Contractual Obligation.
3.6 No Litigation. No litigation, investigation or proceeding of or
before any arbitrator or Governmental Authority is pending or, to the
knowledge of the Borrower, threatened by or against the Borrower or any of
its properties or revenues (a) with respect to this Agreement, the Mezzanine
Term Loan Note, the Collateral Documents or any of the transactions contemplated
hereby
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or thereby or (b) which, if adversely determined, could have a material adverse
effect on the business, operations, property or financial or other condition of
the Borrower.
3.7 No Default. The Borrower is not in default under or with regard
to any Contractual Obligation in any respect which could be materially adverse
to the business, operations, property or financial or other condition of
the Borrower, or which could materially adversely affect the ability of the
Borrower to perform its obligations under this Agreement, the Mezzanine Term
Loan Note, or any of the Collateral Documents. No Default or Event of Default
has occurred.
3.8 Ownership of Property; Liens. The Borrower has good record and
marketable or insurable title in fee simple to or valid leasehold interests
in, all its real property, and good title to all its other property, and none
of such property is subject to any Lien, except as set forth on Schedule
3.8.
3.9 No Burdensome Restrictions. To the best of the
Borrower's knowledge, no Contractual Obligation of the Borrower and no
Requirement of Law materially adversely affects, or insofar as the Borrower may
reasonably foresee may so affect, the business, operations, property or
financial or other condition of the Borrower.
3.10 Taxes. The Borrower has filed or caused to be filed all tax
returns required to be filed, and has paid all taxes shown to be due and
payable on said returns or on any assessments made against it and all other
taxes, fees or other charges imposed on it by any Governmental Authority
(other than those the amount or validity of which is currently being contested
in good faith by appropriate proceedings and with respect to which reserves in
conformity with GAAP have been provided on the books of the Borrower); and no
tax liens have been filed and no assessments are being asserted with respect
to any such taxes, fees or other charges.
3.11 Federal Regulations. The Borrower is not engaged and will not
engage, principally or as one of its important activities, in the business of
extending credit for the purpose of "purchasing" or "carrying" (as each
such term is defined in Regulation U) any Margin Stock. No part of the
proceeds of the Revolving Credit Loan or the Term Loan hereunder will be used
for any purpose which violates, or which would be inconsistent with, the
provisions of the Regulations of the Board of Governors of the Federal Reserve
System or of the Investment Company Act of 1940, as amended.
3.12 Investment Company Act. The Borrower is not an "investment
company" or a company "controlled" by an "investment company", within the
meaning of the Investment Company Act of 1940, as amended.
3.13 Environmental Matters.
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<PAGE>
(a) The Borrower has duly complied with, and its business,
operations, assets, equipment, property, leaseholds, or other facilities are in
compliance with, the provisions of all federal, state and local environmental,
health and safety laws, codes and ordinances, and all rules and regulations
promulgated thereunder.
(b) The Borrower has been issued and will maintain all
required federal, state and local permits, licenses, certificates and
approvals relating to (i) air emissions, (ii) discharges to surface water or
groundwater, (iii) noise emissions, (iv) solid or liquid waste disposal, (v)
the use, generation, storage, transportation, or disposal of toxic or
hazardous substances or wastes (intended hereby and hereafter to include any
and all such materials listed in any federal, state, or local law, code or
ordinance, and all rules and regulations promulgated thereunder, as hazardous
or potentially hazardous), or (vi) other environmental, health, or safety
matters.
(c) The Borrower has not received any notice of, and does
not know of or suspect, facts which might constitute any violations of any
federal, state or local environmental, health or safety laws, codes or
ordinances, and any rules or regulations promulgated thereunder with respect
to its business, operations, assets, equipment, property, leaseholds or other
facilities.
(d) Except in accordance with a valid governmental permit,
license, certificate, or approval issued to the Borrower, there has been no
emission, spill, release, or discharge into or upon (i) the air, (ii) soils or
any improvements located thereon, (iii) surface water or groundwater, or (iv)
the sewer, septic system or waste treatment, storage or disposal system
servicing the premises, of any toxic or hazardous substances or wastes at or
from any premises owned or occupied by the Borrower.
(e) There is no complaint, order, directive, claim,
citation, or notice by any governmental authority or any person or entity
pending with respect to (i) air emissions, (ii) spills, releases, or
discharges to soils or improvements located thereon, surface water,
groundwater or the sewer, septic system or waste treatment, storage
or disposal systems servicing the premises, (iii) noise emissions, (iv)
solid or liquid waste disposal, (v) the use, generation, storage,
transportation, or disposal of toxic or hazardous substances or waste,
or (vi) other environmental, health or safety matters affecting the Borrower
or its business, operations, assets, equipment, property, leaseholds, or
other facilities.
3.14 ERISA. The Borrower is in compliance with all
applicable provisions of ERISA. The Borrower has not (a) incurred any
accumulated funding deficiency within the meaning of ERISA, (b) incurred any
material unfunded vested liability under any Plan, (c) incurred any material
liability to the PBGC in connection with any Plan, or (d) engaged in a
prohibited transaction within the meaning
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of ERISA. No Reportable Event has occurred with respect to any Plan.
3.15 Acquisition Agreements. The Borrower has heretofore
furnished to the Bank true, complete and correct copies of the Acquisition
Agreements, as amended, including all schedules and exhibits thereto.
3.16 Acquisitions. As of the date of this Agreement, the
Borrower has consummated the Acquisitions in accordance with the terms of the
Acquisition Agreements.
3.17 Collateral Locations. All of the Borrower's assets
are located only at the locations set forth in Schedule 3.17 of this Agreement.
3.18 Licenses and Permits. Each license, permit, consent,
certificate, certification, registration, declaration, approval, Medicare and
Medicaid participation agreements, and filing with any governmental body or
authority, or other person or entity required for or in connection with the
Borrower's business (collectively "Licenses"), is in full force and effect.
The Borrower has complied with, and its business, operations, assets,
equipment, property, leaseholds or other facilities are in compliance with all
federal, state, and local laws, codes and regulations relating to the
maintenance of such Licenses.
3.19 Initial Public Offering. On or before the date of
this Agreement, the Borrower has consummated its Initial Public Offering in
accordance with the terms of its Registration Statement on Form SB-2 as filed
with the Securities and Exchange Commission on October 24, 1996, together with
all amendments and exhibits thereto, (the "Registration Statement").
3.20 Registration Statement. The Borrower has heretofore
furnished to the Bank a true, complete and correct copy of the Registration
Statement.
3.21 Subsidiaries. As of the date of this Agreement, the
Borrower has no Subsidiaries.
3.22 Preexisting Indebtedness. As of the date of this
Agreement, the Borrower has no Indebtedness other than the Preexisting Loans.
SECTION 4 CONDITIONS PRECEDENT
4.1 Conditions to Extension of Credit. The obligation of
the Bank to extend the Credit is subject to the satisfaction prior to or
concurrently therewith of the following conditions precedent:
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<PAGE>
(a) Notes. The Bank shall have received the Mezzanine
Term Loan Note conforming to the requirements hereof and executed by an
Authorized Officer.
(b) Opinions. The Bank shall have received the opinion
of legal counsel to the Borrower, dated the date of this Agreement and addressed
to the Bank, in form and substance satisfactory to the Bank. Such opinion shall
address, without limitation, such matters incident to the transactions
contemplated by this Agreement, the Mezzanine Term Loan Note, the Collateral
Documents, the Acquisition Agreements, and the Initial Public Offering as the
Bank shall reasonably require.
(c) Security Agreement. The Borrower shall have
executed and delivered to the Bank the General Security Agreement ("Security
Agreement") in the form of Exhibit C granting to the Bank a security interest
(the "Security Interest") in all of its equipment, inventory, accounts, chattel
paper, general intangibles, documents, and instruments, whether now owned or
hereafter acquired, including, without limitation, pursuant to the Acquisition
Agreements, wherever located, and any and all products and proceeds thereof, and
shall secure the payment of any and all indebtedness and liabilities, whether
now existing or hereafter incurred, of the Borrower to the Bank; and the Bank
shall have received appropriate financing statements to perfect the Security
Interest, which Security Interest shall be superior in priority to all other
Liens.
(d) Environmental. The Borrower shall have executed
and delivered to the Bank an environmental indemnification agreement
("Environmental Indemnification Agreement") in the form of Exhibit D.
(e) Revolving Credit and Term Loan Agreement. The
Borrower shall have executed and delivered to the Bank the Revolving Credit and
Term Loan Agreement and the Borrower shall have taken all other action deemed
necessary and appropriate by the Bank to perfect its rights under such
Agreement.
(f) Corporate Documents. The Bank shall have received
a copy (in form and substance satisfactory to the Bank) certified by the
Secretary or an Assistant Secretary of the Borrower of the resolutions of the
Board of Directors authorizing all borrowings herein provided for and the
execution, delivery and performance of this Agreement, the Mezzanine Term Loan
Note, the Acquisition Agreements, the Initial Public Offering and the
Collateral Documents.
(g) Certificate of Incumbency. The Bank shall have
received a certificate (in form and substance satisfactory to the Bank) of the
Secretary or an Assistant Secretary of the Borrower as to the incumbency and
signature of the Officers of the Borrower ("Authorized Officers") authorized to
sign, this Agreement, the Term Loan Note, and the Collateral Documents and any
certificate or
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<PAGE>
other document to be delivered pursuant to or in connection with this Agreement.
(h) Termination of Security Interests. All holders of
existing security interests in assets of the Borrower, including, without
limitation, all assets acquired by the Borrower from the Sellers pursuant to the
Acquisition Agreements, shall have executed and delivered to the Bank UCC-3
Termination Statements in form and content acceptable to the Bank or shall have
otherwise taken action required by the Bank, to terminate such security
interests.
(i) Payment of Facility Fee. The Bank shall have
received payment in full of the Facilities Fee.
(j) Appraisals. The Bank shall have received
appraisals of all equipment and inventory of the Sellers to be acquired by the
Borrower pursuant to the Acquisition Agreements, prepared by an independent
appraiser acceptable to the Bank, which appraisals shall indicate a fair market
value (in the case of the equipment) and a liquidation value (in the case of
inventory) in an amount acceptable to the Bank. The Bank also shall have
received a schedule of the equipment, real estate, and leases acquired from the
Sellers by the Borrower which corresponds to the equipment appraisal.
(k) Financial Statements. The Bank shall have received
and approved a pro forma balance sheet of the Borrower, prepared by the
Independent Certified Public Accountant, which reflects (i) payment in full of
the Preexisting Loans, (ii) cash proceeds from the Initial Public Offering,
(iii) the assets and liabilities of the Borrower after closing of the
Acquisitions pursuant to the Acquisition Agreements, (iv) compliance with each
applicable financial covenant contained in this Agreement and (v) a financial
condition acceptable to the Bank, in its sole discretion.
(l) Acquisition Agreements. The Acquisition Agreements
shall be in form and substance satisfactory to the Bank, and the Borrower shall
have acquired the assets of the Sellers in accordance with the terms of each of
the Acquisition Agreements (with only those amendments, modifications or waivers
thereof which are acceptable to the Bank) immediately prior to the making of
the initial Loans hereunder.
(m) Initial Public Offering. The Bank shall have
received evidence satisfactory to the Bank of cash equity injection into the
Borrower in an amount of not less than eleven million dollars ($11,000,000)
resulting from its Initial Public Offering, said equity injection to be
evidenced by in form and content acceptable to the Bank.
(n) Payment of Preexisting Loans. The Bank shall
have received evidence satisfactory to the Bank of the payment in full of
the Preexisting Loans.
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<PAGE>
(o) Certificate of Insurance. The Bank shall have
received certificates of insurance, in form and content acceptable to the Bank,
evidencing the insurance required to be carried by the Borrower pursuant to
Subsection 5.10 hereof with endorsements, satisfactory to the Bank, designating
the Bank as loss payee and further designating that each such insurance policy
contains a notice of cancellation provision satisfactory to the Bank.
(p) All other documents and legal matters in
connection with the transactions contemplated by this Agreement and the
Collateral Documents shall be satisfactory in form and substance to the Bank.
The Borrower shall have delivered such further documents to the Bank and taken
such further action respecting this Agreement as the Bank shall reasonably
request.
SECTION 5 AFFIRMATIVE COVENANTS
The Borrower hereby agrees that, so long as the Mezzanine Term Loan remains
outstanding and unpaid or any other amount is owing to the Bank hereunder or
under the Collateral Documents, the Borrower shall [and shall cause each of its
Subsidiaries, to do the following]:
5.1 Financial Statements. Furnish or cause to be furnished
to the Bank:
(a) as soon as available, but in any event within
ninety (90) days after the end of each Fiscal Year of the Borrower, a copy of
the audited financial statements of the Borrower at and as of the end of such
Fiscal Year, certified without qualification or exception by the Independent
Public Accountants; and
(b) as soon as available, but in any event not later
than forty-five (45) days after the end of each Fiscal Quarter of each Fiscal
Year of the Borrower, a copy of the unaudited balance sheet of the Borrower as
of the end of such Fiscal Quarter and the related unaudited statements of income
and retained earnings and cash flow, setting forth in each case in comparative
form the figures for the previous year.
All such financial statements to be true, complete and correct in all
material respects and be prepared in reasonable detail and in accordance with
GAAP applied consistently throughout the periods reflected therein (except as
approved by such accountants or officer, as the case may be, and disclosed
therein and that quarterly statements shall be prepared without footnotes in
accordance with GAAP).
5.2 Certificates; Other Information. Furnish to the Bank:
(a) upon the request of the Bank, concurrently with
the delivery of the financial statements referred to in Subsection
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5.1(a), a certificate of the Independent Public Accountants certifying such
financial statements stating that in making the examination necessary therefor
no knowledge was obtained of any Default or Event of Default, except as
specified in such certificate;
(b) concurrently with the delivery of the financial
statements referred to in Subsections 5.1 (a) and (b), a certificate of an
Authorized Officer (i) stating that, to the best of his or her knowledge, the
Borrower during such period has observed or performed all of its covenants and
other agreements, and satisfied every condition contained in this Agreement, the
Revolving Credit Note, Term Loan Note and the Collateral Documents to be
observed, performed or satisfied by it, and that such Authorized Officer has
obtained no knowledge of any Default or Event of Default except as specified in
such certificate, and (ii) showing in detail the calculations supporting such
statement in respect of the financial covenants contained in Subsection 7.3.
(c) within thirty (30) days after the end of each
Fiscal Year of the Borrower, a copy of the projections by the Borrower's
management of the operating budget and cash flow of the Borrower for the then
current Fiscal Year, such projections to be accompanied by a certificate of an
Authorized Officer to the effect that such projections have been prepared on the
basis of sound financial planning practice and that such Authorized Officer on
the date he or she renders such certificate has no reason to believe they are
incorrect or misleading in any material respect.
5.3 Payment of Obligations. Pay, discharge or otherwise
satisfy at or before maturity or before it becomes delinquent, as the case may
be, all its Indebtedness, taxes and other obligations of whatever nature,
except, in the case of Indebtedness or taxes when the amount or validity thereof
is currently being contested in good faith by appropriate proceedings and
reserves in conformity with GAAP with respect thereto have been provided on the
books of the Borrower.
5.4 Conduct of Business and Maintenance of Existence.
Continue to engage in business of the same general type as now conducted by it,
and preserve, renew and keep in full force and effect its corporate existence
and take all reasonable action to maintain all rights, privileges, Licenses, and
franchises necessary or desirable in the normal conduct of its business.
5.5 Inspection of Property; Books and Records; Discussions.
Keep proper books of record and account in which full, true and correct entries
in conformity with GAAP and all Requirements of Law shall be made of all
dealings and transactions in relation to its business and activities; and permit
representatives of the Bank to visit and inspect any of its properties and
examine and make abstracts from any of its books and records at any reasonable
time and as often as may reasonably be desired, and to discuss the business,
operations, properties and financial and other condition
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of the Borrower with officers and employees of the Borrower and with the
Independent Public Accountants.
5.6 Notices. Give notice to the Bank of each of the following
promptly after the Borrower knows or reasonably should know thereof:
(a) of the occurrence of any Default or Event of
Default;
(b) of any (i) default or event of default under any
Contractual Obligation or Licenses of the Borrower which, if adversely
determined, could have a material adverse effect on the business, operations,
property or financial or other condition of the Borrower, or (ii) litigation,
investigation or proceeding which may exist at any time between the Borrower and
any Person or any Governmental Authority involving a claim against the Borrower
in an amount in excess of Fifty Thousand Dollars ($50,000), or, which, if
adversely determined, could have a material adverse effect on the business,
operations, property or financial or other condition of the Borrower;
(c) of the following events, as soon as possible and
in any event within 30 days after the Borrower knows or has reason to know
thereof: (i) the occurrence or expected occurrence of any Reportable Event with
respect to any Plan, or (ii) the institution of proceedings or the taking or
expected taking of any other action by PBGC or the Borrower to terminate or
withdraw from any Plan, and in addition to such notice, deliver to the Bank
whichever of the following may be applicable: (A) a certificate of the chief
financial officer of the Borrower setting forth details as to such Reportable
Event and the action that the Borrower proposes to take with respect thereto,
together with a copy of any notice of such Reportable Event that may be required
to be filed with PBGC, or (B) any notice delivered by PBGC evidencing its intent
to institute such proceedings or any notice to PBGC that such Plan is to be
terminated, as the case may be;
(d) of any proposed withdrawal by the Borrower from
any Multiemployer Plan;
(e) of any materially adverse change in the business,
operations, property or financial or other condition of the Borrower;
(f) of any representation or warranty contained in
this Agreement or the Collateral Documents which was or has proven to be
incorrect in any material respect on or as of the date made or deemed made.
Each notice pursuant to this Subsection shall be accompanied by a statement of a
Authorized Officer setting forth details of the occurrence referred to therein
and stating what action the Borrower proposes to take with respect thereto. For
all purposes of clause (d) of this Subsection, the Borrower shall be deemed to
have all
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knowledge or knowledge of all facts attributable to the administrator of such
Plan.
5.7 Corporate Standing. Maintain its existence in good
standing, and remain or become duly licensed or qualified and in good
standing in each jurisdiction in which the conduct of its business requires
such qualification or licensing.
5.8 Discharge of Obligations. Cause to be paid and discharged
all obligations when due and all lawful taxes, assessments and governmental
charges or levies imposed upon the Borrower or upon any property, real, personal
or mixed, belonging to the Borrower or upon any part thereof, before the same
shall become in default, as well as all lawful claims for labor, materials and
supplies, which if unpaid become a lien or charge upon the property or any part
of it. Notwithstanding the previous sentence, the Borrower shall not be required
to cause to be paid and discharged any obligation, tax assessment, charge, levy
or claim so long as its validity is contested in the normal course of business
and in good faith by appropriate and timely proceedings and the Borrower, sets
aside on its books adequate reserves with respect to each tax, assessment,
charge, levy or claim so contested.
5.9 Insurance. (a) Keep all its property so insurable insured
at all times with responsible insurance carriers satisfactory to Bank against
fire, theft and other risks in coverage, form and amount satisfactory to Bank;
(b) keep adequately insured at all times in reasonable amounts with responsible
insurance carriers against liability on account of damage to persons or property
and under all applicable worker's compensation laws; (c) promptly deliver to
Bank certificates of insurance or any of those insurance policies required to be
carried pursuant hereto, with appropriate endorsements designating Bank as its
interests may appear as a named insured and loss payee as requested by Bank; and
(d) cause each such insurance policy to contain a thirty (30) day notice of
cancellation or material change in coverage provision satisfactory to Bank.
5.10 Fair Labor Standards Act. Comply with the provisions
of the Fair Labor Standards Act of 1938, as amended.
5.11 Guarantees By Subsidiaries and Affiliates. If the
Borrower forms a Subsidiary or Affiliate with the Bank's prior written consent
in accordance with the provisions of Section 6.12, cause such Subsidiary or
Affiliate to execute and deliver to the Bank, within thirty (30) days of
its organization, a Guaranty, Security Agreement, and Financial Statement
in a form and content acceptable to the Bank.
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<PAGE>
SECTION 6 NEGATIVE COVENANTS
The Borrower hereby agrees that, so long as the Mezzanine Term Loan Note
remains outstanding and unpaid or any other amount is owing to the Bank
hereunder or under the Collateral Documents, the Borrower shall not directly or
indirectly:
6.1 Indebtedness. Create, incur, assume or suffer to exist
any Indebtedness without the prior written consent of the Bank except:
(a) Indebtedness to the Bank; and
(b) Indebtedness for Capitalized Leases to the extent
permitted under Subsection 6.9.
6.2 Limitation on Liens. Create, incur, assume or suffer to
exist, any Lien upon any of the Collateral, whether now owned or hereafter
acquired, except:
(a) Liens for taxes not yet due or which are being
contested in good faith and by appropriate proceedings if adequate reserves
with respect thereto are maintained on the books of the Borrower in accordance
with GAAP;
(b) carriers', warehousemen's, mechanics',
materialmen's, repairmen's or other like Liens arising in the ordinary
course of business which are not overdue for a period of more than 30 days
or which are being contested in good faith and by appropriate proceedings;
(c) pledges or deposits in connection with workmen's
compensation, unemployment insurance and other social security legislation;
(d) deposits to secure the performance of bids,
trade contracts (other than for borrowed money), leases, statutory
obligations, surety and appeal bonds, performance bonds and other
obligations of a like nature incurred in the ordinary course of business;
(e) Liens created or permitted under the terms of the
Security Agreement; and
(f) Liens created under Capitalized Leases to the
extent permitted under Subsection 6.9.
6.3 Financial Condition. Permit, as of the last day of
any Fiscal Quarter, its Debt Service Coverage Ratio measured for the four
(4) preceding fiscal auarters ending on such day to be less than 1.5:1.0.
6.4 Limitation on Contingent Obligations. Create, incur,
assume or suffer to exist any Contingent Obligations, except (a)
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existing Contingent Obligations as set forth on Schedule 6.4 hereto and any
renewal or refinancing thereof provided the aggregate monetary liability of the
Borrower for any such renewed or refinanced Contingent Obligations does not
exceed the applicable aggregate monetary liability for such Contingent
Obligation set forth in Schedule 6.4.
6.5 Prohibition of Fundamental Changes. Make or permit to
be made any material change in the character or conduct of its business or
operations, including entering into any transaction of merger or consolidation
or amalgamation, or liquidation, winding up or dissolving itself (or suffer any
liquidation or dissolution), convey, sell, lease, transfer or otherwise dispose
of, in one transaction or a series of transactions, all or substantially all of
its business or assets or acquiring by purchase or otherwise all or
substantially all the business or assets of, or stock or other evidences of
beneficial ownership of, any Person, or making any material change in its
present method of conducting business, except:
(a) Borrower may merge or consolidate with any other
Person provided in each case that immediately after giving effect thereto, no
Default or Event of Default shall occur and be continuing and, in the case of
any such merger, the Borrower is the surviving corporation; and
(b) Borrower may acquire the assets or capital stock
of other Persons provided the aggregate purchase price (whether payable in
cash or otherwise) of all such asset and capital stock acquisitions in any
Fiscal Year shall not exceed _______ Dollars ($00,000), provided, however, at
the time of any such acquisition no Default or Event of Default shall
have occurred and be continuing, and no Default or Event of Default shall
occur as the result of any such acquisition.
6.6 Prohibition on Sale of Assets. Sell, lease, assign,
transfer or otherwise dispose of any of its assets, excluding (i) obsolete
or worn out property and (ii) inventory disposed of in the ordinary course of
business.
6.7 Loans, Advances and Investments. Make or commit to
make, any advance, loan, extension of credit or capital contribution to, or
purchase of any stock, bonds, notes, debentures or other securities of, or make
any other investment in (by way of transfers of property, acquisitions of
evidences of indebtedness or otherwise), any Person (all such transactions
being herein called "Investments"), except:
[(a) trade credit extended in the ordinary course of
business in an amount not to exceed $________ ;]
(b) advance payments or deposits against purchases
made in the ordinary course of Borrower's business;
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<PAGE>
(c) (i) direct obligations of the United States or
any agency thereof with maturities of one year or less from the date of
acquisition, (ii) commercial paper of a domestic issuer rated at least "A-1"
by Standard & Poor's Corporation or "P-1" by Moody's Investors Services,
Inc., (iii) time deposits and certificates of deposit with maturities of one
year or less from the date of acquisition issued by the Bank or any commercial
bank having capital and surplus in excess of Five Hundred Million Dollars
($500,000,000), and (iv) repurchase obligations within a term of not more
than thirty (30) days for underlying securities of the types described in
clauses (i), (ii) and (iii) above and entered into with any commercial bank
meeting the qualifications specified in clause (iii) above;
(d) existing Investments as set forth in Schedule 6.7;
6.8 Compliance with ERISA. (a) Terminate any Plan so as to
result in any material liability to PBGC, (b) engage in any "prohibited
transaction" (as defined in Section 4975 of the Internal Revenue Code of 1986,
as amended) involving any Plan which would result in a material liability for
an excise tax or civil penalty in connection therewith, (c) incur or suffer to
exist any material "accumulated funding deficiency" (as defined in Section 302
of ERISA), whether or not waived, involving any Plan, or (d) allow or suffer
to exist any event or condition, which presents a material risk of incurring a
material liability to PBGC by reason of termination of any such Plan.
6.9 Capital Expenditures. Make or be committed to make,
directly or indirectly, expenditures for fixed or capital assets (including,
without limitation, under Capitalized Leases) in excess of _______ ($ ,000,000)
in any Fiscal Year of the Borrower.
6.10 Lease Obligations. Enter into any agreement, or
become liable under any agreement, for the lease, hire or use of any real or
personal property, except that the Borrower may enter into any lease,
other than a Capitalized Lease, provided that immediately after giving effect
thereto, the aggregate annual lease obligations of the Borrower would not
exceed .
6.11 Dividends. Declare any dividends (other than dividends
payable solely in stock of the Borrower) on, or make any payment on account
of, or set apart assets for a sinking or other analogous fund for, the
purchase, redemption, retirement or other acquisition of any shares of any
class of stock of the Borrower, whether now or hereafter outstanding, or make
any other distribution in respect thereof, either directly or indirectly,
whether in cash or property or in obligations of the Borrower, or purchase or
otherwise acquire any shares of any class of stock of the Borrower from any
person (such declarations, payments, purchases, redemptions, retirements,
acquisitions or distributions being herein called "stock payments").
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<PAGE>
6.12 Subsidiaries and Affiliates. Organize, cause to
organize, or acquire or invest in, any Subsidiary or Affiliate, without the
prior written consent of the Bank.
6.13 Ownership Interests. Except with respect to the
Initial Public Offering, purchase or retire any of its capital stock or
issue any capital stock, or otherwise change the capital structure of the
Borrower or change the relative rights, preferences or limitations relating
to any of its capital stock.
6.14 Compensation. Pay, or obligate itself to pay, directly
or indirectly, any salaries, bonuses, dividends or other compensation to
the individuals who are executives of the Borrower in excess of $_______ in
the aggregate for all such individuals.
6.15 Affiliate Transactions. Directly or indirectly, enter
into, renew or extend any transaction (including, without limitation, the
purchase, sale, lease or exchange of property or assets, or the rendering of
any service) with any Affiliate (other than wholly owned Subsidiaries
consented to by the Bank pursuant to Section 6.12), except upon fair and
reasonable terms no less favorable to the Borrower or such Subsidiary than
could be obtained, at the time of such transaction or, if such transaction is
pursuant to a written agreement, at the time of the execution of the agreement
providing therefore, in a comparable arms' length transaction with a Person
that is not an Affiliate.
SECTION 7 EVENTS OF DEFAULT
7.1 Events of Default. The following shall be Events of
Default under this Agreement:
(a) Nonpayment. Borrower shall fail to pay any
principal of, or interest on, the Revolving Credit Note, the Term Loan Note or
the Mezzanine Term Loan Note when due in accordance with the terms thereof; or
shall fail to pay, within ten (10) days after written notice thereof from
the Bank, any other amount payable hereunder in accordance with the terms
hereof; or
(b) Representations. Any representation or warranty
made or deemed made by the Borrower herein, in the Collateral Documents, or in
the Revolving Credit and Term Loan Agreement, or which is contained in any
certificate, document or financial or
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<PAGE>
other statement furnished at any time under or in connection with this
Agreement or the Collateral Documents shall prove to have been incorrect in
any material respect on or as of the date made or deemed made; or
(c) Negative Covenants. The Borrower shall default
in the observance or performance of any covenant or agreement contained in
Section 6 of this Agreement; or
(d) Other Covenants. The Borrower shall default
in the observance or performance of any covenant or agreement contained
in this Agreement, the Collateral Documents or the Revolving Credit and
Term Loan Agreement (and not constituting an Event of Default under any of
the other provisions of this Section 7) and shall fail to fully cure such
default within fifteen (15) days after written notice thereof from the Bank; or
(e) Other Indebtedness. The Borrower shall (i)
default in the payment of principal of or interest on any Indebtedness in
excess of __________ Dollars ($_00,000) (other than the Term Loan Note) or
on any Contingent Obligations relating to such Indebtedness in excess of ____
Thousand Dollars ($ 0,000) (such Indebtedness and Contingent Obligations being
herein called the "Obligations") beyond the period of grace, if any, provided
in the instrument or agreement under which the Obligations were created; or
(ii) default in the observance or performance of any other agreement
contained in any such Obligation, or in any instrument or agreement evidencing,
securing or relating thereto, or any other event shall occur, the effect of
which default or other event is to cause, or permit the holder or holders of
such Obligation (or a trustee or agent on behalf of such holder or
holders) to cause, such Obligation to become due prior to its stated maturity;
provided, however, such default described in clause (i) or (ii) above shall not
constitute an Event of Default so long as the Borrower, in good faith, is
contesting the collection or enforcement of such Obligations by appropriate
legal proceedings diligently pursued; or
(f) Insolvency Proceedings. (i) The Borrower
or any Subsidiary shall commence any case, proceeding or other action (A)
under any existing or future law of any jurisdiction, domestic or foreign,
relating to bankruptcy, insolvency, reorganization or relief of debtors,
seeking to have an order for relief entered with respect to it, or seeking
to adjudicate it a bankrupt or insolvent, or seeking reorganization,
arrangement, adjustment, winding-up, liquidation, dissolution, composition or
other relief with respect to its debts, or (B) seeking appointment of a
receiver, trustee, custodian or other similar official for it or for all or
any substantial part of its assets, or the Borrower shall make a general
assignment for the benefit of its creditors; or (ii) there shall be
commenced against the Borrower or any Subsidiary any case, proceeding or
other action of a nature referred to in clause (i) above which (A) results
in the entry of an order for relief or any such adjudication or appointment or
(B) remains undismissed, undischarged or unbonded for a period of 60 days; or
(iii) there
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<PAGE>
shall be commenced against the Borrower any case, proceeding or other action
seeking issuance of a warrant of attachment, execution, distraint or similar
process against all or any substantial part of its assets which results in the
entry of an order for any such relief which shall not have been vacated,
discharged, or stayed or bonded pending appeal within 60 days from the entry
thereof; or (iv) the Borrower shall take any action in furtherance of, or
indicating its consent to, approval of, or acquiescence in, any of the acts set
forth in clause (i), (ii), or (iii) above; or (v) the Borrower shall generally
not, or shall be unable to, or shall admit in writing its inability to, pay its
debts as they become due; or
(g) Pension Default. (i) Any Person shall engage
in any "prohibited transaction" (as defined in Section 406 of ERISA or Section
4975 of the Code) involving any Plan, (ii) any "accumulated funding
deficiency" (as defined in Section 302 of ERISA), whether or not waived,
shall exist with respect to any Plan, (iii) a Reportable Event shall occur
with respect to, or proceedings shall commence to have a trustee appointed, or
a trustee shall be appointed, to administer or to terminate, any Plan, which
Reportable Event or institution of proceedings is, in the reasonable opinion of
the Bank, likely to result in the termination of such Plan for purposes of Title
IV of ERISA, and, in the case of a Reportable Event, the continuance of such
Reportable Event unremedied for ten days after notice of such Reportable
Event pursuant to Section 4043(a), (c) or (d) of ERISA is given or the
continuance of such proceedings for ten days after commencement thereof, as
the case may be, (iv) any Plan shall terminate for purposes of Title IV of
ERISA, or (v) any other event or condition shall occur or exist; and in
each case in clauses (i) through (v) above, such event or condition, together
with all other such events or conditions, if any, could subject the Borrower to
any tax, penalty or other liabilities in the aggregate material in relation to
the business, operations, property or financial or other condition of the
Borrower; or
(h) Judgements. One or more judgments or decrees
shall be entered against the Borrower involving in the aggregate a liability
(not paid or fully covered by insurance) of two hundred fifty thousand dollars
($250,000) or more and all such judgments or decrees shall not have been
vacated, discharged, or stayed pending appeal within sixty (60) days from
the entry thereof; or
(i) Collateral Documents. Any of the Collateral
Documents shall cease to be in full force and effect at any time or the
occurrence of any Event of Default under any Collateral Document or a breach of
any term, condition or provision of any Collateral Documents.
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<PAGE>
7.2 Effect of Event of Default. Upon the occurrence of any
Event of Default specified in Subsection 7.1, all amounts owing under or
evidenced by this Agreement the Mezzanine Term Loan Note and the Collateral
Documents shall immediately become due and payable. Upon the occurrence and
during the continuance of any other Event of Default, the Bank may, by notice of
default to the Borrower, declare all amounts owing under or evidenced by this
Agreement, the Mezzanine Term Loan Note and the Collateral Documents to be due
and payable forthwith, whereupon the same shall immediately become due and
payable. Any acceleration of payment pursuant to this Subsection 7.2 shall be
without presentment, demand, protest or other notice of any kind, all of which
are hereby expressly waived, anything contained herein or in the Mezzanine Term
Loan Note to the contrary notwithstanding.
SECTION 8 MISCELLANEOUS
8.1 Increased Costs/Capital Adequacy. In the event that at
any time or from time to time any Requirement of Law, or any interpretation or
application thereof, or compliance by the Bank with any request or directive
(whether or not having the force of law) from any central bank or monetary
authority or other governmental authority:
(a) does or shall subject the Bank to any tax of
any kind whatsoever, or change in the amount thereof, with respect to this
Agreement, the Mezzanine Term Loan Note, or change the basis of taxation of
payments to the Bank of principal, interest or any other amount payable
hereunder (except for changes in the rate of tax on the overall net income of
the Bank); or
(b) does or shall impose, modify or hold applicable
or change any reserve (including, without limitation, basic, supplemental,
marginal and emergency reserves), special deposit, compulsory loan or similar
requirement against assets held by, or deposits or other liabilities in or for
the account of, advances or loans by, or other credit extended by, or any other
acquisition of funds or capital adequacy or maintenance requirement by the Bank;
or
(c) does or shall impose on the Bank any other
condition or change; and the result of any of the foregoing is to increase
the cost to the Bank of making or maintaining any of the Loans or to reduce
any amount receivable thereunder then, in any such case, the Borrower shall
promptly pay the Bank, upon its demand, such additional amount which will
compensate the Bank for such additional cost or reduced amount receivable. A
certificate showing in reasonable detail any additional amounts determined
by the Bank to be payable pursuant to this Subsection shall be submitted
by the Bank to the Borrower and, absent manifest error, shall be conclusive and
binding on the Borrower.
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<PAGE>
8.2 Amendments, Waivers and Consents. No amendment or waiver
of any provision of this Agreement, the Mezzanine Term Loan Note or the
Collateral Documents, nor consent to any departure by the Borrower therefrom,
shall in any event be effective unless the same shall be in writing and signed
by the Bank, and then such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given.
8.3 Notices. All notices, requests and demands required to be
given hereunder or under the Collateral Documents to or upon the respective
parties hereto or to the Collateral Documents to be effective shall, unless
otherwise expressly provided herein, be in writing or by telegraph and shall
be deemed to have been duly given or made, unless otherwise expressly
provided herein, two (2) days after deposited in the mail (certified or
registered mail return receipt requested, the failure to receive such return
receipt having no effect) or, in the case of telegraphic notice, when
delivered to the telegraph company, addressed as follows or to such address or
other address as may be hereafter designated in writing by the respective
parties hereto and any future holder of the Term Loan Note:
The Borrower: Life Critical Care Corporation
37885 Green Street
New Baltimore, Michigan 48047
Attn: President
The Bank: Manufacturers and Traders Trust Company
One Fountain Plaza
Buffalo, New York 14203
Attn: Shelley C. Drake
Vice President
8.4 No Waiver; Cumulative Remedies. No failure to exercise
and no delay in exercising, on the part of the Bank, any right, power or
privilege hereunder, shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, power or privilege hereunder preclude any other
or further exercise thereof or the exercise of any other right, power or
privilege. The rights and remedies herein provided are cumulative and not
exclusive of any rights or remedies provided by law.
8.5 Survival of Representations and Warranties. All
representations and warranties made hereunder and in any document, certificate
or statement delivered pursuant hereto or in connection herewith shall survive
the execution and delivery of this Agreement and the Mezzanine Term Loan Note.
8.6 Payment of Expenses and Taxes; Indemnity. The Borrower
agrees (a) to pay or reimburse the Bank on demand for all its out-of-pocket
costs and expenses incurred in connection with the preparation and execution
of, and any amendment, waiver, consent, supplement or modification to, this
Agreement, the Mezzanine Term Loan Note, the Collateral Documents and any other
documents
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<PAGE>
prepared in connection herewith, and the consummation of the transactions
contemplated hereby and thereby, including, without limitation, the reasonable
fees and disbursements of legal counsel to the Bank, (b) to pay or reimburse
the Bank on demand for all its costs and expenses incurred in connection
with the enforcement or preservation of any rights under this Agreement,
the Mezzanine Term Loan Note, the Collateral Documents and any such other
documents, including, without limitation, fees and disbursements of legal
counsel to the Bank, (c) without limitation of the provision of clause (a) of
this subsection, to pay, indemnify, and to hold the Bank harmless from, any and
all recording and filing fees, intangibles taxes, UCC and other title or lien
searches, stamp and other taxes, if any, which may be payable or determined to
be payable in connection with the execution and delivery of, or consummation of
any of the transactions contemplated by, or any amendment, supplement or
modification of, or any waiver or consent under or in respect of, this
Agreement, the Mezzanine Term Loan Note, the Collateral Documents and any such
other documents, and (d) to pay, indemnify, and hold the Bank harmless from and
against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any kind or
nature whatsoever (including, without limitation, counsel fees and disbursements
in connection with any litigation, investigation, hearing or other proceeding)
with respect or in any way related to the existence, execution, delivery,
enforcement, performance of this Agreement, the Mezzanine Term Loan Note and the
Collateral Documents (all of the foregoing, collectively, the "Indemnified
Liabilities"), provided, that the Borrower shall not have any obligation
hereunder with respect to Indemnified Liabilities arising directly from the
gross negligence or willful misconduct of the Bank.
8.7 Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the Borrower, the Bank and their respective
successors and assigns, except that the Borrower may not assign or transfer any
of its rights under this Agreement without the prior written consent of the
Bank.
8.8 Counterparts. This Agreement may be executed by one or
more the parties to this Agreement on any number of separate counterparts
and all of said counterparts taken together shall be deemed to
constitute one and the same instrument.
8.9 Governing Law. This Agreement, the Mezzanine Term Loan
Note and the rights and obligations of the parties under this Agreement and the
Mezzanine Term Loan Note shall be governed by, and construed and
interpreted in accordance with, the internal laws of the State of New York
without regard to principles of conflicts of laws.
8.10 Inconsistent Provisions. The terms of this Agreement,
the Mezzanine Term Loan Note and the Collateral Documents shall be cumulative
except to the extent they are specifically inconsistent with each other, in
which case the terms of this Agreement shall prevail.
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<PAGE>
8.11 Further Assurances. The Borrower hereby agrees that it
will, from time to time at its own expense, promptly execute and deliver all
further instruments, and take all further action, that may be necessary or
appropriate or that the Bank may reasonably request, in order to enable the Bank
to exercise and enforce their rights under this Agreement, the Mezzanine Term
Loan Note and the Collateral Documents and otherwise to carry out the intent of
this Agreement and the Collateral Documents.
8.12 Waiver of Jury Trial. THE BANK AND THE BORROWER HEREBY
KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO
A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF,
UNDER, OR IN CONNECTION WITH, THIS AGREEMENT, THE MEZZANINE TERM LOAN NOTE OR
ANY COLLATERAL DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING,
STATEMENTS (WHETHER VERBAL OR WRITTEN), OR ACTIONS OF THE BANK OR THE BORROWER.
THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE BANK TO ENTER INTO THIS
AGREEMENT.
8.13 Consent to Jurisdiction. THE BORROWER AND BANK AGREE
THAT ANY ACTION OR PROCEEDING TO ENFORCE OR ARISING OUT OF THIS AGREEMENT, OR
THE MEZZANINE TERM LOAN NOTE MAY BE COMMENCED IN THE SUPREME COURT OF NEW YORK
IN ERIE COUNTY, OR IN THE DISTRICT COURT OF THE UNITED STATES IN THE WESTERN
DISTRICT OF NEW YORK, AND THE BORROWER AND BANK WAIVE PERSONAL SERVICE OF
PROCESS AND AGREE THAT A SUMMONS AND COMPLAIN COMMENCING AN ACTION OR PROCEEDING
IN ANY SUCH COURT SHALL BE PROPERLY SERVED AND SHALL CONFER PERSONAL
JURISDICTION IF SERVED BY REGISTERED OR CERTIFIED MAIL TO THE BORROWER OR BANK,
OR AS OTHERWISE PROVIDED BY THE LAWS OF THE SATE OF NEW YORK OR THE UNITED
STATES.
8.14 Headings. Headings to the sections of this Agreement
are solely for the convenience of the parties and are not an aid in the
interpretation of this Agreement or any part hereof.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered by their proper and duly authorized
officers as of the day and year first above written.
LIFE CRITICAL CARE CORPORATION
By:
Name:
Title:
MANUFACTURERS AND TRADERS TRUST COMPANY
By:
Name:
Title:
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ENVIRONMENTAL INDEMNIFICATION AGREEMENT
THIS AGREEMENT, dated as of December _ , 1996, is given by Life
Critical Care Corporation, a Delaware corporation, ("Borrower"), to
MANUFACTURERS AND TRADERS TRUST COMPANY, a New York banking corporation
("Lender").
A. Definitions: As used in this Agreement, the following capitalized
terms shall have the meanings set forth below:
"Disposal" means the intentional or unintentional
abandonment, discharge, deposit, injection, dumping, spilling, leaking, storing,
burning, thermal destruction or placing of any substance so that it or any of
its constituents may enter the environment.
"Environment" means any water including but not limited to
surface water and ground water or water vapor; any land including land surface
or subsurface; stream sediments; air; fish, wildlife, plants; and all other
natural resources or environmental media.
"Environmental Laws" means all federal, state and local
environmental, land use, zoning, health, chemical use, safety and sanitation
laws, statutes, ordinances, regulations, codes and rules relating to the
protection of the Environment and/or governing the use, storage, treatment,
generation, transportation, processing, handling, production or disposal of
Hazardous Substances and the policies, guidelines, procedures, interpretations,
decisions, orders and directives of federal, state and local governmental
agencies and authorities with respect thereto.
"Environmental Permits" means all licenses, permits,
approvals, authorizations, consents or registrations required by any applicable
Environmental Laws and all applicable judicial and administrative orders in
connection with ownership, lease, purchase, transfer, closure, use and/or
operation of the property and/or as may be required for the storage, treatment,
generation, transportation, processing, handling, production or disposal of
Hazardous Substances.
"Environmental Questionnaire" means a questionnaire and all
attachments thereto concerning: (i) activities and conditions affecting the
Environment at any property of the Borrower or (ii) the enforcement or possible
enforcement of any Environmental Law against Borrower.
"Environmental Report" means a written report prepared for
the Lender by an environmental consulting or environmental engineering firm.
"Hazardous Substances" means, without limitation, any
explosives, radon, radioactive materials, asbestos, urea formaldehyde foam
insulation, polychlorinated biphenyls, petroleum and petroleum products,
methane, hazardous materials, hazardous wastes, hazardous or toxic substances
and any other material defined as a hazardous substance in Section 101(14) of
the Comprehensive Environmental
<PAGE>
Response, Compensation and Liability Act of 1980, 42 U.S.C. Sections 9601(14).
"Release" has the same meaning as given to that term in
Section 101(22) of the Comprehensive, Environmental Response, Compensation and
Liability Act of 1980, 42 U.S.C. Section 9601(22), and the regulations
promulgated thereunder.
B. Borrower represents and warrants that:
(i) The Environmental Questionnaire previously
provided to the Lender was and is accurate and complete and does not omit any
material fact the omission of which would make the information contained
therein materially misleading.
(ii) All underground storage tanks (including
any tanks no longer in use) on any property owned, leased or operated by
Borrower have been registered and are being maintained in accordance with all
Environmental Laws. Any leaks that have occurred have been repaired properly
and all substances that leaked from any such tank have been removed from
the property on which it was located and disposed of in accordance with
Environmental Laws.
(iii) No property owned, leased or operated by
Borrower is or has been used for the Disposal of any Hazardous Substance.
(iv) No Release of a Hazardous Substance has
occurred or is threatened on, at, from or near any property owned, leased or
operated by Borrower which could reasonably be expected, either presently or
in the future, to have a materially adverse effect on the financial condition,
operations or facilities of the Borrower.
(v) Borrower is not subject to any existing,
pending or threatened suit, claim, notice of violation or request for
information under any Environmental Law.
(vi) Borrower is in compliance in all respects with
all Environmental Laws.
C. Borrower covenants and agrees with the Lender that:
(i) Borrower shall comply with all Environmental
Laws.
(ii) Borrower shall not suffer, cause or permit the
Disposal of Hazardous Substances at any property owned, leased or operated by
it.
(iii) Borrower shall promptly notify the Lender
in the event of the Disposal of any Hazardous Substance at any property owned,
leased or operated by Borrower, or in the event of any Release, or threatened
Release, of a Hazardous Substance, from any such Property.
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<PAGE>
(iv) Borrower shall, at the Lender's request, provide,
at Borrower's expense, updated Environmental Questionnaires and/or Environmental
Reports, in such form and content as the Lender may reasonably request,
concerning any property now or hereafter owned, leased or operated by Borrower.
(v) Borrower shall deliver promptly to the Lender
(a) copies of any documents received from the United States Environmental
Protection Agency or any state, county or municipal environmental or health
agency concerning Borrower's operations; and (b) copies of any documents
submitted by Borrower to the United States Environmental Protection Agency or
any state, county of municipal environmental or health agency concerning its
operations.
D. Borrower agrees to indemnify, defend, and hold harmless
Lender from and against any and all liabilities, claims, damages, penalties,
expenditures, losses, or charges, including, but not limited to, all costs of
investigation, monitoring, legal representation, remedial response, removal,
restoration or permit acquisition, which may now or in the future be undertaken,
suffered, paid, awarded, assessed, or otherwise incurred by Lender or any other
person or entity as a result of the presence of, Release of or threatened
Release of Hazardous Substances on, in, under or near the property owned or
operated by the Borrower. The liability of the Borrower under the covenants of
this Section is not limited by any exculpatory provisions in this Agreement or
any other documents evidencing or securing any loans made by the Lender to the
Borrower and shall survive repayment of all such loans or any transfer or
termination of this Agreement regardless of the means of such transfer or
termination.
E. Borrower agrees that the Lender shall not be liable in any
way for the completeness or accuracy of any Environmental Report or the
information contained therein. Borrower further agrees that the Lender has no
duty to warn the Borrower or any other person or entity about any actual or
potential environmental contamination or other problem that may have become
apparent or will become apparent to the Lender.
LIFE CRITICAL CARE CORPORATION
By:
Name:
Title:
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EXHIBIT 11.1
LIFE CRITICAL CARE CORPORATION
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Period from June 19, 1995
(date of inception) Nine months ended
to December 31, 1995 September 30, 1996
------------------------- ------------------
Average number of shares
outstanding 546,392 769,659
------- -------
Total 546,392 769,659
======= =======
Net loss (267,926) (1,350,695)
Net loss per share (.49) (1.76)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated August 23, 1996, except paragraph 1 of Note 6 for which
the date is August 29, 1996, for Life Critical Care Corporation, and June 28,
1996 for Blue Water Medical Supply, Inc. and Blue Water Industrial Products,
Inc., Great Lakes Home Medical, Inc., and ABC Medical Supply, Inc., in the
Registration Statement (Form SB-2) and related Prospectus of Life Critical Care
Corporation, for the registration of 2,000,000 shares of its common stock.
Ernst & Young LLP
Chicago, Illinois
December 5, 1996
CONSENT PURSUANT TO SEC RULE 438
The undersigned hereby consents to being named as a person about to
become a director of Life Critical Care Corporation (the "Corporation") in the
Corporation's Registration Statement on Form SB-2, as amended (Registration No.
333-14755).
/s/ J. Edward Beck, Jr.
J. Edward Beck, Jr.
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<PERIOD-END> SEP-30-1996
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<RECEIVABLES> 30,000
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