Registration No. 333-23137
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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HEALTHCARE CAPITAL CORP.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
Alberta, Canada
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR
ORGANIZATION)
5999-79
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
Not Applicable
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
111 S.W. Fifth Avenue, Suite 2390
Portland, Oregon 97204
(503) 225-9152
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL
PLACE OF BUSINESS)
MN Service Corp. (Oregon)
111 S.W. Fifth Avenue
Suite 3500
Portland, Oregon 97204
(503) 224-5858
(NAME, ADDRESS, AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
With Copies To:
Miller, Nash, Wiener, Hager & Carlsen LLP
111 S.W. Fifth Avenue, Suite 3500
Portland, Oregon 97204-3699
Attn: Mary Ann Frantz
(503) 224-5858
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this registration statement.
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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. [ ]
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The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
HEALTHCARE CAPITAL CORP.
18,722,493 Shares
Common Stock
This Prospectus relates to 18,722,493 shares (the "Shares") of Common
Stock of HealthCare Capital Corp. (the "Company") which may be offered for sale
from time to time by the selling shareholders identified under "Selling
Shareholders." The expenses of the offering, estimated at $250,000, will be
borne by the Company.
The Company is an Alberta, Canada corporation. The Common Stock is
traded in Canada on The Alberta Stock Exchange (the "ASE"). The last reported
sale price of the Common Stock on the ASE on June ___, 1997, was $____ per
share. There is currently no public market for the Common Stock in the United
States. The Company has been advised that the selling shareholders expect to
offer the Shares from time to time at prices and on terms then prevailing on the
ASE or at prices related to the then-current market prices, or in negotiated
transactions. See "Selling Shareholders" and "Plan of Distribution."
The Shares covered by this Prospectus include 8,694,358 shares of
Common Stock issuable upon the exercise of warrants or convertible securities
acquired by certain selling shareholders prior to the date of this Prospectus.
This Prospectus relates only to the shares of Common Stock issuable upon the
exercise of such warrants or convertible securities and not to the warrants or
convertible securities themselves.
The selling shareholders and any broker-dealers who may participate in
sales of Shares covered by this Prospectus may be deemed to be statutory
underwriters within the meaning of the Securities Act of 1933. See "Plan of
Distribution."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is June __, 1997.
<PAGE>
[Map of United States and Canada Showing HealthCare Capital Corp.
Hearing Care Clinic Locations]
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<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Page
Prospectus Summary.............................................................................................. 3
Risk Factors.................................................................................................... 6
Service and Enforcement of Legal Process........................................................................ 12
Special Note Regarding Forward-Looking Statements............................................................... 12
Price Range of Common Stock..................................................................................... 14
Dividend Policy................................................................................................. 14
Capitalization.................................................................................................. 15
Selling Shareholders............................................................................................ 16
Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................................................... 24
Business ....................................................................................................... 33
Management...................................................................................................... 43
Compensation of Executive Officers.............................................................................. 45
Certain Transactions............................................................................................ 49
Principal Shareholders.......................................................................................... 52
Description of Capital Stock.................................................................................... 54
Canadian Federal Income Tax Considerations...................................................................... 58
Investment Canada Act........................................................................................... 60
Plan of Distribution............................................................................................ 60
Legal Matters................................................................................................... 61
Experts ....................................................................................................... 61
Additional Information.......................................................................................... 62
Pro Forma Financial Information................................................................................. 62
Index to Financial Statements................................................................................. F-1
</TABLE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be
read in conjunction with, the more detailed information and financial statements
appearing elsewhere in this Prospectus. Additionally, investors should carefully
consider the information set forth under "Risk Factors." All dollar amounts,
unless otherwise indicated, are expressed in United States dollars and, if
converted from Canadian dollars, have been so converted using the spot exchange
rate on the date indicated as quoted by the Federal Reserve Bank of New York for
the New York Interbank Market.
THE COMPANY
The Company, through its primary operating subsidiaries HC HealthCare
Hearing Clinics Ltd., an Alberta, Canada, corporation, and HealthCare Hearing
Clinics, Inc., a Washington corporation, currently owns and operates a network
of 53 hearing care clinics in the United
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States and Western Canada. The clinics are located primarily in the metropolitan
areas of Los Angeles, California; San Diego, California; Chicago, Illinois;
Lansing, Michigan; Albuquerque, New Mexico; Vancouver, British Columbia; and
Calgary, Alberta. The Company intends to expand its network of hearing care
clinics by acquiring clinics in its existing as well as new geographic markets.
Since August 1, 1996, the Company has acquired 38 hearing care clinics.
Each of the Company's hearing care clinics provides its hearing
impaired patients with a full range of audiological products and services.
Substantially all of the Company's hearing care clinics are staffed by
audiologists. The Company's operating strategy is to provide patients with high
quality and cost-effective hearing care while at the same time increasing its
operating margins by attracting and retaining patients, recruiting qualified and
productive audiologists, achieving economies of scale and administrative
efficiencies, and pursuing large group and managed care contracts. The Company
believes that it is well positioned to provide retail hearing rehabilitative
services to consumers while simultaneously serving the diagnostic needs of
referring physicians and meeting the access and cost concerns of managed care
providers and insurance companies.
The Company was incorporated under the laws of the Province of Alberta,
Canada in July 1993, under the name "575035 Alberta Ltd." The Company changed
its name to HealthCare Capital Corp. in October 1994. The Company's executive
offices are located at Suite 2390, 111 S.W. Fifth Avenue, Portland, Oregon 97204
(telephone (503) 225-9152), and an additional corporate office is located at
Suite 1120, 595 Howe Street, Vancouver, B.C.
V6B 1NZ (telephone (604) 685-4854).
SUMMARY FINANCIAL, OPERATING AND PRO FORMA DATA
The summary historical financial data presented below for the years
ended July 31, 1995 and 1996 has been derived from the audited financial
statements of the Company included elsewhere in this Prospectus. The summary
historical financial data presented below for the six months ended January 31,
1996 and 1997 has been derived from the unaudited financial statements of the
Company. Such unaudited financial data has been prepared on the same basis as
the audited financial data and reflects all normal recurring adjustments that
are, in the opinion of management of the Company, necessary for a fair
presentation of the financial position of the Company and its results of
operations for the periods indicated. The summary historical financial data
should be read in conjunction with the financial statements and notes thereto
included elsewhere in this Prospectus.
The summary pro forma data for the fiscal year ended July 31, 1996, and
the six-month period ended January 31, 1997, reflects the acquisition of 11
clinics operated by the Hearing Care Associates Group ("HCA") which occurred on
October 1, 1996, and 14 clinics comprising the Midwest Division of Hearing
Health Services, Inc., dba SONUS ("SONUS"), which occurred on October 31, 1996,
as if such acquisitions had occurred on August 1, 1995 and August 1, 1996,
respectively. Such data should be read in conjunction with the information
presented under "Pro Forma Financial Information" herein.
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<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
Year ended July 31, Six months ended January 31,
<S> <C> <C> <C> <C> <C> <C>
Pro Forma Pro Forma
1995 1996 1996(1) 1996 1997 1997(2)
---- ---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Operating revenue $ 1,720 $ 2,389 $ 10,054 $ 1,034 $ 4,201 $ 5,766
Cost of sales 773 1,018 3,374 474 1,546 2,063
Operating expenses 1,038 1,961 7,948 681 3,626 4,794
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Loss from operations (91) (590) (1,268) (121) (971) (1,091)
Other income (expense), net (3) 8 22 -- 24 32
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Loss before income taxes (94) (582) (1,246) (121) (947) (1,059)
Income tax expense (benefit) -- -- 25 -- -- (31)
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Net loss $ (94) $ (582) $ (1,271) $ (121) $ (947) $ (1,028)
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Net loss per common share $ (0.01) $ (0.05) $ (0.07) $ (0.01) $ (0.06) $ (0.05)
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Weighted average number of
shares outstanding 6,679 10,598 18,922 8,602 17,206 20,931
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</TABLE>
<TABLE>
<CAPTION>
July 31, January 31,
1996 1997
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BALANCE SHEET DATA:
<S> <C> <C>
Cash and cash equivalents $ 11 $ 3,327
Working capital 18 3,198
Total assets 2,322 14,634
Long-term debt, net of current portion 92 285
Convertible debt 129 2,730
Shareholders' equity 1,512 9,126
OTHER DATA:
Number of audiology clinics 15 47
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</TABLE>
(1) Gives effect to the acquisitions of 11 clinics operated by HCA and 14
clinics operated by SONUS, and the issuance of 1,792,152 shares in
connection with the acquisition of the HCA clinics, as if such events
had occurred on August 1, 1995.
(2) Gives effect to the acquisitions of 11 clinics operated by HCA and 14
clinics operated by SONUS, and the issuance of 1,792,152 shares in
connection with the acquisition of the HCA clinics, as if such events
had occurred on August 1, 1996.
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RISK FACTORS
The Company's Common Stock, without nominal or par value (the "Common
Stock"), offered hereby should be considered a highly speculative investment.
Prospective investors should carefully consider the following factors, in
addition to the other information contained herein, before deciding to purchase
the Common Stock. This Prospectus contains forward-looking statements within the
meaning of the federal securities laws. Such forward-looking statements involve
risks and uncertainties, and actual results may differ from those projected due
to a number of factors, including those set forth below and elsewhere in this
Prospectus. See "Special Note Regarding Forward-Looking Statements."
SHORT OPERATING HISTORY
The Company has a limited history of operations consisting primarily of
operating a small number of hearing care clinics in British Columbia beginning
in October 1994. The Company did not begin operating in the United States until
it purchased two hearing care clinics in Santa Maria, California, in July 1996.
At June 6, 1997, the Company operated 40 hearing care clinics in the United
States and 13 clinics in Canada.
OPERATING LOSSES
For the fiscal year ended July 31, 1996, the Company sustained a net
loss of approximately $582,000. For the six months ended January 31, 1997, the
Company had a net loss of approximately $947,000. Further losses are anticipated
as a result of planned increases in the executive and general management staff
of the Company to support the Company's expansion plans, additional advertising
and public relations costs, amortization of goodwill related to past and future
acquisitions, and the development of a management information system. There can
be no assurance that the Company will achieve profitability in the near or long
term.
EXPANSION PROGRAM
Much of the Company's future success is dependent upon acquiring
hearing care clinics in new markets in which the Company has no previous
presence. There can be no assurance that the Company will be able to complete
acquisitions consistent with its expansion plans, that such acquisitions will be
on terms favorable to the Company or that the Company will be able to
successfully integrate the hearing care clinics that it acquires into its
business.
The success of the Company's expansion is dependent upon its ability to
establish a market presence in geographic areas in which it is presently unknown
and where competitors with greater financial and other resources may be
operating and on a number of other factors, some of which are beyond the
Company's control. In addition, clinics in areas of recent expansion are not
expected to be profitable for an indeterminate period of time because of the
time and capital required to develop a network of hearing care clinics that is
sufficiently large to permit full implementation of the Company's business
strategy.
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Successful integration will be dependent upon maintaining payor and
customer relationships and converting the management information systems of the
clinics the Company acquires to the Company's systems. Significant expansion
could place a strain on the Company's managerial and other resources and could
necessitate the hiring of a number of new managerial and administrative
personnel. Unforeseen problems with future acquisitions or failure to manage
expansion effectively may have a material adverse effect on the business,
financial condition, and results of operations of the Company. The Company
intends to issue additional shares of its Common Stock in payment of all or a
portion of the purchase price of certain acquisitions. There can be no assurance
that fluctuations in the market price of the Common Stock will not adversely
affect the Company's ability to use its Common Stock for acquisitions.
IMPACT OF POLICY CHANGES BY THIRD-PARTY INSURERS
A portion of the hearing aids sold by the Company are paid for by
third-party insurers. Many of such insurers impose restrictions in their health
insurance policies on the frequency with which hearing instruments may be
upgraded or replaced on a reimbursable basis. Such restrictions have a negative
impact on hearing aid sales volume. There can be no guarantee that such insurers
will not implement other policy restrictions in the future in order to further
minimize reimbursement for hearing care. Such restrictions could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
MANAGED CARE
Managed care arrangements typically shift some of the economic risk of
providing patient care from the person who pays for the care to the provider of
the care by capping fees, requiring reduced fees, or paying a set fee per
patient irrespective of the amount of care delivered. With respect to hearing
care, such limits could result in reduced payments for services or restrictions
on the types of services for which reimbursement is available or the frequency
of replacements or upgrades of equipment. If managed care arrangements become
more prevalent in the hearing care field in the future, or the downward
pressures on fees associated with managed care increase, the Company's business,
financial condition, and results of operations may be materially adversely
affected.
DEPENDENCE ON KEY PERSONNEL
The success of the Company is dependent to a significant degree on the
services of Brandon M. Dawson, president of the Company, and on the other
members of its executive management team. The loss of the services of any of
these key personnel could have a material adverse effect on the Company's
business, financial condition, and results of operations.
The Company's success is also substantially dependent upon its ability
to identify, attract and retain qualified employees, particularly audiologists,
who are primarily responsible for clinic profitability as well as for attracting
and retaining customers. The Company recruits such personnel from a limited pool
of available applicants. Although the Company attempts to enter
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into employment contracts with its audiologists that contain covenants not to
compete, such audiologists may become competitors of the Company. The Company's
failure to attract and retain audiologists and other key employees would have a
material adverse effect on the business, financial condition, and results of
operations of the Company.
CONCENTRATION OF STOCK OWNERSHIP
The executive officers and directors of the Company beneficially own
approximately 8.9 million shares (not including shares subject to options), or
33% of the Common Stock presently outstanding. Accordingly, these individuals,
acting in concert, presently have substantial influence over most matters
requiring shareholder approval, including the election of directors and the
approval of significant corporate transactions. Such concentration of ownership
could also permit substantial shareholders to delay or prevent a change in
control of the Company and may discourage third parties from attempting to
acquire such control.
PUBLIC MARKET; VOLATILITY OF STOCK PRICE
The Common Stock is presently traded on The Alberta Stock Exchange in
Canada. However, there has been no public market for the Company's Common Stock
in the United States and there is no assurance that an active trading market
will develop or be sustained. Even if an active trading market does develop in
the United States, the market price of the Company's Common Stock could be
significantly affected by such factors as the Company's operating results,
changes in any earnings estimates publicly announced by the Company or by
analysts, announcements of technological or surgical innovations affecting
hearing care, the introduction of new hearing care products or changes in
existing hearing care products, and various factors affecting the economy in
general. In addition, the stock markets in the United States and Canada have
experienced a high level of price and volume volatility and market prices for
the stock of many companies have experienced wide price fluctuations not
necessarily related to the operating performance of such companies.
PENNY STOCK REGULATION
The Securities and Exchange Commission (the "Commission") has adopted
rules that regulate broker-dealer practices in connection with transactions in
"penny stocks." Penny stocks generally are equity securities with a price of
less than $5.00 (other than securities registered on certain national securities
exchanges or quoted on the NASDAQ system, provided that current price and volume
information with respect to transactions in such securities is provided by the
exchange or system). The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document that provides information about penny
stocks and the nature and level of risks in the penny stock market. The
broker-dealer also must provide the customer with bid and offer quotations for
the penny stock, the compensation of the broker-dealer and its salesperson in
the transaction, and monthly account statements showing the market value of each
penny stock held in the customer's account. In addition, the penny stock rules
require that, prior to a transaction in a penny stock not otherwise exempt from
such rules, the broker-dealer must make a special
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written determination that the penny stock is a suitable investment for the
purchaser and receive the purchaser's written agreement to the transaction.
These requirements may have the effect of reducing the level of trading activity
in the secondary market for a stock that is subject to the penny stock rules. So
long as the Company's Common Stock is subject to the penny stock rules,
purchasers of Shares offered by this Prospectus may find it more difficult to
sell their Common Stock.
POTENTIAL FOR FUTURE SALES OF SHARES
This Prospectus relates to the offering for sale of a total of
18,722,493 Shares of the Company's Common Stock from time to time by one or more
persons identified under the caption "Selling Shareholders" (the "Selling
Shareholders"), of which (i) 10,028,135 Shares are presently outstanding, (ii)
6,694,358 Shares are issuable upon the exercise of purchase warrants, and (iii)
2,000,000 Shares are issuable upon the exercise of convertible notes. See
"Selling Shareholders," "Principal Shareholders," and "Plan of Distribution." Of
the 18.7 million shares being offered hereunder, 3.2 million shares are held by
executive officers, directors or founding shareholders of the Company. Each such
person intends to offer his or her shares for sale from time to time during the
next 12 to 24 months as his or her individual circumstances dictate. An
additional 3.4 million shares of Common Stock which are not covered by this
Prospectus are issuable upon the exercise of options, purchase warrants, and
convertible securities, of which 2.0 million were exercisable at June 1, 1997.
Also, approximately 10.8 million shares of the outstanding Common Stock which
are not covered by this Prospectus are freely transferable under the Canadian
and U.S. federal securities laws. Sales of any significant number of shares of
Common Stock, or the potential for such sales, in the public market could
adversely affect the prevailing market price of the Common Stock. See "Price
Range of Common Stock."
COMPETITION
The market in which the Company operates is intensely competitive,
highly fragmented, and characterized by intense price competition and an
increasing number of new audiologists entering the market. The Company has
numerous competitors in each of the markets in which it operates hearing care
clinics. Some of its competitors are better known and have substantially greater
financial and marketing resources than the Company. In addition, other persons
or entities may seek to acquire hearing care clinics in the markets in which the
Company hopes to operate, thereby creating competitive pressures in connection
with the acquisition of hearing care clinics by the Company.
LABOR UNIONS
Although there are no collective bargaining agreements in place with
respect to the Company's operations, there can be no assurance that the
Company's employees will not attempt to unionize. Certain individuals have
attempted to unionize the employees of HC HealthCare Hearing Clinics Ltd., the
Company's primary Canadian operating subsidiary, in the past. Any unionization
of the Company's employees could have a material adverse effect on the business,
financial condition, and results of operations of the Company.
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ADDITIONAL FINANCING
The Company's strategy to acquire additional hearing care clinics will
require substantial additional funding. Moreover, funding will be needed for the
development of an on-line management information system that will link each
clinic with the Company's corporate headquarters and for additional working
capital. These funding requirements may result in the Company incurring
long-term and short-term indebtedness and in the public or private issuance,
from time to time, of additional equity or debt securities. There can be no
assurance that any such financing will be available to the Company or will be
available on terms acceptable to the Company.
REPUTATION OF THE INDUSTRY
Certain segments of the hearing care industry, in particular the sale
and fitting of hearing aids, have been the subject of governmental investigation
and adverse publicity due to unscrupulous sales practices by certain
organizations. Adverse publicity concerning the hearing care industry could have
a material adverse effect on the Company's business, financial condition, and
results of operations.
REGULATION
The sale of hearing aid devices is regulated at the federal level in
the United States by the United States Food and Drug Administration ("FDA"),
which has been granted broad authority to regulate the hearing care industry.
Under federal law, hearing aids may only be sold to individuals who have first
obtained a medical evaluation from a licensed physician, although a fully
informed adult may waive a medical evaluation in certain instances. Regulations
promulgated by the FDA also presently require that dispensers of hearing aids
provide customers with certain warning statements and notices in connection with
the sale of hearing aids and that such sales be made in compliance with certain
labeling requirements.
Most states in the United States and many provinces in Canada have
established formal licensing procedures that require the certification of
audiologists and/or hearing instrument specialists ("HISs"). Although the extent
of regulation varies by jurisdiction, almost all states and provinces engage in
some degree of oversight of the industry. The Company operates its hearing care
clinics through its wholly owned subsidiaries, HealthCare Hearing Clinics, Inc.
("HHCI"), which is a Washington general business corporation, and HC HealthCare
Hearing Clinics Ltd., a British Columbia corporation, as well as second-tier
subsidiaries. The subsidiary corporations employ licensed audiologists who offer
and perform audiology services on behalf of the Company.
In certain states in the United States, business corporations such as
HHCI may not be authorized to employ audiologists and offer audiology services.
For example, in California, where the Company operates 26 clinics, although the
performance of audiology services by professional corporations owned solely by
licensed audiologists is expressly authorized under California law, it is
unclear whether general business corporations such as HHCI may employ
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licensed audiologists to perform audiology services. However, the California
Department of Consumer Affairs has indicated by memorandum that speech-language
pathologists, which are regulated under statutes and regulations similar to
those governing audiologists, may practice in a general business corporation and
that a general business corporation may provide speech-language pathology
services through licensed speech pathologists. In Illinois, where the Company
has eight hearing care clinics, it is also unclear whether general business
corporations may employ licensed audiologists to perform audiology services.
Under Illinois law, only professional corporations and individuals are
authorized to obtain licenses to practice audiology.
The laws and regulations governing the practice of audiology are
enforced by regulatory agencies with broad discretion. If the Company were found
to be in violation of such laws and regulations in one or more states, the
consequences could include the imposition of fines and penalties upon the
Company and its audiologists as well as the issuance of orders prohibiting the
Company from operating its clinics under its present structure. In that event,
among the solutions the Company might consider would be the restructuring of all
or a portion of its operations in a manner similar to that used by certain
medical and dental clinic networks. Under such a structure, professional
corporations owned by licensed audiologists would contract with the Company to
perform professional services and the Company would contract with the
professional corporations to provide management services.
No assurance can be given that the Company's activities will be found
to be in compliance with laws and regulations governing the corporate practice
of audiology or, if its activities are not in compliance, that the operational
structure of the Company can be modified to permit compliance. In addition, no
assurance can be given that other states or provinces in which the Company
presently operates will not enact prohibitions on the corporate practice of
audiology or that the regulatory framework of certain jurisdictions will not
limit the ability of the Company to expand into such jurisdictions if the
Company is unable to modify its operational structure to comply with such
prohibitions or to conform with such regulatory framework. Additional laws and
regulations may be adopted in the future at the federal, state, or province
level that could have a material adverse effect on the business, financial
condition, and results of operations of the Company.
A small percentage of the revenues of the hearing care clinics operated
by the Company comes from Medicare and Medicaid programs. Federal law prohibits
the offer, payment, solicitation or receipt of any form of remuneration in
return for, or in order to induce, (i) the referral of a Medicare or Medicaid
patient, (ii) the furnishing or arranging for the furnishing of items or
services reimbursable under Medicare or Medicaid programs or (iii) the purchase,
lease or order of any item or service reimbursable under Medicare or Medicaid.
Noncompliance with the federal anti-kickback legislation can result in exclusion
from Medicare and Medicaid programs and civil and criminal penalties.
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POTENTIAL ISSUANCE OF PREFERRED STOCK AND ADDITIONAL COMMON STOCK
The Board of Directors has the authority to issue an unlimited number
of preferred shares of the Company ("Preferred Stock") in one or more series and
to fix the number of shares of any such series and the designations, rights,
privileges, restrictions, and conditions attaching thereto, without any further
vote or action by the shareholders of the Company. The issuance of Preferred
Stock could adversely affect the rights of holders of Common Stock. For example,
the issuance of Preferred Stock could result in securities outstanding that
would have preference over the Common Stock with respect to dividends and in
liquidation and that could (upon conversion or otherwise) have all of the rights
of the Common Stock. The Board of Directors also has the authority to issue an
unlimited number of additional shares of Common Stock without any further vote
or action by the Company's shareholders, possibly causing the interests of the
existing shareholders to suffer substantial dilution. The issuance of Preferred
Stock or additional Common Stock could potentially be used to discourage
attempts by others to obtain control of the Company through merger, tender
offer, proxy or consent solicitation, or otherwise by making such attempts more
costly or more difficult to achieve.
SERVICE AND ENFORCEMENT OF LEGAL PROCESS
The Company is incorporated under the laws of the Province of Alberta,
Canada. Some of the directors, controlling persons and officers of the Company,
as well as certain of the experts named herein and 10 of the Selling
Shareholders, are residents of Canada and all or a portion of the assets of such
persons and of the Company are located outside of the United States. As a
result, it may be difficult for holders of the Common Stock to effect service
within the United States upon those directors, controlling persons, officers,
experts and Selling Shareholders hereunder who are not residents of the United
States, or to realize in the United States upon judgments of courts of the
United States predicated upon the civil liability provisions of the United
States federal securities laws to the extent such judgments exceed such person's
United States assets. The Company has been advised by its Canadian counsel,
Ballem MacInnes, that there is doubt as to the enforceability in Canada against
the Company or against any of its directors, controlling persons, officers or
experts or any Selling Shareholders hereunder who are not residents of the
United States, in original actions or in actions for enforcement of judgments of
United States courts, of liabilities predicated solely upon United States
federal securities laws. The Company's agent for service of process in the
United States is MN Service Corp. (Oregon), 111 S.W. Fifth Avenue, Suite 3500,
Portland, Oregon 97204, telephone (503) 224-5858.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus, including
without limitation statements containing the words "believes," "anticipates,"
"intends," "expects" and words of similar import, are forward-looking
statements. Such statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company or industry results to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements.
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<PAGE>
Such factors with respect to the Company include economic trends in the
Company's market areas, the ability of the Company to manage its growth and
integrate new acquisitions into its network of hearing care clinics, changes in
the application or interpretation of applicable governmental laws and
regulations, the ability of the Company to complete additional acquisitions of
hearing care clinics on terms favorable to the Company, the degree of
consolidation in the hearing care industry, the Company's success in attracting
and retaining qualified audiologists and staff to operate its hearing clinics,
product and professional liability claims brought against the Company that
exceed the Company's insurance coverage, and the availability of and costs
associated with potential sources of financing. Certain of these factors are
discussed in more detail elsewhere in this Prospectus, including without
limitation under the captions "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and "Business."
Given these uncertainties, prospective investors are cautioned not to place
undue reliance on such forward-looking statements. The Company disclaims any
obligation to update any such factors or to publicly announce the result of any
revisions to any of the forward-looking statements contained herein to reflect
future events or developments.
- 13 -
<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on the ASE. The following table sets forth
the reported high and low sales prices in Canadian and United States dollars for
the Common Stock on the ASE for the periods indicated:
<TABLE>
<CAPTION>
==========================================================================================================================
CANADIAN $ UNITED STATES $(1)
==========================================================================================================================
CALENDAR YEAR Period High Low HIGH LOW
==========================================================================================================================
<S> <C> <C> <C> <C> <C>
1995 First Quarter 0.19 0.11 0.14 0.08
- --------------------------------------------------------------------------------------------------------------------------
Second Quarter 0.26 0.15 0.19 0.11
- --------------------------------------------------------------------------------------------------------------------------
Third Quarter 0.28 0.16 0.21 0.12
- --------------------------------------------------------------------------------------------------------------------------
Fourth Quarter 0.65 0.14 0.48 0.11
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
1996 First Quarter 3.75 0.56 2.76 0.41
- --------------------------------------------------------------------------------------------------------------------------
Second Quarter 4.00 2.10 2.95 1.54
- --------------------------------------------------------------------------------------------------------------------------
Third Quarter 2.89 2.00 2.11 1.45
- --------------------------------------------------------------------------------------------------------------------------
Fourth Quarter 2.47 1.80 1.83 1.32
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
1997 First Quarter 2.58 1.81 1.89 1.34
- --------------------------------------------------------------------------------------------------------------------------
Second Quarter 2.00 1.25 1.44 0.89
through June 4,
1997
==========================================================================================================================
</TABLE>
(1) The high and low sales prices were converted to United States dollars
as of the date of sale.
As of May 31, 1997, there were 111 holders of record of the Common
Stock.
DIVIDEND POLICY
The payment of dividends is solely within the discretion of the
Company's board of directors. Since its inception the Company has not paid cash
dividends on its capital stock. The Company intends to retain any future
earnings for further development and growth of its business and does not
anticipate paying cash dividends in the foreseeable future.
- 14 -
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
January 31, 1997:
Long-term debt, net of current portion (1) $ 285,054
Convertible debt (2) 2,729,973
Shareholders' equity:
Preferred stock, no nominal or par value per share,
unlimited number of shares authorized; none
outstanding --
Common stock, no nominal or par value per share,
unlimited number of shares authorized; 25,933,112
shares issued and outstanding (3) 10,414,009
Retained deficit (1,363,868)
Cumulative translation adjustment 75,501
-----------
Total shareholders' equity 9,125,642
Total capitalization $12,140,669
- ----------
(1) See Note 8 of the Notes to the Consolidated Financial Statements for a
description of the Company's long-term debt.
(2) Convertible debt includes the following: (a) $2,600,000 non-interest
bearing convertible subordinated notes due October 31, 1997,
immediately convertible into shares of Common Stock at the conversion
price of $1.30 principal amount for each share of Common Stock; and (b)
$129,973 non-interest bearing convertible note due September 1, 1997,
immediately convertible into shares of Common Stock at the conversion
price of $1.00 principal amount for each share of Common Stock.
(3) Shares issued and outstanding do not include the following: (a) 2.3
million shares of Common Stock subject to options outstanding at
January 31, 1997, at a weighted average exercise price of $1.09 per
share; (b) 1,905,750 shares of Common Stock issuable upon exercise of
share purchase warrants at an exercise price of $1.09 per share
(converted from Canadian dollars at May 30, 1997) until February 28,
1998; (c) 5,467,410 shares of Common Stock issuable upon the exercise
of share purchase warrants at an exercise price of $2.00 per share; (d)
495,900 shares of Common Stock issuable upon the exercise of share
purchase warrants at an exercise price of $1.25 per share; (e)
2,129,630 shares of Common Stock reserved for issuance in respect of
convertible notes; and (f) 597,384 shares of Common Stock issuable upon
satisfaction of a purchase price contingency.
- 15 -
<PAGE>
SELLING SHAREHOLDERS
The following table sets forth the name of each Selling Shareholder,
any position, office or other material relationship of such Selling Shareholder
with the Company within the past three years, the amount of Common Stock owned
by such Selling Shareholder on June 1, 1997, the number of shares to be offered
by the Selling Shareholder and the amount and percentage of Common Stock to be
owned by such Selling Shareholder after completion of the offering assuming all
the offered shares are sold.
Of the 27,003,044 shares of Common Stock outstanding on June 1, 1997,
10,028,135 shares, or 37%, have been registered for resale pursuant to this
Prospectus. In addition, 8,694,358 shares of Common Stock issuable upon the
exercise of purchase warrants or convertible notes have been registered for
resale, which represents 70% of the approximately 12.4 million shares issuable
upon the exercise of all options, purchase warrants, and other convertible
securities outstanding at June 1, 1997.
Virtually all of the shares held by Selling Shareholders are restricted
securities within the meaning of Rule 144 under the Securities Act of 1933.
Restricted securities may not be sold under Rule 144 until a one-year holding
period has been satisfied. In addition, shares held by executive officers or
directors of the Company are "control shares" subject to the provisions of Rule
144 other than the holding period requirements. Sales under Rule 144 are, among
other matters, subject to manner of sale requirements and provisions limiting
the number of shares which may be sold during any three-month period; no sales
may be made under Rule 144 until the Company has been subject to the reporting
requirements of Section 13 or 15(d) of Securities Exchange Act of 1934 for 90
days. Restricted or control shares may also be sold in a private transaction
outside the requirements of Rule 144 or pursuant to a registration statement.
<TABLE>
<CAPTION>
=============================================================================================================================
NUMBER OF SHARES SHARES TO BE OWNED
NAME OF SELLING OWNED PRIOR TO AFTER OFFERING
SHAREHOLDER OFFERING SHARES OFFERED
=============================================================================================================================
<S> <C> <C> <C>
Abbingdon Venture Partners 743,600(1) 743,600 --
Limited Partnership
- -----------------------------------------------------------------------------------------------------------------------------
Abbingdon Venture Partners 71,280(2) 71,280 --
Limited Partnership II
- -----------------------------------------------------------------------------------------------------------------------------
Aho, Donald J. 16,000(3) 16,000 --
- -----------------------------------------------------------------------------------------------------------------------------
Alfa Life Insurance Co. 400,000(3) 400,000 --
- -----------------------------------------------------------------------------------------------------------------------------
Alfa Mutual Fire Insurance 600,000(3) 600,000 --
Co.
- -----------------------------------------------------------------------------------------------------------------------------
Alfa Mutual Insurance Co. 600,000(3) 600,000 --
- -----------------------------------------------------------------------------------------------------------------------------
Angus, Richard(4) 71,500 71,500 --
- -----------------------------------------------------------------------------------------------------------------------------
Art, Barbara Holley V Trust 40,000(3) 40,000 --
- -----------------------------------------------------------------------------------------------------------------------------
- 16 -
<PAGE>
- -------------------------------------------------------------------------------------------------------------------------
Art, Barbara Holley VII 96,000(3) 96,000 --
Trust
- -------------------------------------------------------------------------------------------------------------------------
Aspen Limited Partnership(5) 683,000(6) 683,000 --
- -------------------------------------------------------------------------------------------------------------------------
Bennett, Carissa(7) 253,091 253,091 --(7)
- -------------------------------------------------------------------------------------------------------------------------
Bickford, Michael D. & 80,000(3) 80,000 --
Lisbeth H.
- -------------------------------------------------------------------------------------------------------------------------
Brown's Creek, Inc. 900,000(8) 900,000 --
- -------------------------------------------------------------------------------------------------------------------------
Business Development 285,120(9) 285,120 --
Capital Limited Partnership
III
- -------------------------------------------------------------------------------------------------------------------------
Caldwell, Derek(10) 89,200(11) 89,200 --
- -------------------------------------------------------------------------------------------------------------------------
Campbell, Murray T.A.(12) 31,700 31,700 --
- -------------------------------------------------------------------------------------------------------------------------
Cass, Baron & Darlene 40,000(3) 40,000 --
"Family Foundation"
- -------------------------------------------------------------------------------------------------------------------------
Cass, A. Baron III 160,000(3) 160,000 --
"Childrens Trust"
- -------------------------------------------------------------------------------------------------------------------------
Cass, A. Baron III 867,664(13) 867,664 --
- -------------------------------------------------------------------------------------------------------------------------
Clark, Dr. Jim & Valerie 1,000 1,000 --
- -------------------------------------------------------------------------------------------------------------------------
Cohen, Barton J. 160,000(3) 160,000 --
- -------------------------------------------------------------------------------------------------------------------------
Cohen, Barton J. "Family 40,000(3) 40,000 --
Foundation"
- -------------------------------------------------------------------------------------------------------------------------
Collins, William 150,000(3) 150,000 --
- -------------------------------------------------------------------------------------------------------------------------
Cross, Deborah Law(14) 408,000 408,000 --
- -------------------------------------------------------------------------------------------------------------------------
Dawson, James W.(15) 6,600 6,600 --
- -------------------------------------------------------------------------------------------------------------------------
Dawson, Brandon M.(16) 4,250,000 500,000 3,750,000(16)
- -------------------------------------------------------------------------------------------------------------------------
DeJong, William(17) 82,200 82,200 --(17)
- -------------------------------------------------------------------------------------------------------------------------
Downey, Gary B. 16,000(3) 16,000 --
- -------------------------------------------------------------------------------------------------------------------------
Drullinger, Randall E.(18) 250,000 250,000 --(18)
- -------------------------------------------------------------------------------------------------------------------------
Feinberg, Hill A. 40,000(3) 40,000 --
- -------------------------------------------------------------------------------------------------------------------------
Ferrer, Christine 160,000(3) 160,000 --
- -------------------------------------------------------------------------------------------------------------------------
Finney, Stanford C., Jr. 160,000(3) 160,000 --
- -------------------------------------------------------------------------------------------------------------------------
- 17 -
<PAGE>
- -------------------------------------------------------------------------------------------------------------------------
Frazer, Gregory(19) 1,217,268 746,909 470,359(19)
- -------------------------------------------------------------------------------------------------------------------------
Friedman, Theodore 80,000(3) 80,000 --
- -------------------------------------------------------------------------------------------------------------------------
Gabbert, Jerome 48,000(3) 48,000 --
- -------------------------------------------------------------------------------------------------------------------------
Good, Douglas F.(20) 1,209,562 500,000 709,562(20)
- -------------------------------------------------------------------------------------------------------------------------
Gross Foundation Inc. 400,000(3) 400,000 --
- -------------------------------------------------------------------------------------------------------------------------
Hill, Mark W. 100,000(3) 100,000 --
- -------------------------------------------------------------------------------------------------------------------------
Holley, John W. and Wilson, 56,000(3) 56,000 --
Barbara
- -------------------------------------------------------------------------------------------------------------------------
Holley, John W. Grantor 240,000(3) 240,000 --
Trust
- -------------------------------------------------------------------------------------------------------------------------
Jacobson, Eli 64,000(3) 64,000 --
- -------------------------------------------------------------------------------------------------------------------------
Judge, James P. 80,000(3) 80,000 --
- -------------------------------------------------------------------------------------------------------------------------
Kanuk, Alan R. 72,000(3) 72,000 --
- -------------------------------------------------------------------------------------------------------------------------
Kaplan, Howard 80,000(3) 80,000 --
- -------------------------------------------------------------------------------------------------------------------------
Kawasaki, Edwin J.(21) 100,000 100,000 --(21)
- -------------------------------------------------------------------------------------------------------------------------
Kigler, Marvin 8,000(3) 8,000 --
- -------------------------------------------------------------------------------------------------------------------------
King, Gail 40,000(3) 40,000 --
- -------------------------------------------------------------------------------------------------------------------------
King, Netta Sue Q-Tip Trust 40,000(3) 40,000 --
- -------------------------------------------------------------------------------------------------------------------------
Lappetito, Paul 20,000(3) 20,000 --
- -------------------------------------------------------------------------------------------------------------------------
Lemak, John 80,000(3) 80,000 --
- -------------------------------------------------------------------------------------------------------------------------
Lieberman, John R. 8,000(3) 8,000 --
- -------------------------------------------------------------------------------------------------------------------------
Low, Nathan(22) 269,137(23) 269,137 --
- -------------------------------------------------------------------------------------------------------------------------
Mabry, Philip H. 40,000(3) 40,000 --
- -------------------------------------------------------------------------------------------------------------------------
Marshall, Marilyn E.(24) 1,381,138 500,000 881,138(24)
- -------------------------------------------------------------------------------------------------------------------------
Mathis, James T. 10,000(3) 10,000 --
- -------------------------------------------------------------------------------------------------------------------------
McKnight, Charles 16,000(3) 16,000 --
- -------------------------------------------------------------------------------------------------------------------------
McNight, Netta Sue King 16,000(3) 16,000 --
- -------------------------------------------------------------------------------------------------------------------------
Miller, Dwight(22) 227,727(25) 227,727 --
- -------------------------------------------------------------------------------------------------------------------------
Milstein, Edward 160,000(3) 160,000 --
- -------------------------------------------------------------------------------------------------------------------------
- 18 -
<PAGE>
- -------------------------------------------------------------------------------------------------------------------------
Milstein, Howard 160,000(3) 160,000 --
- -------------------------------------------------------------------------------------------------------------------------
Mutz, Marcus R. 80,000(3) 80,000 --
- -------------------------------------------------------------------------------------------------------------------------
C. M. Oliver & Company 308,600(27) 308,600 --
Limited(26)
- -------------------------------------------------------------------------------------------------------------------------
Pretlow, Joe 40,000(3) 40,000 --
- -------------------------------------------------------------------------------------------------------------------------
Rachofsky, Howard E. 800,000(3) 800,000 --
- -------------------------------------------------------------------------------------------------------------------------
Rainbow Trading Partners, 160,000(3) 160,000 --
Ltd.
- -------------------------------------------------------------------------------------------------------------------------
Rainbow Trading Venture 176,000(3) 176,000 --
Partners, L.P.
- -------------------------------------------------------------------------------------------------------------------------
Ramsay, Bruce A.(28) 33,400 33,400 --
- -------------------------------------------------------------------------------------------------------------------------
Reik, William J. III 80,000(3) 80,000 --
- -------------------------------------------------------------------------------------------------------------------------
Riggs, Leonard M., Jr., 133,334(3) 133,334 --
M.D.
- -------------------------------------------------------------------------------------------------------------------------
Riggs, Peggy A. 66,666(3) 66,666 --
- -------------------------------------------------------------------------------------------------------------------------
Rutledge, Stephen 10,000(3) 10,000 --
- -------------------------------------------------------------------------------------------------------------------------
Sagit Investment 1,430,000(29) 430,000 --
Management Ltd.
- -------------------------------------------------------------------------------------------------------------------------
Saito, Karen D. 6,600 6,600 --
- -------------------------------------------------------------------------------------------------------------------------
Saito, Kenneth O. 2,000 2,000 --
- -------------------------------------------------------------------------------------------------------------------------
Saito, Linda N. 6,600 6,600 --
- -------------------------------------------------------------------------------------------------------------------------
Saito, Stephanie N. 1,000 1,000 --
- -------------------------------------------------------------------------------------------------------------------------
Sands Partnership No. 1 267,666(30) 267,666 --
Money Purchase Pension
Plan
- -------------------------------------------------------------------------------------------------------------------------
Scharfer, Paul(31) 44,600(32) 44,600 --
- -------------------------------------------------------------------------------------------------------------------------
State Capital Partners 80,000(3) 80,000 --
- -------------------------------------------------------------------------------------------------------------------------
Still, Marc R. IRA(33) 136,000(34) 136,000 --
- -------------------------------------------------------------------------------------------------------------------------
Stinson, John C. 50,000(3) 50,000 --
- -------------------------------------------------------------------------------------------------------------------------
Stone, David 160,000(3) 160,000 --
- -------------------------------------------------------------------------------------------------------------------------
Stone, Richard(22) 72,680(35) 72,680 --
- -------------------------------------------------------------------------------------------------------------------------
- 19 -
<PAGE>
- -------------------------------------------------------------------------------------------------------------------------
Strauss, John L. 800,000(3) 800,000 --
- -------------------------------------------------------------------------------------------------------------------------
Swerdoff, Alan(22) 18,376(36) 18,376 --
- -------------------------------------------------------------------------------------------------------------------------
Tanihana, Jami(37) 905,977 905,977 --(37)
- -------------------------------------------------------------------------------------------------------------------------
Thau, Andrea, Money 8,000(3) 8,000 --
Purchase Plan
- -------------------------------------------------------------------------------------------------------------------------
Thau, Andrea P., Profit 16,000(3) 16,000 --
Sharing Plan
- -------------------------------------------------------------------------------------------------------------------------
The Curran Companies, Inc. 467,666(38) 467,666 --
- -------------------------------------------------------------------------------------------------------------------------
Thomson, Craig R.(39) 68,900 68,900 --
- -------------------------------------------------------------------------------------------------------------------------
Thomson, Michael G.(40) 128,700 128,700 --
=========================================================================================================================
</TABLE>
- -------------------------
(1) Consists of shares issuable upon the conversion of a convertible
subordinated promissory note issued by the Company in the amount of
$966,680 in connection with its acquisition of SONUS on October 31,
1996.
(2) Consists of shares issuable upon the conversion of a convertible
subordinated promissory note issued by the Company in the amount of
$92,664 in connection with its acquisition of SONUS on October 31,
1996.
(3) One-half of the number of shares shown are issuable to the Selling
Shareholder upon the exercise of the Company's September Warrants (as
defined below). Each September Warrant is exercisable for one share of
Common Stock at an exercise price of $2.00 per share until August 31,
1998. See "Description of Capital Stock--Warrants."
(4) Richard Angus, through Wood Gundy, Inc., assisted in the private
placement of the Company's special warrants issued in February 1996,
and received 35,750 shares and 35,750 February Warrants (as defined
below) in partial payment for such placement services. Each February
Warrant is exercisable for one share of Common Stock at an exercise
price of $1.09 per share (converted from Canadian dollars at May 30,
1997) until February 28, 1998. See "Description of Capital
Stock--Warrants."
(5) Aspen Limited Partnership received 464,000 of the shares shown as the
designee of Dallas Research & Trading, Inc. ("Dallas Research"), which
acted as a placement agent in connection with the private placement of
the Company's special warrants in the United States in December 1996.
Dallas Research received a selling commission equal to 9% of the gross
proceeds of the offering that was paid through the issuance of 180,000
September Warrants. Dallas Research also received an additional 20,000
September Warrants in payment of its corporate finance fee and an
option to acquire 200,000 share purchase warrants.
See "Description of Capital Stock--Warrants."
(6) The number of shares shown includes 38,500 shares issuable upon the
exercise of the Company's February Warrants and 219,000 shares issuable
upon the exercise of the Company's September Warrants. The number of
shares shown also includes 168,000 shares issuable upon the exercise of
share purchase warrants at an exercise price of $1.25 per share until
August 31, 1998. See "Description of Capital Stock--Warrants."
- 20 -
<PAGE>
(7) Ms. Bennett has entered into a five-year employment contract with the
Company as an area administrator. She is married to Gregory Frazer, an
officer and director of the Company. She acquired her shares of Common
Stock in connection with the acquisition by the Company of 11 clinics
operated by HCA on October 1, 1996. The shares to be owned by Ms.
Bennett after the offering do not include Mr. Frazer's shares or
100,000 shares which Ms. Bennett will have the right to acquire upon
the exercise of stock options which are not currently vested. See note
19 below and "Management," "Principal Shareholders," and "Certain
Transactions."
(8) Consists of shares issuable upon the conversion of a convertible
subordinated promissory note issued by the Company in the amount of
$1,170,000 in connection with its acquisition of SONUS on October 31,
1996.
(9) Consists of shares issuable upon the conversion of a convertible
subordinated promissory note issued by the Company in the amount of
$370,656 in connection with its acquisition of SONUS on October 31,
1996.
(10) Mr. Caldwell received 9,200 of the shares shown as the designee of
Sunrise Securities Corporation ("Sunrise"), which acted as a placement
agent in connection with the private placement of the Company's
September Warrants in the United States in December 1996. Sunrise
received a selling commission equal to 9% of the gross proceeds of the
offering that was paid through the issuance of 193,410 September
Warrants. Sunrise also received a $25,000 corporate finance fee and an
option to acquire 214,900 share purchase warrants. See "Description of
Capital Stock--Warrants."
(11) The number of shares shown includes 42,800 shares issuable upon the
exercise of the Company's September Warrants. The number of shares
shown also includes 3,600 shares issuable upon the exercise of share
purchase warrants at an exercise price of $1.25 per share until August
31, 1998. See "Description of Capital Stock--Warrants."
(12) Mr. Campbell was one of the Company's original shareholders and a
former director of the Company.
(13) The number of shares shown includes 133,832 shares issuable upon the
exercise of the Company's February Warrants and 300,000 shares issuable
upon the exercise of the Company's September Warrants.
See "Description of Capital Stock--Warrants."
(14) Ms. Cross has entered into a three-year employment contract with the
Company as an area administrator. She acquired her shares of Common
Stock in connection with the acquisition by the Company of Hearing
Dynamics in December 1996. Of the shares shown, a total of 118,000
shares are subject to restrictions on sale or transfer. Such
restrictions will lapse as to one-third of such shares on November 30
in each of 1997, 1998, and 1999. In addition, 80,000 of the shares are
being held by the Company (the "Contingent Shares"). If for any of the
three years ending on November 30, 1997, 1998 or 1999, the income of
Hearing Dynamics before interest, taxes, depreciation and amortization
and after a corporate overhead allocation falls below 20% of the net
revenues of the business for such year, Ms. Cross may elect to pay the
Company $1.00 or cancel one Contingent Share for each $1.00 of
shortfall. A Contingent Share is also required to be canceled or a
dollar retained for each $1.72 of long-term liabilities of the business
as of the date of closing of the acquisition and for each $1.72 of net
accounts receivable that remains uncollected after a specified time
period.
(15) James W. Dawson is the father of Brandon M. Dawson, president and a
director of the Company.
(16) Brandon M. Dawson is president and a director of the Company. The
number of shares to be owned by Mr. Dawson after the offering, which
represents 13.9% of the Common Stock presently outstanding, does not
include 300,000 shares which Mr. Dawson has the right to acquire
pursuant to the exercise of stock options. See "Management," "Principal
Shareholders," "Certain Transactions," and "Description of Capital
Stock--Escrowed Shares."
- 21 -
<PAGE>
(17) Mr. DeJong is a director of the Company. The shares to be owned by Mr.
DeJong after the offering do not include 75,000 shares which Mr. DeJong
has the right to acquire pursuant to the exercise of stock options. See
"Management," "Principal Shareholders," and "Certain Transactions."
(18) Mr. Drullinger is an officer of the Company. The shares to be owned by
Mr. Drullinger after the offering do not include 200,000 shares which
Mr. Drullinger has the right to acquire pursuant to the exercise of
stock options. See "Management" and "Description of Capital
Stock--Escrowed Shares."
(19) Mr. Frazer is an officer and director of the Company and acquired his
shares in connection with the acquisition by the Company of 11 clinics
operated by HCA on October 1, 1996. The number of shares to be owned by
Mr. Frazer after the offering, which represents 1.7% of the Common
Stock presently outstanding, does not include 400,000 shares which Mr.
Frazer will have the right to acquire pursuant to the exercise of stock
options which are not currently vested. See note 7 above and
"Management," "Principal Shareholders," and "Certain Transactions."
(20) Mr. Good is a director of the Company. Mr. Good shares the same
household as Marilyn E. Marshall. The number of shares to be owned by
Mr. Good after the offering, which represents 2.6% of the Common Stock
presently outstanding, does not include Ms. Marshall's shares. See note
24 below and "Management," "Principal Shareholders," "Certain
Transactions," and "Description of Capital Stock-- Escrowed Shares."
(21) Mr. Kawasaki is an officer of the Company. The shares to be owned by
Mr. Kawasaki after the offering do not include 170,000 shares which Mr.
Kawasaki will have the right to acquire pursuant to the exercise of
stock options which are not currently vested. See "Management" and
"Description of Capital Stock-- Escrowed Shares."
(22) The Selling Shareholder received the shares shown as the designee of
Sunrise. See note 10 above and "Description of Capital
Stock--Warrants."
(23) The number of shares shown includes 89,791 shares issuable upon the
exercise of the Company's September Warrants. The number of shares
shown also includes 89,555 shares issuable upon the exercise of share
purchase warrants at an exercise price of $1.25 per share until August
31, 1998. See "Description of Capital Stock--Warrants."
(24) Ms. Marshall shares the same household as Mr. Good, who is a director
of the Company. The number of shares to be owned by Ms. Marshall after
the offering, which represents 3.3% of the Common Stock presently
outstanding, does not include Mr. Good's shares. See note 20 above and
"Principal Shareholders," "Certain Transactions," and "Description of
Capital Stock--Escrowed Shares."
(25) The number of shares shown includes 70,336 shares issuable upon the
exercise of the Company's September Warrants. The number of shares
shown also includes 87,055 shares issuable upon the exercise of share
purchase warrants at an exercise price of $1.25 per share until August
31, 1998. See "Description of Capital Stock--Warrants."
(26) C.M. Oliver & Company Limited acted as placement agent in connection
with the private placement of the Company's September Warrants in
Canada in September 1996 and received a selling commission that
included $48,625 in cash and 34,000 September Warrants. C.M. Oliver &
Company Limited also received a $61,987 syndication fee, a $37,097
corporate finance fee, and an option to acquire 81,000 share purchase
warrants. See "Description of Capital Stock--Warrants."
(27) The number of shares shown includes 34,000 shares issuable upon the
exercise of the Company's September Warrants. The number of shares
shown also includes 81,000 shares issuable upon the exercise of share
purchase warrants at an exercise price of $1.25 per share until August
31, 1998. See "Description of Capital Stock--Warrants."
- 22 -
<PAGE>
(28) Mr. Ramsay was one of the Company's original shareholders.
(29) Consists of shares issuable to the Selling Shareholder upon the
exercise of the Company's February Warrants. See "Description of
Capital Stock--Warrants."
(30) One-half of the number of shares shown are issuable to the Selling
Shareholder upon the exercise of the Company's February Warrants. See
"Description of Capital Stock--Warrants."
(31) Mr. Sharfer received 4,600 of the shares shown as the designee of
Sunrise. See note 10 above and "Description of Capital
Stock--Warrants."
(32) The number of shares shown includes 21,400 shares issuable upon the
exercise of the Company's September Warrants. The number of shares
shown also includes 1,800 shares issuable upon the exercise of share
purchase warrants at an exercise price of $1.25 per share until August
31, 1998. See "Description of Capital Stock--Warrants."
(33) Mr. Still was president of Dallas Research and received the shares
shown as the designee of Dallas Research. See note 5 above and
"Description of Capital Stock--Warrants."
(34) The number of shares shown includes 52,000 shares issuable upon the
exercise of the Company's September Warrants. The number of shares
shown also includes 32,000 shares issuable upon the exercise of share
purchase warrants at an exercise price of $1.25 per share until August
31, 1998. See "Description of Capital Stock--Warrants."
(35) The number of shares shown includes 22,120 shares issuable upon the
exercise of the Company's September Warrants. The number of shares
shown also includes 28,440 shares issuable upon the exercise of share
purchase warrants at an exercise price of $1.25 per share until August
31, 1998. See "Description of Capital Stock--Warrants."
(36) The number of shares shown includes 6,963 shares issuable upon the
exercise of the Company's September Warrants. The number of shares
shown also includes 4,450 shares issuable upon the exercise of share
purchase warrants at an exercise price of $1.25 per share until August
31, 1998. See "Description of Capital Stock--Warrants."
(37) Ms. Tanihana has entered into a five-year employment contract with the
Company as an area administrator. She acquired her shares in connection
with the acquisition by the Company of 11 clinics operated by HCA on
October 1, 1996. The shares to be owned by Ms. Tanihana after the
offering do not include 100,000 shares which Ms. Tanihana will have the
right to acquire upon the exercise of stock options which are not
currently vested. See "Certain Transactions."
(38) The number of shares shown includes 133,833 shares issuable upon the
exercise of the Company's February Warrants and 100,000 shares issuable
upon the exercise of the Company's September Warrants.
See "Description of Capital Stock--Warrants."
(39) Craig R. Thomson was one of the Company's original shareholders and a
former officer and director of the Company.
(40) Michael G. Thomson is employed by and a member of the capital markets
group of C.M. Oliver & Company Limited, which acted as placement agent
in connection with the private placement of the Company's September
Warrants in Canada in September 1996, and is a wholly owned subsidiary
of C.M. Oliver, Inc. See note 26 above. In addition, Mr. Thomson was
one of the Company's original shareholders and a former officer and
director of the Company. See "Certain Transactions."
- 23 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
General
Since 1995, the Company has achieved significant growth in revenues,
primarily due to the acquisition and operation of additional hearing care
clinics. For the year ended July 31, 1996, and the six months ended January 31,
1997, the Company generated total revenues of $2.4 million and $4.2 million,
respectively. As of January 31, 1997, the Company's cumulative deficit was $1.4
million and its total shareholders' equity was $9.1 million. For the year ended
July 31, 1996, and the six months ended January 31, 1997, the Company generated
net losses of $582,000 and $947,000, respectively. On a pro forma basis, giving
effect to the acquisitions of HCA and SONUS, as if such acquisitions had
occurred on August 1, 1995, the Company would have generated net losses of
$1,273,000 for the year ended July 31, 1996.
Recent Acquisitions
On August 1, 1996, HHCI acquired the assets of Santa Maria Hearing
Associates. Consideration for acquisition of the single clinic consisted of
$50,000 in cash paid at closing and $25,000 for a covenant not to compete which
was paid on January 5, 1997. The intangible assets recorded in the acquisition
of the single clinic, including the covenant not to compete amounted to $78,000.
On October 1, 1996, HCA, consisting of 11 hearing care clinics located
in Los Angeles, California, merged with HealthCare Hearing Clinics, Inc.
("HHCI"), a wholly owned subsidiary of the Company. The consideration paid by
the Company consisted of $314,724 in cash and 2,389,536 shares of Common Stock,
of which 597,384 shares are being held by the Company pending satisfaction of a
purchase price contingency. An additional $350,861 in cash was paid for
covenants not to compete. The intangible assets recorded in the transaction,
including the covenants not to compete, amounted to $2,001,000.
On October 31, 1996, HHCI acquired the assets of SONUS, consisting of
14 hearing care clinics located in the Chicago, Illinois, and Lansing, Michigan
metropolitan areas. The consideration paid by the Company consisted of a
subordinated convertible note in the principal amount of $2,600,000, which is
convertible into 2,000,000 shares of Common Stock at $1.30 per share, and the
assumption of certain liabilities in the amount of $360,000. The intangible
assets recorded in the transaction, including a covenant not to compete,
amounted to $2,482,000.
On December 6, 1996, HHCI completed a merger with Hearing Dynamics
("HD"), which operated four hearing care clinics in the San Diego, California,
area. Cash in the amount of $102,600 and 408,000 shares of Common Stock were
exchanged for all of the issued and outstanding shares of HD in connection with
the merger. An additional $25,000 was paid to the
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seller for a covenant not to compete. The intangible assets recorded in the
transaction, including the covenant not to compete, amounted to $855,000.
On December 17, 1996, HHCI acquired all of the common stock of FHC,
Inc., doing business as Family Hearing Centers ("FHC"). Consideration for
acquisition of the single clinic consisted of cash in the amount of $150,000,
the issuance of a promissory note in the amount of $150,000 and the assumption
and repayment of $100,000 in FHC corporate debt. An additional $112,000 was paid
to the sellers for a covenant not to compete. The intangible assets recorded in
the transaction, including covenants not to compete, amounted to $489,000.
On January 10, 1997, HHCI purchased all of the outstanding shares of
Hearing Care Associates-Los Angeles, Inc., for $301,000 in cash. An additional
$112,500 was paid to the sellers for a covenant not to compete. The intangible
assets recorded in the acquisition of the single clinic, including the covenant
not to compete, amounted to $420,000.
On February 28, 1997, HHCI acquired all of the outstanding shares of
Hearing Care Associates-Arcadia, Inc., for $410,338 in cash. An additional
$130,170 was paid to the sellers for a covenant not to compete. The intangible
assets recorded in the acquisition of the single clinic, including the covenant
not to compete, amounted to $414,000.
On March 6, 1997, HHCI acquired all of the outstanding shares of
Hearing Care Associates-Sherman Oaks, Inc., for $26,568 in cash. An additional
$33,783 was paid to the sellers for a covenant not to compete. The intangible
assets recorded in the acquisition of the single clinic, including the covenant
not to compete, amounted to $45,000.
On March 14, 1997, HHCI acquired all of the outstanding shares of
Auditory Vestibular Center, Inc., for $56,204 in cash. An additional $28,580 was
paid to the sellers for a covenant not to compete. The intangible assets
recorded in the acquisition of the single clinic, including the covenant not to
compete, amounted to $47,000.
On April 8, 1997, HHCI acquired all of the outstanding shares of
Hearing Care Associates - Lancaster, Inc., for $136,751 in cash. An additional
$61,877 was paid to the sellers for a covenant not to compete. The intangible
assets recorded in the acquisition of the single clinic, including the covenant
not to compete, amounted to $98,000.
On June 6, 1997, HHCI acquired all the outstanding shares of Hearing
Improvement Center, Inc., a California corporation operating two hearing care
clinics, in exchange for $500,000 in cash, 144,844 shares of Common Stock, a
two-year promissory note in the amount of $132,624 payable in equal quarterly
installments including interest at 6% per annum, and a three-year promissory
note in the amount of $282,036 with accrued interest at the rate of 6% per annum
payable at the end of the first year and the balance of the note, including
interest, payable in equal monthly installments over the remaining term. An
additional $50,000 was paid to the sellers for covenants not to compete. The
intangible assets recorded in the acquisition of the two clinics, including
covenants not to compete, amounted to $809,000.
The Company is in the advanced stages of evaluating and negotiating
with two prospective acquisition targets. Although definitive agreements have
not been executed, most of the significant elements of each transaction have
been negotiated, including total consideration, type of consideration,
employment contracts and covenants not to compete, and the acquisitions are
expected to close during the third quarter of the Company's fiscal year. A
summary of each transaction follows:
o The pending acquisition of all the outstanding shares of
Hearing Care Associates- North Hollywood, Inc., for $201,263
in cash. An additional $52,755 will be payable to the sellers
to enter into covenants not to compete. The intangible
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assets anticipated in the acquisition of the clinic, including
covenants not to compete, are estimated at $160,000.
o The pending acquisition of all the outstanding shares of
Hearing Care Associates-Santa Monica, Inc., for $258,268 in
cash. An additional $76,090 will be payable to the sellers to
enter into covenants not to compete. The intangible assets
anticipated in the acquisition of the clinic, including
covenants not to compete, are estimated at $260,000.
As of January 31, 1997, the Company had recorded $7.2 million in
intangible assets, including $641,000 in covenants not to compete, which
represented 49% of the Company's total assets. Including the acquisitions that
have closed subsequent to January 31, 1997, and the two pending acquisitions
described above, the Company will have recorded $9.0 million in intangible
assets, including $1,075,000 in payments for covenants not to compete. The
amortization of the $9.0 million in intangible assets will result in an annual
non-cash charge to earnings of approximately $384,000 in each of the next 20
years. If all of the covenants not to compete referred to above were currently
in effect, an additional non-cash charge to earnings of approximately $374,000
in each of the current and next two fiscal years would also be incurred.
Revenues
The Company intends to increase its revenues by making additional
acquisitions of hearing care clinics and by providing high-quality service and
using targeted regional marketing at existing and newly acquired clinics. The
Company believes that, for the foreseeable future, the level of managed care and
third-party reimbursement will continue to be minimal and that its revenues will
be derived primarily from its private payor patient base.
Cost of Sales and Operating Expenses
The Company intends to lower its cost of sales as a percentage of
revenues by negotiating improved hearing aid manufacturer discounts. In
addition, the Company expects that operating expenses will decrease as a
percentage of revenues as revenues increase and economies of scale
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and administrative efficiencies are realized. However, the amortization of
goodwill resulting from acquisitions will increase as more clinics are acquired
by the Company.
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Company's
audited and unaudited consolidated financial statements and the notes thereto
contained elsewhere in this Prospectus.
RESULTS OF OPERATIONS
Six Months Ended January 31, 1997, Compared to Six Months Ended January 31, 1996
Accounts Receivable Turnover. The Company's accounts receivable
turnover improved to 55 days for the 12-month period ended January 31, 1997 from
78 days for the 12-month period ended January 31, 1996. The Company's accounts
receivable balances consisted primarily of insurance proceeds to be received
from managed care and third party insurance providers. HCA's accounts receivable
turnover averaged 91 days while SONUS's accounts receivable turnover averaged 33
days as of January 31, 1997.
Revenues. Total revenues for the six months ended January 31, 1997,
were $4,201,000, representing a 306% increase over revenues of $1,034,000 for
the comparable period in fiscal 1996. Of this increase, $2,579,000 was
attributable to the 32 clinics acquired by the Company during the six-month
period ended January 31, 1997, $427,000 was attributable to the five clinics
acquired and the one clinic opened during the third and fourth quarters of
fiscal 1996, $123,000 was attributable to one clinic that operated for a full
six months during fiscal 1997 compared to only a portion of the comparable
period during fiscal 1996, and $38,000 was attributable to eight clinics in
Canada that operated for the full six-month period ended January 31 in both
fiscal 1997 and 1996, representing an internal growth rate of 4% for clinics
operated by the Company during both periods.
Product sales revenue was $3,712,000 for the six months ended January
31, 1997, up 365% from the $1,017,000 for the same period in 1996. Audiological
service revenues of $490,000 represented 12% of total revenues for the six
months ended January 31, 1997, as compared to $17,000 or 2% for the comparable
period in 1996. Substantially all of the clinics acquired in the United States
separately charge for the performance of audiological services when a hearing
aid is purchased. The Company's policy in the past was to waive the fee if a
hearing aid was purchased.
Gross Profit on Product Sales. Product gross profit for the six months
ended January 31, 1997, was $2,165,000 or 58% of revenue, compared to $543,000
or 53% of revenue for the comparable period in fiscal 1996. The improvement in
gross profit percentage was primarily due to the Company's access to greater
volume discounts from manufacturers as a result of increased hearing aid
purchases.
Operating Expenses. Operating expenses for the six months ended January
31, 1997, were $3,626,000, representing an increase of 432% over operating
expenses of $681,000 for the
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comparable period in fiscal 1996. Of this increase, $1,771,000 was attributable
to the 32 clinics acquired by the Company during the six-month period ended
January 31, 1997, $223,000 was attributable to the five clinics acquired and the
one clinic opened during the third and fourth quarters of fiscal 1996, $73,000
was attributable to one clinic that operated for a full six months during fiscal
1997 compared to only a portion of the comparable period during fiscal 1996,
$66,000 was attributable to eight clinics in Canada that operated for the full
six-month period ended January 31 in both fiscal 1997 and 1996, and $812,000 was
attributable to planned increases in corporate staff, increases in amortization
of intangibles, and other corporate expenses related to the operation of a
larger organization.
As a percentage of total revenues, operating expenses increased to 86%
for the six months ended January 31, 1997, from 66% for the comparable period in
fiscal 1996. Approximately 56% or $1,641,000 of this increase was attributable
to salaries and benefits for staff of newly acquired clinics and planned
expansion of the administrative infrastructure. An additional 10% or $300,000 of
the increase was attributable to higher lease rates associated with United
States clinics (i.e., primarily in the California region) as compared to the
existing lease rates at Canadian clinics. The remaining 34% of the increase was
attributable to higher advertising and promotion budgets for the U.S. clinics,
additional charges for amortization and depreciation and other clinic-related
expenses.
Year Ended July 31, 1996, Compared to Year Ended July 31, 1995
Accounts Receivable Turnover. The Company's accounts receivable
turnover improved to 61 days for the fiscal year ended July 31, 1996 from 70
days in the prior fiscal year. The Company's accounts receivable balances
consisted primarily of insurance proceeds to be received from managed care and
third party insurance providers. HCA's accounts receivable turnover averaged 62
days while SONUS's accounts receivable turnover averaged 33 days as of each
entity's most recent fiscal year-end.
Revenues. Total revenues for the fiscal year ended July 31, 1996, were
$2,389,000, representing a 39% increase over revenues of $1,720,000 for the
prior fiscal year. Of this increase, $445,000 was attributable to the five
clinics acquired and the one clinic opened during fiscal 1996 and $337,000 was
attributable to one clinic that operated throughout fiscal 1996 compared to only
a portion of fiscal 1995. These increases were offset by a 7% or $113,000
decrease in revenues attributable to the clinics that operated during both
fiscal 1996 and fiscal 1995. Product sales revenue was $2,345,000 for the 1996
fiscal year, up 37% from the $1,707,000 for fiscal 1995, while service revenue
increased from $13,000 in fiscal 1995 to $44,000 for the 1996 fiscal year.
During the third quarter of fiscal 1996, the Company was affected by a
general downturn in the total number of hearing aids sold in the British
Columbia market area. This drop was primarily attributable to policy changes
adopted in 1994 and 1995 by third party insurers such as the Workers'
Compensation Board, the Department of Veteran Affairs and certain provincial
medical plans, which extended the time before hearing aids could be upgraded or
replaced. This change, coupled with certain marketing restrictions relating to
promoting such upgrades, is
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expected to have a continued negative effect on replacement hearing aid sales in
Canada in the future.
Gross Profit on Product Sales. Product gross profit for the fiscal year
ended July 31, 1996, was $1,328,000 or 57% of revenues compared to $934,000 or
55% of revenues for the prior fiscal year. The improvement in gross profit
percentage was primarily due to higher volume discounts and improved product
sales management.
Operating Expenses. Operating expenses for the fiscal year ended July
31, 1996, were $1,961,000, representing an increase of 89% over operating
expenses of $1,038,000 for the prior fiscal year. As a percentage of total
revenues, operating expenses increased to 82% for the fiscal year ended July 31,
1996, from 60% for fiscal 1995. This increase was mainly due to (i) the addition
of costs associated with being listed on the ASE in Canada, including investor
relations activities and compliance with Alberta and British Columbia regulatory
reporting requirements and ASE listing requirements; (ii) increased costs
associated with the continued integration of the various hearing clinics
acquired since October 1994 and the costs of negotiating additional
acquisitions; and (iii) the addition of key senior management personnel
beginning in December 1995 to assist in implementing the acquisition and
consolidation strategy of the Company.
Of the $923,000 increase in operating expenses in fiscal 1996, $277,000
was attributable to the five clinics acquired and the one clinic opened during
fiscal 1996, $182,000 was attributable to one clinic which operated for a full
year during fiscal 1996 compared to a partial year during fiscal 1995, $56,000
was attributable to the clinics which operated during both fiscal 1996 and 1995,
and $408,000 was attributable to planned increases in corporate staff and other
corporate expenses related to the Company's expansion program.
As a percentage of total revenues, operating expenses increased to 82%
for the fiscal year ended July 31, 1996, from 60% for the comparable period in
fiscal 1995. Approximately 18% or $163,000 of this increase was attributable to
the implementation of a patient support network in Canada and costs associated
with investor relations and communications. An additional 46% or $423,000 was
attributable to salaries and benefits of newly acquired clinics and initial
buildup of the administrative infrastructure. The remaining 36% of the increase
was distributed among the remaining expense categories.
LIQUIDITY AND CASH RESERVES
From August to December 1995, the Company financed its operations
mainly through internally generated funds, borrowing under bank credit
arrangements, and advances from shareholders. Since that time, the Company has
relied on the issuance and sale of equity securities to repay shareholder loans,
open a new balance and hearing center in Calgary, Alberta, fund acquisitions,
begin development of a management information system, and provide additional
working capital.
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On February 28, 1996, the Company issued 1,700,000 special warrants in
a private placement at a price of $0.74 (converted from Canadian dollars at
February 28, 1996) for gross proceeds of $1,241,000. Each special warrant
entitled the holder to 1.1 shares of Common Stock and a share purchase warrant
to acquire an additional 1.1 shares of Common Stock at a price of $1.09 per
share (converted from Canadian dollars at May 30, 1997). The share purchase
warrants expire on February 28, 1998. The proceeds of the February 1996 private
placement were used for acquisitions and working capital.
During September 1996, the Company issued 810,000 special warrants in a
private placement in Canada at a price of $1.25 for gross proceeds of
$1,012,500. In December 1996, the Company issued 4,149,000 special warrants in a
private placement in the United States at a price of $1.25 for gross proceeds of
$5,186,250. Each special warrant issued in Canada entitled the holder to 1.1
shares of Common Stock and a share purchase warrant to acquire an additional 1.1
shares of Common Stock at a price of $2.00 per share. Each special warrant
issued in the United States entitled the holder to one share of Common Stock and
a share purchase warrant to acquire one additional share of Common Stock at a
price of $2.00 per share. The share purchase warrants expire on August 31, 1998.
However, if the closing bid for the Common Stock is in excess of $3.00 per share
for a period of 20 consecutive trading days (as traded on the ASE or another
more senior North American stock exchange), the Company has the option upon 45
days' prior written notice to the holders to force the exercise or cancellation
of the share purchase warrants. The actual and anticipated uses of the proceeds
of the September and December 1996 private placements are as follows:
Working capital $1,898,750
Capital expenditures 600,000
Registration costs 250,000
Acquisitions 3,200,000
Offering costs 250,000
----------
$6,198,750
==========
During the six months ended January 31, 1997, the Company acquired 32
hearing care clinics located in California, Illinois, Michigan, and New Mexico.
The acquisitions were funded primarily through the issuance of Common Stock
valued at $3.1 million, the issuance of convertible subordinated notes in an
aggregate principal amount of $2.6 million, the issuance of $150,000 in
promissory notes, cash payments totaling $919,000, and the assumption of debt
totaling $460,000. During the year ended July 31, 1996, the Company acquired
four hearing care clinics in Canada and two clinics in the United States. The
acquisitions were funded through the issuance of a convertible note in the
amount of $129,000, promissory notes in the aggregate principal amount of
$77,700, and cash in the amount of $4,264,063.
The Company has a revolving demand loan with the Royal Bank of Canada,
providing for borrowings up to $185,675. As of January 31, 1997, $96,551 was
outstanding against this line, compared to $33,200 as of July 31, 1996. Advances
under the line of credit bear interest at 1% above the Royal Bank of Canada
prime rate, which was 5.75% at January 31, 1997. Advances under the revolving
line of credit are secured by all the assets of HC HealthCare
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Hearing Clinics, Ltd., the Company's Canadian operating subsidiary, and
personally guaranteed by Marilyn Marshall, a shareholder.
The Company expects to spend approximately $600,000 in fiscal 1997 to
develop a management information system that will link each clinic with the
Company's headquarters. Development costs will include system design, new
hardware, patient management and accounting software, and staff training. The
Company is seeking to finance a substantial portion of this cost. The Company
also plans to outsource the majority of its advertising and public relations
functions at a cost of approximately $350,000 over the next 12 months, exclusive
of direct marketing costs such as printing, mailing, and media purchases.
The Company believes that its existing cash balances, amounts available
under the revolving line of credit, and cash from operations will be sufficient
to fund its operations and planned acquisitions over the next three months.
However, to execute its long-term business strategy, the Company will require
additional funding in order to acquire new clinics and to expand into other
geographic markets. The Company plans to fund its long-term liquidity needs by a
combination of the following methods: (i) obtaining lease financing for
significant capital expenditures; (ii) securing senior operating lines of credit
secured by accounts receivable; (iii) issuing subordinated debt; (iv) raising
additional privately placed equity; and (v) the exercise of outstanding share
purchase warrants. In the event the Company is unable to consummate any of the
above strategies, the Company will be unable to continue to pursue its
acquisition strategy, necessitating significant reductions in administrative
personnel in order to reduce expenses. There can be no assurance that any such
financing alternatives will be available to the Company or will be available on
terms acceptable to the Company.
SHARES HELD IN ESCROW
At June 1, 1997, 4,250,000 shares of Common Stock (the "Escrow Shares")
were held in escrow in accordance with an escrow agreement dated October 7,
1994. All of the Escrow Shares are held by officers and directors of the
Company. The escrow agreement provides that (i) one share of Common Stock will
be released for each $0.08 (converted from Canadian dollars at May 30, 1997) of
cash flow generated by the Company, (ii) the release shall only be made pursuant
to a written application to The Alberta Stock Exchange, and (iii) the maximum
number of shares to be released in any year to a shareholder is limited to
one-third of the original number of shares held in escrow on behalf of such
shareholder. For purposes of the escrow agreement, "cash flow" is defined as the
Company's net income as shown on the Company's audited financial statements,
plus depreciation, depletion, deferred taxes, and amortization of goodwill and
research and development costs. The Escrow Shares have been accounted for as
presently issued and outstanding shares for balance sheet purposes but are
considered to be "contingent shares" and have been excluded from the computation
of net loss per common share. If the Escrow Shares are released pursuant to the
terms of the escrow agreement, the fair value of such shares will be required to
be recognized by the Company as compensation expense during the period in which
such shares are released.
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NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share." SFAS No. 128 supersedes APB Opinion No. 15, "Earnings Per Share" and
specifies the computation, presentation, and disclosure requirements for
earnings per share ("EPS") for entities with publicly held common stock or
potential common stock. It replaces the presentation of primary EPS with a
presentation of basic EPS and fully diluted EPS with diluted EPS. Basic EPS,
unlike primary EPS, excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that would then share in the earnings of the entity. Diluted EPS is
computed similarly to fully diluted EPS under APB Opinion No. 15. SFAS No. 128
is effective for financial statements for both interim and annual periods ending
after December 15, 1997. The Company will adopt SFAS No. 128 at January 31, 1998
for the quarter then ended. All prior period EPS data will be restated to
conform with SFAS No. 128. The Company does not expect this statement to have a
significant impact on its EPS calculations.
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BUSINESS
OVERVIEW
The Company, through its primary operating subsidiaries HC HealthCare
Hearing Clinics Ltd., a British Columbia corporation, and HealthCare Hearing
Clinics, Inc., a Washington corporation, currently owns and operates a network
of 53 hearing care clinics in the United States and Western Canada. The clinics
are located primarily in the metropolitan areas of Los Angeles, California; San
Diego, California; Chicago, Illinois; Lansing, Michigan; Albuquerque, New
Mexico; Vancouver, British Columbia; and Calgary, Alberta. The Company intends
to expand its network of hearing care clinics by acquiring clinics in its
existing as well as new geographic markets. Since August 1, 1996, the Company
has acquired 38 hearing care clinics.
Each of the Company's hearing care clinics provides its hearing
impaired patients with a full range of audiological products and services. As of
January 31, 1997, approximately 88% of the Company's revenues were derived from
product sales, including hearing aids, batteries, and accessories, while the
remaining 12% of the Company's revenues were derived from audiological services.
Substantially all of the Company's hearing care clinics are staffed by
audiologists. The Company's operating strategy is to provide patients with high
quality and cost-effective hearing care while at the same time increasing its
operating margins by attracting and retaining patients, recruiting qualified and
productive audiologists, achieving economies of scale and administrative
efficiencies, and pursuing large group and managed care contracts. The Company
believes that it is well positioned to provide retail hearing rehabilitative
services to consumers while simultaneously serving the diagnostic needs of
referring physicians and meeting the access and cost concerns of managed care
providers and insurance companies.
INDUSTRY BACKGROUND
Professionals and Clinics. Hearing aids may be dispensed by either a
dispensing audiologist or an HIS. Although both audiologists and HISs may be
licensed to dispense hearing aids, audiologists have advanced training in
audiology and hold either a masters or Ph.D.
degree.
Overall, dispensing audiologists are much younger than HISs. The March
1996 issue of The Hearing Review, a hearing industry trade journal, indicates
that approximately 40% of HISs in the U.S. are at least 60 years of age, 24% are
50-60 years of age, 22% are 40-50 years of age and only 15% are under age 40,
compared to 1%, 11%, 37% and 52%, respectively, for dispensing audiologists. The
Company believes that many HISs are facing retirement with no formal
"exit-strategy," a situation that creates an attractive investment opportunity
for the Company.
The typical hearing care practice wields little purchasing power with
manufacturers, and must spread overhead over a relatively small revenue base. In
addition, a typical hearing care practice often has insufficient capital to
purchase new technologies and lacks the systems and size necessary to develop
economies of scale. As a result, the Company believes that dispensing
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audiologists and HISs will find it increasingly attractive to sell their
practices to or affiliate with larger organizations, such as the Company.
Another factor that may favor the consolidation of hearing care
practices is managed care. As managed care becomes more pervasive, hearing care
professionals will have an even greater need for the information resources,
management expertise, economies of scale, and access to managed care group
contracts that larger organizations such as the Company may be better able to
provide. However, managed care is not presently a large part of the hearing care
market and hearing care products and services are likely to continue to be
provided predominantly on a private pay basis for the next several years.
Notwithstanding the factors favoring consolidation of hearing care
practices, there are currently only a few multiple clinic networks operating in
more than one state or province in the United States or Canada with combined
annual revenues in excess of $5 million.
Hearing Impaired Population. According to the 1996 edition of
Communication Facts, published by the American Speech-Language Hearing
Association, the number of persons in the United States who have hearing loss is
estimated to be approximately 28 million and the percentage of individuals with
a hearing loss relative to the general population is approximately 2 percent for
those under 18 years of age, 5 percent for those between 18 and 44 years of age,
14 percent for those between 45 and 64 years of age, 23 percent for those
between 65 and 74 years of age and 32 percent for those over 75 years of age. In
addition, the American Tinnitus Association estimates that approximately 12
million American adults have tinnitus (a ringing sensation in the ears) that is
severe enough to seek medical help.
The Company believes that the widely recognized demographic trend
toward an aging population will increase the demand for hearing aid sales and
audiological services and that the demand for hearing aids that are less visible
and for newer and superior hearing aid technology, such as digital and
programmable hearing aids, will also contribute to market growth. In addition,
the Company believes that some individuals forgo hearing care because of the
stigma of aging that can be associated with wearing a hearing aid and that the
demand for hearing aid sales and hearing care services can be increased by
marketing and education designed to reduce that stigma.
Hearing Health Care Industry Segments. The hearing health care industry
serving patients with hearing and balance disorders is comprised of four
distinct service segments:
o hearing rehabilitation services, including the evaluation and
rehabilitation of persons with hearing impairments by assessing
communicative impairment and providing amplification;
o advanced audio-diagnostic services, including the neuro-audiologic
evaluation and non-medical diagnosis of hearing and balance
disorders;
o industrial and preventative audiological services, including noise
level measurements, dosimetry, and hearing screenings; and
o otolaryngologic services, including surgery and other medical
treatment.
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The Company's clinics primarily provide hearing rehabilitation services. The
Company has one facility, the Rockyview Hearing and Balance Clinic located in
Calgary, Alberta, that provides advanced audio-diagnostic services and one
clinic located in San Diego, California, that provides evaluation and treatment
for patients with tinnitus.
Hearing rehabilitation services include the assessment and
rehabilitation of persons with hearing impairments through the use of hearing
instruments and counseling. Rehabilitation services, including amplification
systems, are provided by audiologists and HISs. The services offered include the
diagnostic audiological testing, fitting and dispensing of hearing aids,
follow-up rehabilitative assistance, the sale of hearing aid batteries, hearing
aid repairs, and the sale of swim plugs, custom ear plugs, and assistive
listening devices.
Advanced audio-diagnostic services include the assessment and
non-medical treatment of vestibular and balance disorders and the evaluation of
patients with specific symptoms of an auditory or vestibular disorder, including
hearing loss, tinnitus, and balance problems. In order to make a differential
diagnosis of hearing disorders, an ear, nose and throat physician may employ or
refer patients to an audiologist to conduct special diagnostic hearing tests to
differentiate between conductive, sensory, and neural pathology. If the cause of
the hearing loss is a medical disorder in either the nervous system (neural) or
the middle ear (conductive), the physician proceeds with medical treatment.
However, if a non-treatable conductive or sensory loss is found, the physician
will generally refer the patient to an audiologist for rehabilitation.
GROWTH STRATEGY
The Company's growth strategy is to expand its operations through the
selective acquisition of hearing clinics located in existing as well as new
geographic markets. The Company believes that the fragmented nature of the
hearing care industry, the absence of industry-wide standards, and the
inexperience and limited capital resources of many hearing care providers,
combine to provide an opportunity to build an expanding network of hearing care
clinics devoted to providing high-quality hearing health care services. See
"Risk Factors--Expansion Program."
The Company plans to expand its network of clinics in each new market
by initially targeting for acquisition a significant hearing care practice in
order to secure a solid foundation upon which to build a regional network of
audiology practices. The Company will then seek to acquire additional individual
or group practices in order to realize economies of scale in management,
marketing, and administration, and hopes that its initial purchase in the region
will attract other practitioners interested in selling their businesses. Due to
the contacts of management with audiologists in the industry, the Company is
frequently presented with opportunities to acquire hearing care clinics. Since
August 1, 1996, the Company has acquired 38 clinics, all located in the United
States.
The Company looks at the following factors before acquiring clinics in
a particular geographic market: (a) population size and distribution; (b)
audiology practice density, saturation and average group size; (c) local
competitors; (d) level of managed care penetration;
- 35 -
<PAGE>
and (e) local industry and economy. In acquiring particular clinics within a
geographic market, the Company seeks clinics with the following characteristics:
(a) an established patient base drawing from a substantial metropolitan
population; (b) significant revenue and profitability prior to acquisition; (c)
above-average potential to enhance clinic profitability after acquisition; and
(d) if a clinic has an audiologist, a willingness by the audiologist to enter
into an employment agreement with the Company in order to retain continuity in
patient service and relationships and maintain the identity of the clinic in the
community where it is located.
Prior to acquiring a hearing care clinic, the Company conducts a due
diligence investigation of the clinic's operations that includes an analytical
review of the clinic's financial statements, tax returns, and other operating
data, a review of patient files on a random sample basis, a review of credit
reports, contracts, bank deposits, and other documents and information that the
Company deems significant, and the preparation of financial projections. Based
on the information collected and analyzed during the due diligence review, the
Company determines an appropriate purchase price for the acquisition.
The Company generally uses cash, Common Stock, promissory notes,
assumption of debt, or a combination of the foregoing to fund acquisitions. See
"Risk Factors--Additional Financing." The amount paid for each practice varies
on a case-by-case basis according to historical revenues, projected earnings
after integration into the Company, and transaction structure. In connection
with each acquisition, the Company acquires substantially all of the assets of
the practice, including its audiological equipment and supplies, office lease
and improvements, receivables and patient files.
At the time a practice is acquired, the audiologist associated with the
practice typically becomes an employee of the Company and enters into an
employment agreement with the Company with an initial term of three years and
annual renewals thereafter. The employment agreement usually includes a
three-year noncompete provision following termination of employment. If the
office of a retiring HIS is acquired, a six- to 12-month transition plan is
usually negotiated with the HIS. See "Risk Factors--Dependence on Key
Personnel."
OPERATING STRATEGY
The Company's operating strategy is to provide its patients with high
quality and cost effective hearing care products and services while at the same
time increasing its operating margins by attracting and retaining patients,
recruiting qualified and productive audiologists, achieving economies of scale
and administrative efficiencies, and pursuing large group and managed care
contracts.
Attracting and Retaining Patients. The Company seeks to attract new
patients and retain existing patients at each clinic by providing patients with
friendly, comprehensive, and cost-effective hearing care at convenient times and
locations. In addition, by educating patients about hearing health issues and by
providing quality service during office visits and consistent patient follow-up
and support, the Company hopes to foster patient loyalty and increase the
likelihood of obtaining referrals and repeat visits for examinations and product
purchases. See
- 36 -
<PAGE>
"Risk Factors--Competition" and "Risk Factors--Impact of Policy Changes by
Third-Party Insurers."
Recruiting Qualified and Productive Audiologists. The Company seeks to
employ audiologists who share the Company's goal of delivering high-quality
hearing care service and who are also dedicated to expanding and enhancing their
practices. The Company believes that it can offer significant benefits to
audiologists by providing assistance in administrative tasks associated with
operating an audiology practice, thereby allowing them to focus on serving
patients and increasing productivity. The Company also believes that its size
and structure enable it to offer financial resources for practice development
and enhancement that solo and small group practitioners find difficult to obtain
independently. See "Risk Factors--Dependence on Key Personnel."
Achieving Economies of Scale and Administrative Efficiencies. A key
operating strategy of the Company is to achieve increased economies of scale and
administrative efficiencies at each of its clinics. When a clinic is acquired by
the Company, it immediately has available to it terms and discounts with hearing
aid manufacturers that are generally more favorable than it could negotiate
independently. In addition, the Company believes that by centralizing certain
management and administrative functions such as marketing, billing, collections,
human resources, risk management, payroll, and general accounting services, the
profitability of a clinic can be improved by spreading the cost of such
functions over a larger revenue base. The Company is also developing an on-line
management information system that will link each clinic with the Company's
corporate headquarters in order to provide management with the ability to
collect and analyze clinic data, control overhead expenses, allow detailed
budgeting at the clinic level, and permit effective resource management. See
"Risk Factors--Expansion Program" and "Risk Factors--Additional Financing."
Pursue Large Group and Managed Care Contracts. Although the Company
intends to continue to aggressively pursue private-payor business because it is
presently more pervasive and profitable than managed care business, the Company
believes that by providing comprehensive geographic coverage in a particular
market, it will be strongly positioned to offer group hearing care plans in that
market. At the present time, managed care penetration of the hearing care market
is limited. However, if managed care begins to play a larger role in hearing
care, the Company plans to develop information systems to improve productivity,
manage complex reimbursement methodologies, measure patient satisfaction and
outcomes of care, and integrate information from multiple sources. See "Risk
Factors--Competition" and "Risk Factors--Managed Care."
CLINIC STAFFING AND FACILITIES
Typically, each Company hearing clinic is staffed with at least one
audiologist and one patient care coordinator, who handles reception, clerical,
and most bookkeeping functions. The Company currently employs a total of 89
audiologists. Where volume warrants, a clinic may also be staffed with
additional audiologists and patient care coordinators. An audiologist employed
by the Company has a masters or Ph.D. degree in audiology. The audiologist is
- 37 -
<PAGE>
licensed by the appropriate state or province to dispense hearing aids and is a
member of the Canadian Association of Speech/Language Pathologists and
Audiologists or the American Speech--Language Hearing Association.
Each of the Company's hearing clinics operates in leased space that
ranges in size from 800 to 3,000 square feet depending on patient volume and the
extent of services provided by the clinic. Clinics generally have a reception
seating area, a reception work and filing area, an office for the audiologist, a
laboratory for hearing instrument repairs and modifications, a technology
demonstration room and an evaluation room. A properly equipped office offering
only hearing rehabilitation services requires equipment that costs $50,000 to
$75,000. The cost of equipment for a clinic offering advanced audio-diagnostic
services is much greater and ranges from $225,000 to $250,000.
The table below shows the location of each of the Company's hearing
care clinics acquired prior to June 1, 1997, the date the clinic was acquired by
the Company, and the revenues generated by each clinic for the periods
indicated:
- 38 -
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Revenues Revenues Revenues Revenues
Date for 3 months for 3 months as of latest as of next-to-latest
Clinic and Location Purchased/Opened ended 1/31/97 ended 1/31/96 fiscal year fiscal year
- ------------------- ---------------- ------------- ------------- ------------ -----------
Alberta
Rockyview, Calgary(3) April 1996 $101,523 $ - $ - $ -
T.H. Moore, Calgary(6) April 1995 53,609 105,622 383,423 -
British Columbia
- ----------------
Fraserview, Abbotsford October 1994 20,234 17,209 91,343 108,044
Fraserview, Chilliwack October 1994 69,733 51,714 228,405 214,507
Kamloops, Kamloops October 1994 61,362 43,303 205,394 265,494
Langley, Langley(4) January 1996 80,977 285,611 292,724
Fraserview, Maple Ridge October 1994 48,038 40,067 145,742 191,653
Fraserview, New Westminster October 1994 91,395 80,271 288,459 312,210
Pacific, North Vancouver(8) April 1996
Fraserview, Richmond October 1994 50,013 29,405 152,771 110,540
Terrace, Terrace October 1994 37,618 34,635 149,385 188,044
Fraserview (2 clinics), Vancouver October 1994 175,237 158,965 653,590 652,735
California
- ----------
HCA, Alhambra October 1996 167,321 124,462 515,144 392,212
Hearing Dynamics, Alvarado December 1996 123,017 96,594 597,221 492,217
HCA, Arcadia February 1997 105,028 110,855 508,329 299,923
Allied, Arroyo Grande(1) July 1996 38,116 30,403 119,647 71,758
HCA, Auditory Vestibular Center March 1997 51,998 65,425 279,622 436,303
HCA, Burbank October 1996 69,257 59,735 280,643 235,266
Hearing Dynamics, Chula Vista December 1996 51,509 33,069 284,335 333,186
Hearing Dynamics, Coronado(1) December 1996 28,929 28,002 106,160 96,598
HCA, Fountain Valley(1)(5) December 1996
HCA, Gardena(1) October 1996 9,380 10,801 47,367 86,096
HCA, Glendale October 1996 212,865 167,044 837,293 734,348
HCA, Glendora October 1996 64,786 84,953 267,568 207,663
HCA, Lancaster(6) March 1997 67,255 72,232 453,939 -
HCA, Long Beach October 1996 131,747 86,435 393,353 144,745
HCA, Los Angeles(4)(6) January 1997 - - 618,207 -
HCA, Mission Hills October 1996 94,953 60,789 341,935 346,214
HCA, Montrose(1) October 1996 16,215 23,532 105,861 80,225
HCA, Northridge October 1996 274,017 199,402 1,176,386 1,078,007
HCA, Oxnard October 1996 65,869 20,760 115,882 89,307
Hearing Dynamics, San Diego December 1996 115,880 131,426 619,755 605,557
HCA, Santa Clarita Valley October 1996 61,064 85,759 256,149 222,960
Allied, Santa Maria July 1996 47,783 93,564 201,137 226,465
Santa Maria, Santa Maria(4)(6) August 1996 89,259 - 157,714 -
HCA, Sherman Oaks March 1997 69,643 87,666 384,551 272,827
Illinois
- --------
SONUS, Berwyn October 1996 118,696 163,423 736,632 581,503
SONUS, Chicago October 1996 33,716 52,439 244,355 178,520
SONUS, Hinsdale October 1996 86,650 55,113 240,647 297,321
SONUS, Lombard(1) October 1996 35,217 37,854 177,660 146,303
SONUS, North Aurora October 1996 29,320 30,734 117,341 199,941
SONUS, North Cicero(1)(7) October 1996 - - - -
SONUS, Oak Lawn October 1996 126,825 150,515 667,515 589,152
SONUS, Oak Park October 1996 48,570 42,277 247,589 229,233
New Mexico
- ----------
Family Hearing Centers, Albuquerque December 1996 238,622 255,372 991,923 881,180
Michigan
- --------
SONUS, Carson City(1)(2) October 1996 - - - -
SONUS, Hayes Green Beach(1)(2) October 1996 - - - -
SONUS, Grand Ledge October 1996 91,342 89,413 437,636 422,035
SONUS, Lansing October 1996 86,295 88,732 310,851 279,332
SONUS, Okemos October 1996 74,737 66,279 241,558 225,432
</TABLE>
(1) Designates satellite clinic. Satellite clinics operate less than five days
per week and are generally located in doctors' offices or hospitals.
(2) Information combined with SONUS, Grand Ledge.
(3) Opened April 1996.
(4) Quarterly comparative information unavailable.
(5) Opened December 1996.
(6) Annual comparative information unavailable.
(7) Information combined with SONUS, Oak Lawn.
(8) Information combined with Fraserview (2 clinics), Vancouver.
"Revenues as of latest fiscal year" represents clinic revenues for the most
recently completed fiscal year prior to acquisition by the Company. "Revenues as
of next-to-latest fiscal year" represents clinic revenues for the fiscal year
immediately preceding the aforementioned fiscal year. The fiscal year-ends from
which these revenues were derived vary from clinic to clinic depending on the
acquisition date and the fiscal year ending date. Therefore, the amounts in the
"Revenues for 3 months ended 1/31/96" will not coincide with the clinic's fiscal
year and should not be annualized for comparative purposes.
- 39 -
<PAGE>
PRODUCTS AND SUPPLIERS
The hearing aid manufacturing industry is highly competitive with
approximately 40 manufacturers serving the worldwide market. Few manufacturers
offer significant product differentiation. The Company currently purchases
hearing aids from a number of manufacturers based upon criteria that include
quality, price, and service. Over time, the Company intends to reduce the number
of manufacturers from whom it purchases hearing aids in order to achieve greater
volume discounts. In addition to hearing aids, the Company's clinics also offer
a limited selection of other assistive listening devices and hearing aid
accessories.
MARKETING
The Company's marketing program is designed to help its hearing care
clinics retain existing patients and expand the services they receive, attract
new patients, and develop contracts to serve large groups of patients.
The Company believes that patient satisfaction is the key to retaining
and expanding services to existing patients. The Company also believes that
delivering comfortable, high quality hearing care at times and locations that
are convenient for the patient will motivate patients to return to the Company's
clinics for their future hearing care needs. Educating patients about hearing
health, prescribing only necessary hearing enhancing products, ensuring that
each patient leaves a clinic with a future visit already scheduled, and
maintaining consistent patient follow-up and support are key elements of the
Company's plan to build patient loyalty and patronage.
After a patient has obtained a hearing instrument, ongoing revenues are
generated from battery purchases and routine maintenance of the instruments. The
Company believes that repeat revenues are attributable to the length of time
that a clinic has been established and the effectiveness of its patient
retention programs.
The Company believes that the same aspects of the Company's approach
that earn the loyalty of current patients will also generate new patients. The
Company's new patient marketing programs are designed to help the Company
generate referrals from physicians and existing patients and increase the
Company's visibility in the community. The Company seeks to foster such
visibility by developing marketing materials and information sources that
communicate the Company's philosophy of high quality patient-oriented hearing
care.
The Company's large group marketing approach is designed to enable the
Company to develop contacts with self-insured employers and with health plans in
the metropolitan areas it serves and emphasizes the convenience, quality of
care, and wide range of services offered by the Company. The economies of scale
available to the Company may also allow health plans and self-insured employers
served by the Company to reduce administrative burdens they might otherwise
face. The Company believes that it is well positioned to respond to challenges
presented by the growth of managed care arrangements as they arise.
- 40 -
<PAGE>
COMPETITION
The hearing care industry in the United States and Canada is highly
fragmented and intensely competitive. Many of the Company's competitors are
small retailers that focus primarily on the sale of hearing aids. However, the
Company also competes with other networks of hearing care clinics and with large
distributors of hearing aids such as Bausch & Lomb, a hearing aid manufacturer
that distributes its products through a national network of over 1,000
franchised stores (Miracle Ear), and Beltone Electronic Corp., a privately-owned
hearing aid manufacturer that distributes its products primarily through its
nationwide network of approximately 600 franchised dealers. These competitors
are in many cases better known and owned by companies having far greater
financial and other resources than the Company. There can be no assurance that
one or more of these competitors will not seek to compete directly in the
markets targeted by the Company, nor can there be any assurance that the largely
fragmented hearing care market cannot be successfully consolidated by other
companies or through the establishment of co-operatives, alliances,
confederations or the like. See "Risk Factors--Competition."
REGULATION
The sale of hearing aid devices is regulated at the federal level in
the United States by the United States Food and Drug Administration ("FDA"),
which has been granted broad authority to regulate the hearing care industry.
Under federal law, hearing aids may only be sold to individuals who have first
obtained a medical evaluation from a licensed physician, although a fully
informed adult may waive a medical evaluation in certain instances. Regulations
promulgated by the FDA also presently require that dispensers of hearing aids
provide customers with certain warning statements and notices in connection with
the sale of hearing aids and that such sales be made in compliance with certain
labeling requirements.
Most states in the United States and many provinces in Canada have
established formal licensing procedures that require the certification of
audiologists and/or HISs. Although the extent of regulation varies by
jurisdiction, almost all states and provinces engage in some degree of oversight
of the industry. The Company operates its hearing care clinics through its
wholly owned subsidiaries, HealthCare Hearing Clinics, Inc. ("HHCI"), which is a
Washington general business corporation, and HC HealthCare Hearing Clinics Ltd.,
a British Columbia corporation, as well as second-tier subsidiaries. The
subsidiary corporations employ licensed audiologists who offer and perform
audiology services on behalf of the Company.
In certain states in the United States, business corporations such as
HHCI may not be authorized to employ audiologists and offer audiology services.
For example, in California, where the Company operates 26 clinics, although the
performance of audiology services by professional corporations owned solely by
licensed audiologists is expressly authorized under California law, it is
unclear whether general business corporations such as HHCI may employ licensed
audiologists to perform audiology services. However, the California Department
of Consumer Affairs has indicated by memorandum that speech-language
pathologists, which are regulated under statutes and regulations similar to
those governing audiologists, may practice in
- 41 -
<PAGE>
a general business corporation and that a general business corporation may
provide speech-language pathology services through licensed speech pathologists.
In Illinois, where the Company has eight hearing care clinics, it is also
unclear whether general business corporations may employ licensed audiologists
to perform audiology services. Under Illinois law, only professional
corporations and individuals are authorized to obtain licenses to practice
audiology.
The laws and regulations governing the practice of audiology are
enforced by regulatory agencies with broad discretion. If the Company were found
to be in violation of such laws and regulations in one or more states, the
consequences could include the imposition of fines and penalties upon the
Company and its audiologists as well as the issuance of orders prohibiting the
Company from operating its clinics under its present structure. In that event,
among the solutions the Company might consider would be the restructuring of all
or a portion of its operations in a manner similar to that used by certain
medical and dental clinic networks. Under such a structure, professional
corporations owned by licensed audiologists would contract with the Company to
perform professional services and the Company would contract with the
professional corporations to provide management services.
No assurance can be given that the Company's activities will be found
to be in compliance with laws and regulations governing the corporate practice
of audiology or, if its activities are not in compliance, that the operational
structure of the Company can be modified to permit compliance. In addition, no
assurance can be given that other states or provinces in which the Company
presently operates will not enact prohibitions on the corporate practice of
audiology or that the regulatory framework of certain jurisdictions will not
limit the ability of the Company to expand into such jurisdictions if the
Company is unable to modify its operational structure to comply with such
prohibitions or to conform with such regulatory framework. Additional laws and
regulations may be adopted in the future at the federal, state, or province
level that could have a material adverse effect on the business, financial
condition, and results of operations of the Company.
A small percentage of the revenues of the hearing care clinics operated
by the Company comes from Medicare and Medicaid programs. Federal law prohibits
the offer, payment, solicitation or receipt of any form of remuneration in
return for, or in order to induce, (i) the referral of a Medicare or Medicaid
patient, (ii) the furnishing or arranging for the furnishing of items or
services reimbursable under Medicare or Medicaid programs or (iii) the purchase,
lease or order of any item or service reimbursable under Medicare or Medicaid.
Noncompliance with the federal anti-kickback legislation can result in exclusion
from Medicare and Medicaid programs and civil and criminal penalties.
PRODUCT AND PROFESSIONAL LIABILITY; PRODUCT RETURNS
In the ordinary course of its business, the Company may be subject to
product and professional liability claims alleging the failure of, or adverse
effects claimed to have been caused by, products sold or services provided by
the Company. The Company maintains insurance against such claims at a level that
the Company believes is adequate. A customer may return a hearing aid to the
Company and obtain a full refund up to 30 days after the date of
- 42 -
<PAGE>
purchase. Some of the Company's clinics offer a 60-day refund period. In
general, the Company can return hearing aids returned by customers within 30 to
60 days to the manufacturer for a full refund. The Company maintains a reserve
based on estimated returns to account for returns that cannot be passed through
to the manufacturers and must be absorbed by the Company.
EMPLOYEES
At June 1, 1997, the Company had 156 full-time and 41 part-time
employees, of which 86 were practicing audiologists. None of the Company's
employees are represented by a labor union. Management believes it maintains
good relationships with its employees. See "Risk Factors--Labor Unions."
PROPERTIES
The Company's principal executive offices are located in approximately
3,000 square feet of leased office space in downtown Portland, Oregon. The lease
covering such space expires in August 1999 and provides for an annual rent of
$57,072. Each of the Company's hearing clinics operates in leased space that
ranges in size from 800 to 3,000 square feet. All of the locations are leased
for one to six year terms pursuant to generally non-cancelable leases (with
renewal options in some cases). The aggregate committed rental expense as of
January 31, 1997, for the subsequent five-year period is approximately $2.5
million.
MANAGEMENT
Information with respect to the directors and executive officers of the
Company, including their age, position with the Company, and principal business
experience during the previous five years, is set forth below:
<TABLE>
<CAPTION>
======================================================================================================================
NAME AGE POSITION
======================================================================================================================
<S> <C> <C>
Brandon M. Dawson 29 President and Director
- ----------------------------------------------------------------------------------------------------------------------
Douglas F. Good 55 Chairman of the Board and Director
- ----------------------------------------------------------------------------------------------------------------------
Gregory Frazer, Ph.D. 44 Vice President, Business Development and Director
- ----------------------------------------------------------------------------------------------------------------------
William DeJong 39 Secretary and Director
- ----------------------------------------------------------------------------------------------------------------------
Gene K. Balzer, Ph.D. 41 Director
- ----------------------------------------------------------------------------------------------------------------------
Hugh T. Hornibrook 48 Director
- ----------------------------------------------------------------------------------------------------------------------
Randall E. Drullinger 33 Vice President, Marketing
- ----------------------------------------------------------------------------------------------------------------------
Edwin J. Kawasaki 38 Vice President, Finance
- ----------------------------------------------------------------------------------------------------------------------
Kathy A. Foltner 43 Vice President, Operations
======================================================================================================================
</TABLE>
- 43 -
<PAGE>
BRANDON M. DAWSON. Mr. Dawson has served as President and as a director
of the Company since December 1995. From May 1992 to December 1995, he was
director of U. S. sales for Starkey Laboratories Inc. ("Starkey"), the largest
custom "in-the-ear" hearing aid manufacturer in the world. Prior to May 1992,
Mr. Dawson held a number of positions with Starkey, including Assistant Sales
Manager from December 1988 to October 1990 and National Sales Manager from
November 1990 to April 1992.
DOUGLAS F. GOOD. Mr. Good has served as a director of the Company since
1994, and as Chairman of the Board since August 1996. From December 1995 to July
1996, he served as the Company's chief financial officer and as President of the
Company from October 1994 to December 1995. Prior to becoming President of the
Company, Mr. Good was chief financial officer and a director of International
Retail Systems Inc. of Dallas, Texas, a software and point of sale systems
company.
GREGORY FRAZER, PH.D. Mr. Frazer has served as Vice President, Business
Development and as a director of the Company since October 1996. Prior to
becoming a director and an officer of the Company, Mr. Frazer was one of the
owners of Hearing Care Associates Group which operated 11 audiology based
hearing clinics in Southern California, which were recently acquired by the
Company in October 1996. Mr. Frazer is also part owner of 11 other hearing care
clinics in Southern California, of which have been purchased by the Company in
1997. He received his doctoral degree in audiology from Wayne State School of
Medicine in 1981.
WILLIAM DEJONG. Mr. DeJong is a partner in the Calgary, Alberta, law
firm of Ballem MacInnes, which he joined in September 1987. He has served as
Secretary of the Company since shortly after its incorporation in 1993 and as a
director of the Company since 1994.
GENE K. BALZER, PH.D. Mr. Balzer has served as a director of the
Company since 1995. He has a degree in audiology from the University of
Cincinnati with specialty training in clinical neurophysiology. Since 1991, Mr.
Balzer has been President of NeuroDynamic Systems, Inc., located in Bismarck,
North Dakota, which specializes in the provision of technicians, clinicians and
consultants for medical practices and hospitals.
HUGH T. HORNIBROOK. Mr. Hornibrook has been a director of the Company
since April 1996. From April 1996 to January 1997 he was Vice President,
Corporate Development of the Company and from July 1994 to April 1996, he was an
independent business consultant. He served as director of corporate development
for The Loewen Group Inc., a large funeral home and cemetery operator with
operations throughout North America, from 1988 to June 1994.
RANDALL E. DRULLINGER. Mr. Drullinger has served as Vice President,
Marketing of the Company since April 1996. From August 1990 to April 1996, he
was director of financial management services at Starkey.
EDWIN J. KAWASAKI. Mr. Kawasaki has served as Vice President, Finance
of the Company since August 1996. Mr. Kawasaki was a principal of Stafford
Capital Corp., an investment buy-out firm, from September 1995 to July 1996, and
was a senior vice president
- 44 -
<PAGE>
at Peregrine Holdings Ltd., an investment banking boutique firm, from January
1994 to September 1995. From 1987 to 1993, he was the controller of Lewis and
Clark College. Prior to 1987, Mr. Kawasaki was a supervising senior accountant
with KPMG Peat Marwick LLP.
KATHY A. FOLTNER. Ms. Foltner was appointed Vice President, Operations
of the Company in November 1996, when the Company acquired substantially all of
the assets of SONUS. Ms. Foltner served as vice president of Hearing Health
Services, Inc., since January 1995 and as director of Michigan operations, from
July 1994 to December 1994. Prior to July 1994, Ms. Foltner was the owner and
president of Audio-Vestibular Testing Center, Inc.
TERM OF DIRECTORS AND BOARD COMMITTEES
The Company's articles of incorporation provide for six directors until
the directors of the Company increase or decrease that number in accordance with
the articles of incorporation. Directors are elected annually. The board of
directors maintains an audit committee, consisting of Messrs. Balzer and
Hornibrook, which oversees actions taken by the Company's independent auditors
and reviews the Company's internal controls.
COMPENSATION OF DIRECTORS
The directors of the Company do not receive any fees for attending
board meetings but are reimbursed for out-of-pocket and travel expenses incurred
in attending board meetings. The Company has no other standard arrangement
pursuant to which directors are compensated by the Company for their services in
their capacity as directors. The Company may from time to time, as it has in the
past, grant stock options to directors in accordance with the policies of the
ASE and the Alberta Securities Commission and the securities laws and
regulations of the jurisdictions where the directors reside. In addition to the
options disclosed under "Compensation of Executive Officers" below, the
following directors were granted options to purchase Common Stock during the
fiscal year ended July 31, 1996: an option to Gene K. Balzer, Ph.D. for 200,000
shares with an exercise price of $0.28 (converted from Canadian dollars at May
30, 1997) expiring December 19, 2000; an option to William DeJong for 75,000
shares with an exercise price of $0.72 (converted from Canadian dollars at May
30, 1997) expiring February 14, 2001; and an option to Hugh T. Hornibrook for
200,000 shares with an exercise price of $1.99 (converted from Canadian dollars
at May 30, 1997) expiring April 1, 2001.
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION
The following table sets forth the compensation of Douglas F. Good, who
served as the Company's chief executive officer from October 1994 until December
1995, and Brandon M. Dawson, who succeeded Mr. Good as chief executive officer
(collectively, the "Named Executive Officers"). There were no other executive
officers of the Company whose total salary and bonus exceeded $100,000 during
the fiscal year ended July 31, 1996.
- 45 -
<PAGE>
<TABLE>
<CAPTION>
==================================================================================================================
SUMMARY COMPENSATION TABLE
==================================================================================================================
Long-Term
Annual Compensation
Compensation(1) Awards
==================================================================================================================
Number of Shares
Name and Principal Position Year Salary(2) Underlying Options
==================================================================================================================
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Douglas F. Good 1996 $67,661 225,000
--------------------------------------------------------------------------
President 1995 $19,644 --
- ------------------------------------------------------------------------------------------------------------------
Brandon M. Dawson 1996 $86,667 650,000
President
==================================================================================================================
(1) Includes all compensation paid or accrued by the Company during the fiscal year.
(2) Converted from Canadian dollars at July 31, 1996.
</TABLE>
OPTION GRANTS
The following table sets forth certain information concerning grants of
options to purchase Common Stock to the Named Executive Officers during the
fiscal year ended July 31, 1996:
<TABLE>
<CAPTION>
===========================================================================================================================
OPTION GRANTS IN LAST FISCAL YEAR
===========================================================================================================================
Number of Percentage of
Shares Total Options Exercise
Underlying Granted to Price
Name Options Employees in ($/share) Expiration Date
Granted(1) Fiscal Year (2)
===========================================================================================================================
<S> <C> <C> <C> <C>
Douglas F. Good 225,000 14.8% $0.73 February 14, 2001
- ---------------------------------------------------------------------------------------------------------------------------
Brandon M. Dawson 650,000 42.6 0.28 December 19, 2000
===========================================================================================================================
(1) The options became exercisable in full on the date of grant.
(2) Converted from Canadian dollars at July 31, 1996.
</TABLE>
- 46 -
<PAGE>
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth certain information regarding option
exercises during the fiscal year ended July 31, 1996, and the fiscal year-end
value of unexercised options held by the Named Executive Officers:
<TABLE>
<CAPTION>
==================================================================================================================================
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND
FISCAL YEAR-END OPTION VALUES
==================================================================================================================================
Number of Securities
Underlying Value of Unexercised
Unexercised In-the-Money Options
Options at at July 31, 1996(2)
July 31, 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Shares
Acquired on Value
Name Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Douglas F. -- -- 225,000 -- $180,065 --
Good
- ----------------------------------------------------------------------------------------------------------------------------------
Brandon M. 100,000 $219,156 550,000 -- $688,701 --
Dawson
==================================================================================================================================
</TABLE>
(1) The value realized has been calculated based on the difference between
$2.47, which was the closing sale price of the Common Stock reported on
the ASE on April 1, 1996, the date of exercise, and the applicable
exercise price, converted from Canadian dollars at April 1, 1996.
(2) The values shown have been calculated based on the difference between
$1.53, which was the closing sale price of the Common Stock reported on
the ASE on July 31, 1996, and the per share exercise price of
unexercised options, converted from Canadian dollars at July 31, 1996.
EMPLOYMENT AND CONSULTING AGREEMENTS
On October 1, 1996, the Company entered into a five-year employment
agreement with Gregory J. Frazer, its Vice President, Business Development, that
provides for a base salary of $110,000 per year and for a bonus based on the
aggregate net income of the hearing clinics acquired by the Company that were
previously owned, in part, by Mr. Frazer. The employment agreement provides Mr.
Frazer with certain fringe benefits such as medical and dental insurance,
vacation, professional liability insurance, an automobile allowance,
reimbursement of certain expenses, and options to purchase up to 200,000 shares
of Common Stock at $1.30 per share. Mr. Frazer also received an additional
200,000 options to purchase Common Stock at $1.30 per
- 47 -
<PAGE>
share upon his election as a director of the Company. Mr. Frazer has also
entered into an agreement with the Company which contains covenants not to
compete with and not to solicit employees, clients or customers of the Company
on behalf of a competitor during his period of employment and for three years
following termination of his employment.
Effective January 1, 1997, the Company entered into a five-year
consulting agreement with Hugh T. Hornibrook, a director of the Company, under
which the Company will pay Mr. Hornibrook a retainer of $72 per month and $91
per hour (each converted from Canadian dollars at May 30, 1997) for consulting
services on an as-needed basis.
Since January 1, 1997, the Company has retained NeuroDynamic Systems,
Inc., at the rate of $6,000 per month, to provide consulting services in
connection with the Company's Canadian operations and the development of a
training program for audiologists. The consulting arrangement may be canceled at
any time by the Company. Gene K. Balzer, Ph.D., a director of the Company, is
president and sole shareholder of NeuroDynamic Systems, Inc.
OPTION PLANS
Effective November 18, 1993, the board of directors of the Company
adopted and the shareholders of the Company approved a stock option plan (the
"1993 Plan") that provides for the grant of options to officers, directors and
key employees in an aggregate number equal to 10% of the outstanding Common
Stock.
The exercise price of options granted under the Plan may not be less
than that permitted by the ASE. Under the rules of the ASE, the option exercise
price may not be lower than the closing price per share on the ASE on the day
prior to the date that written notice is received by the ASE that an option has
been granted (the "Notice Date") less a certain permitted discount amount. The
maximum discount allowed is 10% if the closing price per share exceeds $3.62,
15% if the closing price is from $1.45 to $3.62, 18% if the closing price is
from $0.73 to $1.44, 20% if the closing price is from $0.37 to $0.72, and 25% if
the closing price is equal to or less than $0.36 (all prices converted from
Canadian dollars at May 30, 1997). The minimum exercise price at which an option
can be granted, after applying the maximum allowable discount, is $0.07
(converted from Canadian dollars at May 30, 1997). In addition, if the weighted
average per share price for the 10 days immediately prior to the Notice Date is
greater than the actual closing price on the day prior to the Notice Date by
more than 10%, then the ASE may require the weighted average price to be used in
calculating the permitted option exercise price.
Individual options granted may have a term of up to five years and may
cover a number of shares up to 5% of the outstanding Common Stock. All options
under the 1993 Plan are non-transferable and non-assignable. The option
agreements vary as to vesting, with the majority providing for vesting in
installments. A total of 3,475,000 options have been granted under the 1993
Plan, of which 1,375,000 have been exercised, 1,525,000 are outstanding, and
575,000 have been canceled or terminated.
- 48 -
<PAGE>
Effective December 10, 1996, the board of directors of the Company
adopted a stock award plan, which was amended and restated as of February 5,
1997 (the "1996 Plan"), providing for the grant of options covering up to
1,500,000 shares of Common Stock. The adoption of the 1996 Plan and the option
awards granted under the 1996 Plan are subject to approval by the Company's
shareholders at its next annual general meeting to be held in December 1997.
Options granted under the 1996 Plan may have a term of up to five years. The
option exercise price must equal or exceed 100% of the fair market value of the
Common Stock on the date of grant. The board of directors has granted incentive
stock options to purchase a total of 917,000 shares of Common Stock to 12
persons under the 1996 Plan, subject to shareholder approval at the annual
general meeting to be held in December 1997. The options granted vest over
varying periods of time and certain options may become exercisable earlier if
specified production goals are met. If the 1996 Plan is approved by the
shareholders, the board of directors does not intend to grant any further
options under the 1993 Plan.
CERTAIN TRANSACTIONS
From its inception in 1994 through July 31, 1996, Douglas F. Good, a
shareholder and director of the Company and its former chief executive officer,
advanced funds to the Company for short-term working capital and acquisitions.
Interest on the advances accrued at 9% per annum. The Company paid Mr. Good
aggregate interest of $43,001 (converted from Canadian dollars at July 31, 1996)
for the three-year period ended July 31, 1996 and the highest outstanding
balance during such period was $240,167 during January 1995. As of July 31,
1996, the total of the advances and all accrued interest were repaid.
HC HealthCare Hearing Clinics Ltd., the Company's primary Canadian
operating subsidiary, maintains a revolving bank loan bearing interest at the
bank's prime rate plus 1% per annum and secured by a general security agreement
covering all assets of the Company and the guarantee and postponement of claim
of Marilyn Marshall, who is a shareholder of the Company and shares the same
household as Mr. Good.
William DeJong is a partner in the Calgary, Alberta law firm of Ballem
MacInnes and a director of the Company. During the period from October 15, 1994,
to May 30, 1997, total fees, disbursements and government sales tax paid to
Ballem MacInnes by the Company for legal services was $175,772 (converted from
Canadian dollars at May 30, 1997). Mr. DeJong exercised 50,000 options at $0.07
per share (converted from Canadian dollars at February 22, 1996) on February 22,
1996. Total consideration received by the Company was $3,635.
On October 1, 1996, the Company acquired the Hearing Care Associates
Group through the acquisition of all of the outstanding shares of three
corporations owned by Gregory J. Frazer, who was subsequently appointed Vice
President, Business Development and a director of the Company, his wife, Carissa
Bennett, and Jami Tanihana (the "HCA Shareholders"). The consideration paid by
the Company consisted of $314,724 in cash and 2,389,536 shares of Common Stock
of which Mr. Frazer and Ms. Bennett received a total of 1,470,359 shares.
- 49 -
<PAGE>
Mr. Frazer and Ms. Bennett also received a total of $314,724 in payment for
covenants not to compete.
Twenty-five percent, or 597,384, of the shares of Common Stock issued
to the HCA Shareholders are being held by the Company (the "Retained Shares").
One share of Common Stock will be issued to the HCA Shareholders on a pro rata
basis from the Retained Shares for each dollar by which net current assets (as
defined in the acquisition agreement) of the acquired corporations exceed
certain target amounts. To the extent that such net current assets do not exceed
the target amounts, the HCA Shareholders may elect to either pay the Company one
dollar or cancel one Retained Share for each dollar of shortfall. A Retained
Share is also required to be canceled or a dollar paid to the Company for each
dollar by which long term liabilities of the acquired corporations exceed a
specified amount, or certain accounts receivable remain uncollected after
specified time periods.
The HCA Shareholders have the right, until September 30, 2001, to
require the Company to redeem an aggregate of 15,000 of their shares of Common
Stock as of the last day of each calendar quarter at a price of $1.67 per share.
The redemption right is noncumulative and expires if not exercised as of the end
of any calendar quarter as to such quarter. Jami Tanihana has exercised such
redemption right as to a total of 13,200 shares and received a total of $22,044
from the Company. The Company also agreed to register the shares received by the
HCA Shareholders in October 1996 under the Securities Act. A total of 1,905,977
of such shares are covered by this Prospectus.
On October 31, 1996, the Company acquired SONUS in exchange for
convertible subordinated notes made payable to certain affiliates of SONUS in
the aggregate amount of $2,600,000 convertible into 2,000,000 shares of Common
Stock and the assumption of a promissory note with a balance of $360,000 payable
to Kathy Foltner, Vice President, Operations of the Company. The promissory note
is payable in equal annual installments of $120,000 beginning July 1, 1997, and
bears interest at 6% per annum. In addition to the promissory note, the Company
also agreed to assume an obligation of SONUS to pay Ms. Foltner $50,000 in each
of 1997, 1998, and 1999, if specified production goals are met. The Company also
agreed to register the shares issuable upon conversion of the convertible
subordinated notes under the Securities Act. Such shares are covered by this
Prospectus.
On January 10, 1997, the Company, through HHCI, acquired all of the
outstanding shares of Hearing Care Associates-Los Angeles, Inc., for $301,000 in
cash, of which Gregory J. Frazer received $155,000. Mr. Frazer also received
$37,500 in payment for a covenant not to compete.
On February 28, 1997, the Company, through HHCI, acquired all of the
outstanding shares of Hearing Care Associates-Arcadia, Inc. for $410,338 in
cash, of which Gregory J. Frazer received $205,169. Mr. Frazer also received
$43,390 in payment for a covenant not to compete.
- 50 -
<PAGE>
On March 6, 1997, the Company, through HHCI, acquired all of the
outstanding shares of Hearing Care Associates-Sherman Oaks, Inc., for $26,568 in
cash, of which Gregory J. Frazer received $13,284. Mr. Frazer also received
$11,261 in payment for a covenant not to compete.
On March 14, 1997, the Company, through HHCI, acquired all of the
outstanding shares of Auditory Vestibular Center, Inc., for $56,204 in cash, of
which Gregory J. Frazer received $28,102. Mr. Frazer also received $7,145 in
payment for a covenant not to compete.
On April 8, 1997, the Company, through HHCI, acquired all of the
outstanding shares of Hearing Care Associates-Lancaster, Inc., for $136,751 in
cash, of which Gregory J. Frazer received $34,188. Mr. Frazer also received
$10,313 in payment for a covenant not to compete.
The Company has entered into an employment agreement with Gregory J.
Frazer and a consulting agreement with Hugh T. Hornibrook. See
"Management--Employment and Consulting Agreements."
On January 11, 1996, Michael G. Thomson, one of the Company's original
shareholders, exercised options for 200,000 shares of Common Stock at $0.07 per
share (converted from Canadian dollars at January 11, 1996). In connection with
such exercise, Mr. Thomson paid the Company $14,657.
Dr. Eddison G.N. Sinanan, an advisory director of the Company,
exercised options for 50,000 shares of Common Stock at $0.18 per share
(converted from Canadian dollars at January 18, 1996) on January 18, 1996, and
options for an additional 100,000 shares at $0.18 per share (converted from
Canadian dollars at July 31, 1996) on July 31, 1996. In connection with these
exercises, the Company received consideration of $9,164 and $18,186,
respectively.
On April 1, 1996, Brandon M. Dawson, President of the Company,
exercised options for 100,000 shares of Common Stock at $0.28 per share
(converted from Canadian dollars at April 1, 1996). In connection with such
exercise, Mr. Dawson paid the Company $28,048. On May 8, 1997, Mr. Dawson
exercised options for 250,000 shares of Common Stock at $0.27 per share
(converted from Canadian dollars at May 8, 1997). In connection with such
exercise, the Company loaned Mr. Dawson $67,500 to pay the aggregate exercise
price of the options. Interest on the loan accrues at 10% per annum.
On August 16, 1996, Douglas F. Good, a director of the Company,
exercised options for 225,000 shares of Common Stock at $0.73 per share
(converted from Canadian dollars at August 16, 1996). In connection with such
exercise, Mr. Good paid the Company $163,744.
On May 19, 1997, Gene K. Balzer, a director of the Company, exercised
options for 200,000 shares of Common Stock at $0.28 per share (converted from
Canadian dollars at May 19, 1997). In connection with such exercise, the Company
loaned Mr. Balzer $56,000 to pay the aggregate exercise price of the options.
Interest on the loan accrues at 10% per annum.
- 51 -
<PAGE>
Under a settlement agreement between the Company and Roger W. Larose,
formerly the Company's chief operating officer, the Company agreed to pay the
exercise price of 200,000 options to purchase Common Stock held by Mr. Larose.
On April 1, 1996, Mr. Larose exercised options for 100,000 shares of Common
Stock at $0.28 per share (converted from Canadian dollars at April 1, 1996), and
Douglas F. Good, as an advance to and on behalf of the Company, paid the
exercise price of $28,048 to the Company. On September 30, 1996, Mr. Larose
exercised options for an additional 100,000 shares of Common Stock at $0.28 per
share (converted from Canadian dollars at September 30, 1996), and Mr. Good, as
an advance to and on behalf of the Company, paid the exercise price of $27,900
to the Company.
Brandon M. Dawson subsequently executed promissory notes in favor of
Mr. Good equal to the amounts advanced by Mr. Good in connection with the
options exercised by Mr. Larose and Mr. Dawson was substituted for Mr. Good as
the obligee with respect to such advances. Interest on the advances made by Mr.
Dawson accrues at the rate of 9% per annum. At May 8, 1997, the outstanding
balance of the advances made by Mr. Dawson, plus accrued interest, was $59,134.
The Company also is indebted to Mr. Dawson in the amount of $46,565 for wages
earned from January 1 through May 31, 1996 (converted from Canadian dollars at
May 30, 1997), which sum is non-interest-bearing.
The Company is in the process of negotiating the acquisition of all of
the outstanding shares of Hearing Care Associates-North Hollywood, Inc., for
$201,263 and all of the outstanding shares of Hearing Care Associates-Santa
Monica, Inc., for $258,268. If such acquisitions are consummated, Gregory J.
Frazer will receive $50,316 and $64,567, respectively, in payment for his shares
in such corporations. Mr. Frazer will also receive $13,189 and $19,023,
respectively, in payment for covenants not to compete.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership, as of June 1, 1997, of the Common Stock by (i) each person
known by the Company to own beneficially more than 5% of the Common Stock, (ii)
each director of the Company, (iii) the Named Executive Officers, and (iv) all
directors and executive officers as a group. Unless otherwise indicated, the
Company believes that the persons listed have sole investment and voting power
with respect to the Common Stock owned by them. Shares shown as beneficially
owned include shares which such persons have the right to acquire within 60 days
of June 1, 1997.
- 52 -
<PAGE>
<TABLE>
<CAPTION>
=======================================================================================================================
Amount and Nature % of Common
Name and Address of Beneficial % of Common Stock Including
of Beneficial Owner Ownership Stock(1) Shares Issuable(2)
=======================================================================================================================
<S> <C> <C> <C>
Brandon M. Dawson 4,550,000(3) 16.7% 11.5%
111 S.W. Fifth Avenue
Suite 2390
Portland, Oregon 97204
- -----------------------------------------------------------------------------------------------------------------------
Douglas F. Good 2,590,700(4) 9.6% 6.6%
595 Howe Street
Suite 1120
Vancouver, B.C. V6C-2T5
- -----------------------------------------------------------------------------------------------------------------------
Gregory Frazer, Ph.D. 1,470,359(5) 5.4% 3.7%
18531 Roscoe Boulevard
Suite 201
Northridge, California 91324
- -----------------------------------------------------------------------------------------------------------------------
Gene K. Balzer, Ph.D 200,000 * *
1000 East Rosser Avenue
Suite D2
Bismark, North Dakota 58501
- -----------------------------------------------------------------------------------------------------------------------
Hugh T. Hornibrook 200,000(6) * *
2631 West 13th Avenue
Vancouver, B.C. V6K-2T3
- -----------------------------------------------------------------------------------------------------------------------
William DeJong 157,200(7) * *
1800 First Canadian Centre
350 7th Avenue, S.W.
Calgary, Alberta T2P-3N9
- -----------------------------------------------------------------------------------------------------------------------
Hearing Health Services, Inc. 2,000,000(8) 6.9% 5.1%
1018 W. Ninth Avenue
Suite 310
King of Prussia, Pennsylvania 19406
- -----------------------------------------------------------------------------------------------------------------------
Sagit Investment Management Ltd. 1,430,000(9) 5.0% 3.6%
789 West Pender Street, Suite 900
Vancouver, B.C. V6H 1H2
- -----------------------------------------------------------------------------------------------------------------------
All directors and executive officers 9,724,759(10) 35.0% 24.7%
as a group (9 persons)
=======================================================================================================================
</TABLE>
- -------------
* Less than 1% of the outstanding Common Stock
(1) Calculated in accordance with Rule 13d-3(d)(1) under the Securities
Exchange Act of 1934.
(2) Calculated on the basis of 39,400,000 shares of Common Stock
outstanding, which assumes that all outstanding options, purchase
warrants, and convertible securities have been exercised or converted.
(3) Includes 3,900,000 shares subject to an escrow agreement dated October
7, 1994, of which 1,900,000 shares are subject to an Assignment and
Novation Agreement dated August 28, 1996, between Mr. Dawson and Roger
W. Larose, a former officer of the Company. See "Description of Capital
Stock--Escrowed Shares." Also includes 300,000 shares of Common Stock
issuable upon the exercise of stock options.
- 53 -
<PAGE>
(4) Includes 1,381,138 shares held by Marilyn Marshall, who shares the same
household as Mr. Good.
(5) Includes 253,091 shares held by Carissa Bennett, Mr. Frazer's wife.
(6) Consists of 200,000 shares of Common Stock issuable upon the exercise
of stock options.
(7) Includes 75,000 shares of Common Stock issuable upon the exercise of
stock options.
(8) Consists of, upon conversion of convertible subordinated notes issued
by the Company, 900,000 shares held by Brown's Creek, Inc., 285,120
shares held by Business Development Capital Limited Partnership III,
743,600 shares held by Abbingdon Venture Partners Limited Partnership,
and 71,280 shares held by Abbingdon Venture Partners Limited
Partnership II, each of whom is an affiliate of Hearing Health
Services, Inc.
(9) Consists of 1,430,000 shares to be issued upon the exercise of the
Company's February Warrants. See "Description of Capital
Stock--Warrants."
(10) Includes 775,000 shares of Common Stock issuable upon the exercise of
stock options.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of an unlimited
number of shares of Common Stock and an unlimited number of shares of Preferred
Stock.
COMMON STOCK
The Company is authorized to issue an unlimited number of shares of
Common Stock. Holders of Common Stock are entitled to one vote per share at all
meetings of holders of the Common Stock. All shares of Common Stock rank ratably
with regard to dividends (if and when declared by the board of directors of the
Company). In the event of a liquidation, dissolution, or winding up of the
Company, holders of Common Stock are entitled to share equally and ratably in
the assets of the Company, if any, remaining after the payment of all
liabilities of the Company and the liquidation preference of any outstanding
class or series of Preferred Stock. The holders of Common Stock have no
preemptive rights under Alberta law or the Company's Articles of Incorporation.
At June 1, 1997, a total of 27,003,044 shares of Common Stock were
issued and outstanding, fully paid and non-assessable, with 5,250,000 of such
shares subject to escrow provisions (see "--Escrowed Shares"). If all
outstanding warrants, options and convertible securities to acquire shares of
the Company's Common Stock had been exercised or converted at June 1, 1997, a
total of approximately 39,400,000 shares of Common Stock would have been
outstanding at that date. Of these, 1,870,000 shares are issuable upon the
exercise of share purchase warrants (the "February Warrants") issued in
connection with the Company's special warrants that were issued in February 1996
(the "February Special Warrants") at an exercise price of $1.09 per share
(converted from Canadian dollars at May 30, 1997) until February 28, 1998, and
5,467,410 shares are issuable upon the exercise of share purchase warrants (the
"September Warrants") issued upon the exercise or deemed exercise of the
Company's special
- 54 -
<PAGE>
warrants that were issued in September 1996 and December 1996 (together, the
"September Special Warrants") at a price of $2.00 per share until August 31,
1998. If the closing bid for the Company's Common Stock is in excess of $3.00
per share on each of 20 consecutive trading days (as traded on the ASE or
another more senior North American stock exchange), the Company has the option,
upon 45 days' prior written notice to the holders, to force the exercise or
cancellation of the September Warrants.
In addition, in connection with certain acquisitions made by the
Company, 129,630 shares of Common Stock are issuable pursuant to the terms of a
convertible promissory note due September 1, 1997, and 2,000,000 shares are
issuable pursuant to convertible subordinated notes due October 31, 1997. Up to
495,900 shares of Common Stock will be issuable at a price of $1.25 per share
pursuant to share purchase warrants to be issued by the Company that will expire
on August 31, 1998. See "--Warrants." Upon the acceptance for listing or
quotation of the Common Stock on a recognized stock exchange or national trading
market in the United States, the Company will have the option upon 45 days'
prior written notice to force the exercise or cancellation of the warrants if
the closing bid for the Common Stock is at least $3.00 per share on each of 20
consecutive trading days. In addition, an aggregate of 2.4 million shares of
Common Stock are issuable upon the exercise of stock options granted to the
Company's officers, employees and directors.
The Board of Directors may issue an unlimited number of additional
shares of Common Stock without any further vote or action by the Company's
shareholders, which may cause the interests of existing shareholders to suffer
substantial dilution. See "Risk Factors--Potential Issuance of Preferred Stock
and Additional Common Stock."
PREFERRED STOCK
The Company is authorized to issue an unlimited number of shares of
Preferred Stock. The board of directors has the authority to issue Preferred
Stock in one or more series and to fix the number of shares comprising any such
series and the designations, rights, privileges, restrictions, and conditions
attaching thereto, including the rate or amount of dividends or the method of
calculating dividends, the dates of payment of dividends, the redemption,
purchase, and/or conversion price or prices and the terms and conditions of any
such redemption, purchase, and/or conversion, and any sinking fund or other
provisions, without any further vote or action by the shareholders of the
Company. The issuance of Preferred Stock by the board of directors could
adversely affect the voting power and other rights of holders of Common Stock.
For example, the issuance of shares of Preferred Stock could result in
securities outstanding that would have preference over the Common Stock with
respect to dividends and upon liquidation and that could (upon conversion or
otherwise) enjoy all of the rights of the Common Stock.
The authority possessed by the board of directors to issue Preferred
Stock could potentially be used to discourage attempts by others to obtain
control of the Company through merger, tender offer, proxy or consent
solicitation or otherwise by making such attempts more costly or more difficult
to achieve. There are no agreements or understandings for the issuance
- 55 -
<PAGE>
of Preferred Stock, and the Company has no plans to issue any shares of
Preferred Stock. See "Risk Factors--Potential Issuance of Preferred Stock and
Additional Common Stock."
WARRANTS
At June 1, 1997, the Company had outstanding 1,870,000 February
Warrants governed by an indenture dated February 28, 1996 (the "February Warrant
Indenture"), between the Company and The R-M Trust Company, as trustee and
warrant agent (the "Trustee"). Each February Warrant entitles the holder thereof
to purchase one share of Common Stock at an exercise price of $1.09 per share
(converted from Canadian dollars at May 30, 1997) until February 28, 1998.
At June 1, 1997, the Company had outstanding 5,467,410 September
Warrants governed by an indenture dated September 17, 1996 (the "September
Warrant Indenture"), between the Company and the Trustee, as trustee and warrant
agent. Each September Warrant entitles the holder to subscribe for one share of
Common Stock of the Company at a subscription price of $2.00 until the expiry
thereof. The September Warrants will expire on August 31, 1998. If the closing
bid for the Company's Common Stock is in excess of $3.00 per share on each of 20
consecutive trading days (as traded on the ASE or another more senior North
American stock exchange), the Company has the option, upon 45 days' prior
written notice to the holders, to force the exercise or cancellation of the
September Warrants.
The February Warrant Indenture and September Warrant Indenture each
provides that the exercise price per share of Common Stock thereunder is subject
to adjustment under certain circumstances, including any subdivision,
consolidation, or reclassification of the Common Stock or any reorganization of
the Company including amalgamation, merger, or arrangement.
To the extent that a holder of a February Warrant or September Warrant
is entitled to purchase a fraction of a share of Common Stock, such right may be
exercised only in combination with other rights which in the aggregate entitle
the holder to purchase a whole number of shares of Common Stock. Holders of such
warrants are not entitled to any cash payment or other compensation in respect
of fractional entitlements. Holders of such warrants do not have any voting or
preemptive rights or any other rights as shareholders of the Company.
The Company has agreed to issue a total of 495,900 share purchase
warrants to or at the direction of C.M. Oliver & Company Limited, Sunrise
Securities Corporation, and Dallas Research & Trading, Inc., which acted as
placement agents in the Company's offering of September Special Warrants in
Canada and the United States. Each share purchase warrant is exercisable for one
share of Common Stock at an exercise price of $1.25 per share until August 31,
1998. Upon acceptance for listing or quotation of the Common Stock on a
recognized stock exchange or national trading market in the United States, the
Company will have the option upon 45 days' prior written notice to force the
exercise or cancellation of the warrants if the closing bid for the Common Stock
is at least $3.00 per share on each of 20 consecutive trading days.
- 56 -
<PAGE>
The shares issuable upon exercise of the 1,870,000 February Warrants,
4,576,410 of the September Warrants, and the 495,900 share purchase warrants,
together with 4,589,000 of the shares issued pursuant to the February Special
Warrants and September Special Warrants, are covered by this Prospectus.
ESCROWED SHARES
Pursuant to certain requirements of the Alberta securities commission
and the ASE, certain shares of Common Stock are subject to escrow agreements
entered into by the Company and various shareholders.
Under the terms of an escrow agreement dated January 14, 1994, among
the Company, the Trustee, and Michael G. Thomson, Craig R. Thomson, Murray T.A.
Campbell, Bruce A. Ramsay and William DeJong (the "Founding Shareholders"),
3,000,000 shares of Common Stock were issued to the Founding Shareholders in
exchange for an aggregate of $100,000 in cash and deposited in escrow with the
Trustee. Two million shares have been released from escrow and the last
1,000,000 shares are subject to release on October 21, 1997, upon application to
the executive director of the ASE.
Douglas F. Good, Marilyn Marshall, and Trudy McCaffery (the "Fraserview
Shareholders"), the Company, and the Trustee are parties to an escrow agreement
dated October 7, 1994 (the "Performance Escrow Agreement"), with respect to
4,250,000 shares of Common Stock (the "Performance Shares") that were issued to
the Fraserview Shareholders in connection with the Company's acquisition of
Fraserview Hearing & Speech Clinic Ltd. The terms of the Performance Escrow
Agreement specify that one share of Common Stock is eligible for release from
escrow, upon application to the ASE, for each $0.08 (converted from Canadian
dollars at May 30, 1997) of "cash flow" generated by the Company. For purposes
of the Performance Escrow Agreement, "cash flow" is defined as the Company's net
income as shown on the Company's audited financial statements, plus
depreciation, depletion, deferred taxes, and amortization of goodwill and
research and development costs. All of the Performance Shares remain subject to
the Performance Escrow Agreement.
Pursuant to a purchase and sale agreement (the "Share Purchase
Agreement") dated as of April 15, 1996, between the Fraserview Shareholders and
Brandon M. Dawson, Roger W. Larose, Randall E. Drullinger and Hugh T. Hornibrook
(the "Purchasers"), the Fraserview Shareholders sold all of the Performance
Shares to the Purchasers for an aggregate consideration of $601,637 (converted
from Canadian dollars at April 15, 1996). Pursuant to an assignment and novation
agreement dated as of August 28, 1996, Roger W. Larose agreed to assign all of
his right, title and interest in the Share Purchase Agreement to Brandon M.
Dawson. In addition, pursuant to an assignment and novation agreement dated as
of February 27, 1997, Mr. Hornibrook agreed to assign all of his right, title,
and interest in the Share Purchase Agreement to Edwin J. Kawasaki. The
assignments are subject to the approval of the ASE. As a result of the Share
Purchase Agreement and assignments, Messrs. Dawson, Drullinger and Kawasaki hold
3,900,000, 250,000 and 100,000 Performance Shares, respectively.
- 57 -
<PAGE>
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Felesky Flynn, Barristers and Solicitors, tax counsel
to the Company, as of the date hereof, the following is a summary of the
principal Canadian federal income tax considerations pursuant to the Income Tax
Act (Canada) (the "Tax Act") and the regulations thereunder generally applicable
to a holder who acquires Common Stock pursuant to this offering and who, for
purposes of the Tax Act, holds such shares as capital property and deals at
arm's length with the Company. Generally, Common Stock will be considered to be
capital property to a holder provided the holder does not hold the Common Stock
in the course of carrying on a business and has not acquired it in one or more
transactions considered to be an adventure in the nature of trade. Special rules
apply to non-resident insurers that carry on an insurance business in Canada and
elsewhere.
This summary is based upon the provisions of the Tax Act in force as of
the date hereof, all specific proposals to amend the Tax Act that have been
publicly announced prior to the date hereof (the "Proposed Amendments") and
counsel's understanding of the current published administrative and assessing
policies and practices of Revenue Canada, Customs, Excise and Taxation ("Revenue
Canada"). For the purposes of this summary, it has been assumed that the Tax Act
will be amended as proposed, although no assurance can be given in this regard.
This summary is not exhaustive of all possible federal income tax consequences
and, except for the Proposed Amendments, does not anticipate any changes in the
law, whether by legislative, governmental or judicial decision or action, nor
does it take into account provincial, territorial or foreign tax considerations,
which may differ significantly from those discussed herein. This summary is not
applicable to subscribers who are traders or dealers in securities, a holder
that is a "financial institution" as defined in the Tax Act for purposes of the
mark-to-market rules, or to a holder of an interest which would be a "tax
shelter investment" as defined in the Proposed Amendments.
THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, AND
SHOULD NOT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR HOLDER.
ACCORDINGLY, HOLDERS SHOULD CONSULT THEIR INDEPENDENT TAX ADVISERS FOR ADVICE
WITH RESPECT TO THE INCOME TAX CONSEQUENCES RELEVANT TO THEIR PARTICULAR
CIRCUMSTANCES.
The following applies to holders who acquire Common Stock pursuant to
this offering, who are not resident in Canada for purposes of the Tax Act and
who do not use or hold and are not deemed to use or hold their Common Stock in,
or in the course of, carrying on a business in Canada.
DISPOSITIONS OF COMMON SHARES
A non-resident holder will, upon a disposition or deemed disposition of
Common Stock, not be subject to taxation in Canada on any gain realized on the
disposition unless the share is "taxable Canadian property" for the purposes of
the Tax Act and no relief is afforded under an applicable tax convention between
Canada and the country of residence of the holder. Since the Common Stock is
listed on a prescribed stock exchange for the purposes of the Tax Act,
- 58 -
<PAGE>
Common Stock held by a non-resident holder will generally not be a "taxable
Canadian property" unless, at any time during the five year period immediately
preceding the disposition, the non-resident holder, persons with whom the
non-resident holder did not deal at arm's length, or the non-resident holder
together with such persons, owned or had the right to acquire 25% or more of the
issued shares of any class of the capital of the Company. Any interest in shares
or options in respect of shares will be considered to be the equivalent of
ownership of such shares for purposes of the definition of taxable Canadian
property.
Subject to the comments set out below in respect of the application of
the Canada-United States Income Tax Convention, 1980 (the "Convention") to U.S.
resident holders, non-residents whose shares constitute "taxable Canadian
property" will be subject to taxation thereon on the same basis as Canadian
residents unless otherwise exempted by an applicable tax convention between
Canada and the country of residence of the holder.
Pursuant to the Convention, shareholders of the Company that are
residents in the U.S. for the purposes of the Convention and whose shares might
otherwise be "taxable Canadian property" may be exempt from Canadian taxation in
respect of any gains on the disposition of the Common Stock, provided the
principal value of the Company is not derived from real property located in
Canada at the time of disposition.
Non-resident holders who might hold their Common Stock as "taxable
Canadian property" should consult their own tax advisers with respect to the
income tax consequences of a disposition of their Common Stock.
Non-resident holders whose shares are repurchased by the Company,
except in respect of certain purchases made by the Company in the open market,
will be deemed to have received the payment of a dividend by the Company in an
amount equal to the excess paid over the paid-up capital of the Common Stock so
purchased. Such deemed dividend will be excluded from the holder's proceeds of
disposition of this Common Stock for the purposes of computing any capital gain
or loss but will be subject to Canadian non-resident withholding tax in the
manner described below under "--Dividends."
DIVIDENDS
Dividends received by a non-resident holder of Common Stock will be
subject to Canadian withholding tax at the rate of 25% of the amount thereof
unless the rate is reduced under the provisions of an applicable tax convention
between Canada and the country of residence of the holder. The provisions of the
Convention generally reduce the rate to 15%. A further reduction to 5% under the
Convention will be available if the recipient is a company which owns at least
10% of the voting shares of the Company.
- 59 -
<PAGE>
INVESTMENT CANADA ACT
The Investment Canada Act (the "ICA") prohibits the acquisition of
control of a Canadian business by non-Canadians without review and approval of
the Investment Review Division of Industry Canada, the agency that administers
the ICA, unless such acquisition is exempt from review under the provisions of
the ICA. The Investment Review Division of Industry Canada must be notified of
such exempt acquisitions. The ICA covers acquisitions of control of corporate
enterprises, whether by purchase of assets, shares or "voting interests" of an
entity that controls, directly or indirectly, another entity carrying on a
Canadian business. The ICA will have no effect on the acquisition of Shares
covered by this Prospectus.
Apart from the ICA, there are no other limitations on the right of
nonresident or foreign owners to hold or vote securities imposed by Canadian law
or the Company's Articles of Incorporation. There are no other decrees or
regulations in Canada that restrict the export or import of capital, including
foreign exchange controls, or that affect the remittance of dividends, interest
or other payments to nonresident holders of the Company's Common Stock, except
as discussed elsewhere herein.
PLAN OF DISTRIBUTION
The Shares offered hereby may be offered and sold from time to time by
the Selling Shareholders. Such offers and sales may be made from time to time at
prices and on terms then prevailing or at prices related to the then-current
market price, or in negotiated transactions. The methods by which such Shares
may be sold may include, but not be limited to, the following: (a) a block trade
in which the broker or dealer so engaged will attempt to sell the Shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction; (b) purchases by a broker or dealer as principal and
resale by such broker or dealer for its account; (c) an exchange distribution in
accordance with the rules of such exchange; (d) ordinary brokerage transactions
and transactions in which the broker solicits purchasers; (e) privately
negotiated transactions; (f) short sales; and (g) a combination of any such
methods of sale. In effecting sales, brokers or dealers engaged by the Selling
Shareholders may receive commissions or discounts from the Selling Shareholders
or from the purchasers in amounts to be negotiated immediately prior to the
sale. The Selling Shareholders may also sell Shares in accordance with Rule 144
under the Securities Act. The Company reserves the right to suspend transfers of
the Shares offered hereby if, in its reasonable judgment, such suspension is
necessary to ensure that all material information about the Company has been
properly disseminated to the public.
The Company has advised each Selling Shareholder that he or she and any
such brokers, dealers or agents who effect a sale of the Shares offered hereby
are subject to the prospectus delivery requirements under the Securities Act.
The Company also has advised each Selling Shareholder that in the event of a
"distribution" of his shares, such Selling Shareholder and any broker, dealer or
agent who participates in such distribution may be subject to applicable
provisions of the Securities Exchange Act of 1934 and the rules and regulations
thereunder,
- 60 -
<PAGE>
including, without limitation, the anti-manipulation rules under the Securities
Exchange Act of 1934.
The Selling Shareholders and any brokers participating in such sales
may be deemed to be underwriters within the meaning of the Securities Act. There
can be no assurance that the Selling Shareholders will sell any or all of the
Shares offered hereby.
Any commission paid or any discounts or concessions allowed to any
broker, dealer, underwriter, agent or market maker and, if any such broker,
dealer, underwriter, agent or market maker purchases any of the Shares offered
hereby as principal, any profits received on the resale of such Shares, may be
deemed to be underwriting commissions or discounts under the Securities Act.
The Company has agreed to register the shares of certain Selling
Shareholders under the Securities Act pursuant to various agreements, and all of
such shares are covered by this Prospectus. The Company is bearing substantially
all of the costs relating to the registration of the Shares offered hereby,
except commissions, discounts or other fees payable to a broker, dealer,
underwriter, agent or market maker in connection with the sale of any of such
Shares and the legal fees incurred by the Selling Shareholders, all of which
will be borne by the Selling Shareholders. The Company will not receive any of
the proceeds from the sale of the Shares offered hereby.
LEGAL MATTERS
The legality of the shares offered hereby has been passed upon for the
Company by Ballem MacInnes, Calgary, Alberta. William DeJong, a partner in
Ballem MacInnes, is a director of the Company.
EXPERTS
The consolidated financial statements of the Company as of July 31,
1996, and 1995, and for each of the years in the two-year period ended July 31,
1996, have been included in this Prospectus in reliance upon the report of
Shikaze Ralston, Chartered Accountants, appearing elsewhere herein and upon the
authority of such firm as experts in accounting and auditing.
The financial statements of the Hearing Care Associates Group as of
July 31, 1996, and for each of the years in the two-year period ended July 31,
1996, and the financial statements of the Midwest Division of Hearing Health
Services, Inc., dba SONUS, as of June 30, 1996, and for each of the years in the
two-year period ended June 30, 1996, have been included in this Prospectus in
reliance upon the reports of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein and upon the authority of said firm as
experts in accounting and auditing.
Effective December 20, 1996, upon the recommendation of the board of
directors and approval by the shareholders, the Company retained KPMG Peat
Marwick LLP as its
- 61 -
<PAGE>
independent auditors, replacing Shikaze Ralston. The Company made the change in
independent auditors due to its significant and growing operations in the United
States and its need to draw upon the services and expertise of a large
international accounting and auditing firm. The report of Shikaze Ralston on the
consolidated financial statements of the Company referred to above does not
contain an adverse opinion or disclaimer of opinion and is not qualified as to
uncertainty, audit scope, or accounting principles. In addition, there were no
disagreements with Shikaze Ralston on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Shikaze Ralston, would
have caused them to make reference to the subject matter of the disagreements in
connection with their report. Before engaging KPMG Peat Marwick LLP as its new
independent certified public accountants, the Company did not consult with them
regarding any matters related to the application of accounting principles, the
type of audit opinion that might be rendered on the Company's financial
statements or any other such matters.
ADDITIONAL INFORMATION
A Registration Statement on Form SB-2 relating to the shares offered
hereby has been filed by the Company with the Securities and Exchange Commission
(the "Commission"). This Prospectus does not contain all of the information set
forth in such Registration Statement and the exhibits thereto. For further
information with respect to the Company and the Shares offered hereby, reference
is made to such Registration Statement and exhibits. A copy of the Registration
Statement may be inspected and copied at the offices of the Commission at 450
Fifth Street, N. W., Washington, D. C. 20549 and at regional offices of the
Commission located at 7 World Trade Center, 13th Floor, New York, New York 10048
and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of all or any part of the Registration Statement may be obtained
from the Public Reference Section of the Commission, Washington, D. C., upon the
payment of the fees prescribed by the Commission. The Commission also maintains
a site on the World Wide Web that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of such site is http://www.sec.gov.
The Company is not currently subject to the periodic reporting
requirements of the Securities Exchange Act of 1934. The Company intends to
furnish to its shareholders annual reports containing financial statements
audited by an independent public accounting firm.
PRO FORMA FINANCIAL INFORMATION
The "HealthCare Combined" column set forth in the unaudited pro forma
condensed combined statement of operations for the year ended July 31, 1996,
assumes that the acquisition of the Hearing Care Associates Group on October 1,
1996, and the acquisition of the Midwest Division of Hearing Health Services,
Inc., dba SONUS on October 31, 1996 (the "Acquisitions"), had occurred on August
1, 1995. The unaudited pro forma combined financial information includes all of
the operations of the 25 clinics acquired in the Acquisitions.
- 62 -
<PAGE>
The "HealthCare Combined" column set forth in the unaudited pro forma
condensed combined statement of operations for the six months ended January 31,
1997, assumes that the Acquisitions had occurred on August 1, 1996.
The unaudited pro forma condensed combined financial information set
forth below is not necessarily indicative of the Company's combined financial
position or the results of operations that actually would have occurred if the
transactions had been consummated on such dates. In addition, such information
is not intended to be a projection of results of operations that may be obtained
by the Company in the future. The unaudited pro forma combined financial
information should be read in conjunction with the consolidated financial
statements and related notes thereto included elsewhere in this Prospectus.
- 63 -
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1996
ACQUIRED PRO FORMA HEALTHCARE
HEALTHCARE CLINICS(B) ADJUSTMENTS COMBINED
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Product sales $ 2,345 $ 6,513 $ $ 8,858
Product cost of sales 1,018 2,356 3,374
------ ------ ------
1,327 4,157 5,484
Net patient service revenue 44 1,152 1,196
Expenses:
Operational expenses 1,836 5,556 7,392
Depreciation and amortization 125 179 252 (a) 556
--------- ----------- --------- ---------
Total operating expenses 1,961 5,735 252 7,948
--------- ----------- --------- ---------
Loss from operations (590) (426) (252) (1,268)
Other income 8 14 - 22
Loss before income taxes (582) (412) (252) (1,246)
Income tax expense - 25 - 25
--------- ----------- --------- ---------
Net loss $ (582) $ (437) $ (252) $ (1,271)
========= =========== ========= ========
Pro forma:
Net loss per common share $ (0.07)
========
Weighted average number of
shares outstanding 18,922
========
</TABLE>
- 64 -
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JANUARY 31, 1997
ACQUIRED PRO FORMA HEALTHCARE
HEALTHCARE CLINICS(B) ADJUSTMENTS COMBINED
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Product sales $ 3,712 $ 1,273 $ $ 4,985
Product cost of sales 1,546 517 2,063
-------- ---------- --------
2,166 756 2,922
Net patient revenue 489 292 781
Expenses:
Operational expenses 3,357 1,265 (276)(c) 4,346
Depreciation and amortization 269 53 126 (a) 448
--------- ---------- ------ --------
Total operating expenses 3,626 1,318 (150) 4,794
--------- ---------- ------ --------
Income (loss) from
operations (971) (270) 150 (1,091)
Other income (expense):
Interest income 35 - 35
Other, net (11) 8 - (3)
--------- ---------- ------ --------
Net other income (expense) 24 8 - 32
--------- ---------- ------ --------
Income (loss) before income
taxes (947) (262) 150 (1,059)
Income tax benefit (31) (31)
--------- ---------- ------ --------
Net income (loss) $ (947) $ (231) $ 150 $ (1,028)
======== ========== ===== ========
Pro forma:
Net loss per common share $ (0.05)
========
Weighted average number of
shares outstanding 20,931
========
</TABLE>
- 65 -
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL
INFORMATION
(1) BASIS OF PRESENTATION
The "HealthCare Combined" column set forth in the unaudited pro forma
condensed combined statements of operations (i) for the year ended July 31,
1996, gives effect to the Acquisitions as if such transactions had occurred on
August 1, 1995 and (ii) for the six months ended January 31, 1997, gives effect
to the Acquisitions as if such transactions had occurred on August 1, 1996.
(2) PRO FORMA ADJUSTMENTS
(a) To record amortization of goodwill for the Acquisitions in the
amount of $252,000 and $126,000 for the year ended July 31, 1996,
and the six months ended January 31, 1997, respectively, as if the
Acquisitions had occurred on August 1, 1995 and August 1, 1996,
respectively.
(b) Reflects the historical operations of the acquired clinics prior
to their acquisition by the Company.
(c) To record the elimination of non-recurring acquisition bonuses in
the amount of $276,000 paid to certain employees of acquired
clinics immediately prior to the closing date.
- 66 -
<PAGE>
ACQUISITIONS (FOR THE YEAR ENDED JULY 31,1996)
<TABLE>
<CAPTION>
HEARING CARE
ASSOCIATES SONUS TOTAL
---------- ----- -----
(in thousands)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C>
Product sales $ 3,480 $ 3,033 $ 6,513
Product cost of sales 1,393 963 2,356
--------- --------- ---------
2,087 2,070 4,157
Net patient service revenue 673 479 1,152
Expenses:
Operational expenses 3,202 2,354 5,556
Depreciation and amortization 68 111 179
---------- --------- -----------
Total operating expenses 3,270 2,465 5,735
---------- --------- -----------
Income (loss) from
operations (510) 84 (426)
Other income, net 12 2 14
---------- --------- -----------
Net income (loss) before income (498) 86 (412)
taxes
Income expense (benefit) (23) 48 25
---------- ---------- ----------
Net income (loss) $ (475) $ 38 $ (437)
========== ========= ==========
</TABLE>
ACQUISITIONS (FOR PERIODS FROM AUGUST 1, 1996 TO DATE OF ACQUISITION)
<TABLE>
<CAPTION>
HEARING CARE
ASSOCIATES SONUS
AUGUST 1, 1996 AUGUST 1, 1996
THROUGH THROUGH
SEPTEMBER 30, OCTOBER 31,
1996 1996 TOTAL
(in thousands)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C>
Product sales $ 584 $ 689 $ 1,273
Product cost of sales 248 269 517
---------- ----------- ---------
336 420 756
Net patient service revenue 205 87 292
Expenses:
Operational expenses 697 568 1,265
Depreciation and amortization 20 33 53
----------- ----------- ---------
Total operating expenses 717 601 1,318
----------- ----------- ---------
Loss from operations (176) (94) (270)
Other income, net 8 - 8
----------- ----------- ---------
Net loss before income (168) (94) (262)
taxes
Income tax benefit - (31) (31)
----------- ----------- ---------
Net loss $ (168) $ (63) $ (231)
=========== =========== =========
</TABLE>
- 67 -
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
HEALTHCARE CAPITAL CORP.
<S> <C>
Independent Auditors' Report....................................................................................F-2
Consolidated Balance Sheets as of July 31, 1996 and January 31, 1997 (unaudited)................................F-3
Consolidated Statements of Operations and Retained Earnings (Deficit) for the years
ended July 31, 1996 and 1995, and for the six month periods ended January 31, 1997
and 1996 (unaudited)..........................................................................................F-4
Consolidated Statements of Cash Flows for the years ended July 31, 1996 and 1995
and the six month periods ended January 31, 1997 and 1996 (unaudited).........................................F-5
Consolidated Statement of Shareholders' Equity for the years ended July 31, 1996
and 1995 and the six month periods ended January 31, 1997 (unaudited).........................................F-6
Notes to Consolidated Financial Statements......................................................................F-7
HEARING CARE ASSOCIATES GROUP
Independent Auditors' Report...................................................................................F-21
Balance Sheet as of July 31, 1996..............................................................................F-22
Statements of Operations for the years ended July 31, 1996 and 1995............................................F-23
Statements of Stockholders' Equity (Deficit) for the years ended July 31, 1996 and 1995........................F-24
Statements of Cash Flows for the years ended July 31, 1996 and 1995............................................F-25
Notes to Financial Statements..................................................................................F-26
THE MIDWEST DIVISION OF HEARING HEALTH SERVICES, INC., DBA SONUS
Independent Auditors' Report...................................................................................F-30
Balance Sheets as of June 30, 1996 and October 31, 1996 (unaudited)............................................F-31
Statements of Operations and Accumulated Earnings for the years ended June 30,
1996 and 1995, and the four months ended October 31, 1996 and 1995 (unaudited)...............................F-32
Statements of Cash Flows for the years ended June 30, 1996 and 1995, and the
four months ended October 31, 1996 and 1995 (unaudited)......................................................F-33
Notes to Financial Statements..................................................................................F-34
</TABLE>
F-1
<PAGE>
AUDITORS' REPORT
To the Shareholders of
HealthCare Capital Corp.
We have audited the consolidated balance sheet of HealthCare Capital Corp. as at
July 31, 1996, and the consolidated statements of operations and retained
earnings (deficit), cash flows and shareholders' equity for the years ended July
31, 1996 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance 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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at July 31, 1996 and
the results of its operations, its cash flows and its shareholders' equity for
the years ended July 31, 1996 and 1995 in accordance with generally accepted
accounting principles as adopted in the United States of America.
Vancouver, Canada /s/ Shikaze Ralston
October 8, 1996 Chartered Accountants
F-2
<PAGE>
HEALTHCARE CAPITAL CORP.
CONSOLIDATED BALANCE SHEETS
(Stated in U.S. Dollars)
<TABLE>
<CAPTION>
July 31, January 31,
1996 1997
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash $ 11,196 $3,327,146
Accounts receivable, net of allowance for doubtful accounts and contractual
write downs of $4,743 and $150,767 for each period, respectively 402,836 1,819,331
Inventory 143,597 317,031
Prepaid expenses 40,996 162,281
Income taxes recoverable 8,724 8,790
------------ ------------
607,349 5,634,579
Capital Assets (Note 5) 593,192 1,512,629
Names, Files, Reputations and Covenants Not To Compete (Note 6) 810,806 7,222,839
Trademarks 5,384 20,552
Deferred Acquisition Costs 263,443 241,586
Deferred Financing Costs 41,940 1,725
------------ -----------
$ 2,322,114 $14,633,910
============ ============
LIABILITIES
Current Liabilities
Bank loan (Note 7) $ 33,170 $ 96,551
Accounts payable and accrued liabilities 462,561 1,768,003
Current portion of long term debt (Note 8) 92,946 572,242
------------ -------------
588,677 2,436,796
Long Term Debt (Note 8) 92,474 285,054
Convertible Notes Payable (Note 9) 128,993 2,729,973
Due To Shareholder (Note 14) - 56,445
------------ -------------
810,144 5,508,268
------------ -------------
SHAREHOLDERS' EQUITY
Share Capital (Note 10) 1,925,318 10,414,009
Deficit (416,497) (1,363,868)
Cumulative Translation Adjustment (Note 11) 3,149 75,501
------------ -------------
1,511,970 9,125,642
------------ -------------
$ 2,322,114 $14,633,910
============ ============
</TABLE>
See accompanying notes to the financial statements.
F-3
<PAGE>
HEALTHCARE CAPITAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
(Stated in U.S. Dollars)
<TABLE>
<CAPTION>
Six Month Period
Year Ended July 31 Ended January 31
- ---------------- --------------------------- ---------------------------
1996 1995 1997 1996
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Product Sales $2,345,237 $1,706,987 $3,711,786 $1,017,074
Product Cost Of Sales 1,017,414 772,973 1,546,626 474,570
------------ ------------ ------------ ------------
Product Gross Profit 1,327,823 934,014 2,165,160 542,504
Service Revenue 44,216 12,898 489,586 17,329
------------ ------------ ------------ ------------
1,372,039 946,912 2,654,746 559,833
------------ ------------ ------------ ------------
Expenses
Advertising and promotion 207,109 44,021 239,041 26,633
Amortization 124,920 77,706 269,404 40,401
Bad debts 11,832 1,283 35,690 384
Bank charges and interest 19,839 17,906 22,524 11,221
Insurance 6,551 2,728 17,597 1,036
Interest on long term debt 15,177 20,635 15,293 8,339
Legal and accounting 77,911 24,514 109,153 16,984
Management and consulting fees 143,993 41,387 75,453 48,646
Office and miscellaneous 121,268 47,191 206,773 50,303
Rent 207,679 146,471 376,024 75,723
Salaries and benefits 882,705 561,888 2,053,098 356,940
Telephone 50,814 32,444 81,410 20,204
Training 15,770 3,441 11,052 1,270
Travel 75,821 16,768 112,384 23,038
------------ ------------ ------------ ------------
1,961,389 1,038,383 3,625,706 681,122
------------ ------------ ------------ ------------
Loss From Operations (589,350) (91,471) (970,960) (121,289)
Interest Income 7,684 - 34,542 -
Foreign Exchange Loss - - (10,953) -
Loss On Disposal Of Capital Assets - (3,493) - -
------------ ------------ ------------ ------------
Loss Before Income Taxes (Recovery) (581,666) (94,964) (947,371) (121,289)
Income Taxes (Recovery) - (13,967) - -
------------ ------------ ------------ ------------
Net Loss (Note 12) (581,666) (80,997) (947,371) (121,289)
Retained Earnings (Deficit), beginning of period 165,169 246,166 (416,497) 246,166
------------ ------------ ------------ ------------
Retained Earnings (Deficit), end of period $ (416,497) $ 165,169 $(1,363,868) $124,877
============ ============ ============ ============
</TABLE>
See accompanying notes to the financial statements.
F-4
<PAGE>
HEALTHCARE CAPITAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in U.S. Dollars)
<TABLE>
<CAPTION>
Six Month Period
Year Ended July 31 Ended January 31
--------------------------- ---------------------------
1996 1995 1997 1996
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash Provided By (Used For)
Operating Activities
Net loss for the period $ (581,666) $ (80,997) $ (947,371) $ (121,289)
Adjustments to reconcile net loss to cash
provided by operating activities
Amortization 124,920 77,706 269,404 40,401
Loss on disposal of capital assets - 3,493 - -
------------ ------------ ------------ ------------
(456,746) 202 (677,967) (80,888)
------------ ------------ ------------ ------------
Changes in non-cash working capital
Accounts receivable (6,890) 77,707 49,903 7,806
Inventory (16,481) 18,588 21,996 11,720
Prepaid expenses (25,178) 1,236 (10,085) (11,887)
Income taxes 14,353 (33,981) - 14,380
Accounts payable and accrued liabilities 44,987 (16,385) (98,704) (16,728)
Deferred purchase discounts (23,476) 23,148 - (5,842)
------------ ------------ ------------ ------------
(12,685) 70,313 (36,890) (551)
------------ ------------ ------------ ------------
(469,431) 70,515 (714,857) (81,439)
------------ ------------ ------------ ------------
Investing Activities
Purchase of capital assets (293,034) (21,227) (383,804) (19,909)
Purchases of covenants not to compete (5,340) - - -
Trademarks (5,374) - (15,064) -
Incurrance of deferred acquisition costs (262,943) - 20,945 (4,782)
Current liabilities assumed on reverse
takeover - 7,039 - -
Net cash paid in business acquisitions (232,952) (84,372) (1,664,067) -
------------ ------------ ------------ ------------
(799,643) (258,943) (2,041,990) (24,691)
------------ ------------ ------------ ------------
Financing Activities
Net proceeds (payments) of long term debt (101,364) (10,150) (14,199) (22,751)
Incurrance of deferred financing costs (41,861) - 40,364 -
Advances (repayment of bank loans) (74,308) 4,353 29,098 39,885
Advances from (payments to) shareholders (234,649) (139,132) 56,210 2,535
Issuance (redemption) of convertible notes (31,635) - - -
Net proceeds on issuance of shares
and warrants 1,749,935 175,217 5,994,779 93,064
------------ ------------ ------------ ------------
1,266,118 190,671 6,106,252 112,733
------------ ------------ ------------ ------------
Increase (Decrease) In Cash (2,956) 2,243 3,349,405 6,603
Effect On Cash Of Changes In Foreign
Translation Rate (1,961) (2,107) (33,455) 20,072
Cash, beginning of period 16,113 15,977 11,196 15,977
------------ ------------ ------------ ------------
Cash, end of period $ 11,196 $ 16,113 $ 3,327,146 $ 42,652
============ ============ ============ ============
</TABLE>
See accompanying notes to the financial statements.
F-5
<PAGE>
HEALTHCARE CAPITAL CORP.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Stated in U.S. Dollars)
<TABLE>
<CAPTION>
Retained Total
Common Stock Special Warrants Earnings Translation Shareholders'
Number Amount Number Amount (Deficit) Adjustment Equity
--------- ------- --------- --------- --------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 31, 1994 5,000,000 $ 166 - $ - $ 246,166 $(4,995) $ 241,337
Issue of Equity 6,450,000 175,217 - - - - 175,217
Net Loss For The Year - - - - (80,997) - (80,997)
Translation Adjustment - - - - - 2,768 2,768
--------- ------- --------- --------- --------- ------- ----------
Balance, July 31, 1995 11,450,000 175,383 - - 165,169 (2,227) 338,325
Issue of Equity 3,672,000 678,277 1,700,000 1,071,658 - - 1,749,935
Net Loss For The Year - - - - (581,666) - (581,666)
Translation Adjustment - - - - - 5,376 5,376
--------- ------- --------- --------- --------- ------- ----------
Balance, July 31, 1996 15,122,000 853,660 1,700,000 1,071,658 (416,497) 3,149 1,511,970
Issue of Equity 2,637,952 2,710,676 4,959,000 5,778,015 - - 8,488,691
Net Loss For The Period - - - - (947,371) - (947,371)
Translation Adjustment - - - - - 72,352 72,352
--------- ------- --------- --------- --------- ------- ----------
Balance, January 31, 1997 17,759,952 $3,564,336 6,659,000 $6,849,673 $(1,363,868) $ 75,501 $9,125,642
(Unaudited) ========== ========== ========= ========== =========== ======== ==========
</TABLE>
See accompanying notes to the financial statements.
F-6
<PAGE>
HEALTHCARE CAPITAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Stated In U.S. Dollars)
1. Operations
The Company is in the initial stages of embarking on a major expansion
program in the United States through mergers and acquisitions of
audiology-based hearing clinics. As such, the proportion of deferred costs
to total assets is relatively high in 1996 due to the size and volume of
acquisitions completed.
2. Basis of Consolidation
These consolidated financial statements report the financial position and
results of operations of HealthCare Capital Corp. and its 100% owned
Canadian subsidiaries, HC HealthCare Hearing Clinics Ltd., Pacific Hearing
Clinics Inc. and Oakridge Hearing Clinics Inc., and its U.S.A. subsidiary
HealthCare Hearing Clinics, Inc.
3. Business Acquisitions
Total net assets acquired in all acquisitions during the year ended July 31,
1996 and six month period ended January 31, 1997 consist of:
July 31, January 31,
1996 1997
------------ ------------
(Unaudited)
Non cash working capital $ 25,987 $ 349,458
Capital assets 156,865 662,505
------------ ------------
182,852 1,011,963
Names, patient files and reputations 258,036 5,742,545
Covenants not to compete - 589,457
------------ ------------
$ 440,888 $7,343,965
============ ============
The Company's acquisitions have been accounted for using the purchase
method.
Certain acquisitions have been structured using the Company's common stock
or debt convertible into the Company's common stock as a portion of the
consideration in the transaction. The valuation of the Company's common
stock given in consideration is based on the market price for a reasonable
period before and after the date the terms of an acquisition are agreed to,
announced and approved by The Alberta Stock Exchange.
a) Langley Hearing Clinic
On January 2, 1996, HealthCare Hearing Clinics Ltd. acquired certain
assets of Langley Hearing Clinic at a cost of $158,762 plus acquisition
costs of $6,842. In accordance with the terms of the agreement,
consideration consisted of cash in the amount of $106,676 upon closing
and a $52,086 note payable bearing interest at 11% per annum.
Net assets acquired consist of:
Non cash working capital $ 40,094
Capital assets 69,082
------------
109,176
Names, patient files and reputations 56,428
------------
$ 165,604
============
b) Pacific Hearing Clinics Inc. and Oakridge Hearing Clinics Inc.
On May 1, 1996, the Company acquired 100% of the issued and outstanding
shares of Pacific Hearing Clinics Inc. and Oakridge Hearing Clinics Inc.,
British Columbia corporations operating hearing clinics in Vancouver,
British Columbia, at a cost of $165,531 plus acquisition costs of $9,200.
In accordance with the terms of the agreement, consideration consisted of
cash in the amount of $36,785 and a $129,630 convertible, non-interest
bearing promissory note for the balance with a term of sixteen months.
The promissory note is convertible into 129,630 common shares of the
Company at $1.00 per share during the term of the note.
F-7
<PAGE>
HEALTHCARE CAPITAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Stated In U.S. Dollars)
3. Business Acquisitions (...continued)
Net assets acquired consist of:
Non cash working capital $ (18,067)
Capital assets 42,287
------------
24,220
Names, patient files and reputations 150,511
------------
$ 174,731
============
c) Allied Hearing Aid Service
On July 4, 1996, HealthCare Hearing Clinics, Inc. acquired certain assets
of Allied Hearing Aid Service, at a cost of $78,000 plus acquisition
costs of $5,449. In accordance with the terms of the agreement,
consideration consisted of $53,000 cash paid on closing and $25,000 paid
on January 5, 1997. The seller entered into a five year covenant not to
compete with HealthCare Hearing Clinics, Inc. for consideration of
$15,000 cash paid on closing.
Net assets acquired consist of:
Non cash working capital $ 3,000
Capital assets 45,000
------------
48,000
Names, patient files and reputations 35,449
Covenant not to compete 15,000
------------
$ 98,449
============
d) Santa Maria Hearing Associates (Unaudited)
On August 1, 1996, HealthCare Hearing Clinics, Inc. acquired for cash
certain assets of Santa Maria Hearing Associates at a cost of $75,000
plus acquisition costs of $11,576. The seller entered into a three year
covenant not to compete with HealthCare Hearing Clinics, Inc. for
consideration of $25,000 which was paid on January 5, 1997.
Net assets acquired consist of:
Non cash working capital $ 5,000
Capital assets 3,000
------------
8,000
Names, patient files and reputations 52,412
Covenant not to compete 25,000
------------
$ 85,412
============
F-8
<PAGE>
HEALTHCARE CAPITAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Stated In U.S. Dollars)
e) Hearing Care Associates Group (Unaudited)
On October 1, 1996, HealthCare Hearing Clinics, Inc. completed the merger
of Hearing Care Associates Group ("HCA") through a merger of three HCA
corporations at a cost of $2,704,260 plus acquisition costs of $129,756.
As consideration for this merger, the Company paid cash of $314,724 and
issued 2,389,536 common shares of the Company at a price of $1.00 per
share. 597,384 of the shares have been retained by the Company and will
be released at the rate of one share for each dollar that the net assets
of HCA exceed certain target amounts. Any shares not released under this
formula may be purchased by the sellers for $1.00 per share or will be
cancelled. The sellers entered into employment agreements with HealthCare
Hearing Clinics, Inc., one for five years and two for three years. In
consideration for $314,724 paid in cash at closing plus $36,137 paid on
November 1, 1996, the sellers also entered into covenants not to compete
for a period of three years after their employment terminates for any
reason.
Net assets acquired consist of:
Non cash working capital $ 369,600
Capital assets 148,928
------------
518,528
Names, patient files and reputations 2,247,827
Less: Contingent consideration (597,384)
Covenants not to compete 350,861
------------
$ 2,587,493
============
f) Hearing Health Services, Inc. doing business as "SONUS" (Unaudited)
On October 31, 1996, HealthCare Hearing Clinics, Inc. purchased
substantially all the assets of Hearing Health Services, Inc. doing
business as "SONUS" at a cost of $2,960,000 plus acquisition costs of
$10,716. SONUS operates 14 audiology based clinics in the Chicago,
Illinois and Lansing, Michigan greater metropolitan areas. Consideration
for this acquisition was in the form of a secured $2,600,000 convertible
note payable due October 31, 1997 and a $360,000 note payable. The former
note is convertible into 2,000,000 common shares of the Company at the
rate of $1.30 per share.
F-9
<PAGE>
HEALTHCARE CAPITAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Stated In U.S. Dollars)
Net assets acquired consist of:
Non cash working capital $ 99,349
Capital assets 389,090
------------
488,439
Names, patient files and reputations 2,482,277
------------
$ 2,970,716
============
g) Hearing Dynamics, Inc ("HD") (Unaudited)
On December 6, 1996, HealthCare Hearing Clinics, Inc. merged with HD, a
California corporation that operates 3 hearing clinics in the San Diego,
California area. The merger of HD into HealthCare Hearing Clinics, Inc.
was consummated as a tax-free merger whereby common shares of the Company
were exchanged for all the issued and outstanding shares of HD at a cost
of $804,360 plus acquisition costs of $23,527. Consideration for this
acquisition was $102,600 paid in cash on closing and 408,000 common
shares of the Company issued at a price of $1.72 per share. The purchase
price is subject to adjustment if the actual amount of net current assets
acquired as of the closing date is determined to vary from the agreed
amount. The seller entered into an employment agreement for three years
with HealthCare Hearing Clinics, Inc. In consideration for $25,000 paid
in cash at closing, the seller also entered into a covenant not to
compete for a period of one year after employment terminates for any
reason.
Net assets acquired consist of:
Non cash working capital $ (48,492)
Capital assets 46,356
------------
(2,136)
Names, patient files and reputations 830,023
Covenant not to compete 25,000
------------
$ 852,887
============
F-10
<PAGE>
HEALTHCARE CAPITAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Stated In U.S. Dollars)
h) FHC, Inc. doing business as "Family Hearing Centers" (Unaudited)
On December 17, 1996, HealthCare Hearing Clinics, Inc. acquired all the
outstanding shares of FHC, Inc., a New Mexico corporation, at a cost of
$400,000 plus acquisition costs of $19,108. FHC, Inc. operates one clinic
in Albuquerque, New Mexico. Consideration for this acquisition was
$250,000 cash paid on closing and three year promissory notes for a total
of $150,000 bearing interest at 6 1/2% per annum. The purchase price is
subject to adjustment if the actual amount of net current assets acquired
as of the closing date is determined to vary from the agreed amount. The
sellers entered into employment agreements with HealthCare Hearing
Clinics, Inc., one for three years and one for two years. In
consideration for a $112,233 note payable, the sellers also entered into
covenants not to compete for a period of three years from the date of
closing.
Net assets acquired consist of:
Non cash working capital $ (62,957)
Capital assets 68,144
------------
5,187
Names, patient files and reputations 376,510
Covenants not to compete 112,233
------------
$ 493,930
============
i) Hearing Care Associates - Los Angeles, Inc. (Unaudited)
On January 9, 1997, HealthCare Hearing Clinics, Inc. purchased all the
outstanding shares of Hearing Care Associates - Los Angeles, Inc. at a
cost of $301,000 paid in cash at closing. In consideration for $112,500
paid in cash, the sellers entered into covenants not to compete for a
period of three years after employment terminates for any reason.
Net assets acquired consist of:
Non cash working capital $ (11,754)
Capital assets 5,526
------------
(6,228)
Names, patient files and reputations 307,228
Covenants not to compete 112,500
------------
$ 413,500
============
F-11
<PAGE>
HEALTHCARE CAPITAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Stated In U.S. Dollars)
4. Significant Accounting Policies
a) Inventory
Inventory is recorded at the lower of cost or net realizable value.
b) Capital Assets
Capital assets are recorded at cost and are amortized in the following
manner:
Audiology equipment 20% Declining balance
Office equipment 20% Declining balance
Computer equipment 30% Declining balance
Leasehold improvements Straight line over five years
Computer software 30% Declining balance
In the year of acquisition, amortization is calculated at one-half of the
above-noted rates.
c) Names, Patient Files, Reputations and Covenants Not To Compete
The amounts paid for the names, patient files and reputations acquired
are equivalent to the purchase price less the fair value of identifiable
net assets acquired, as determined by management. These costs are
amortized over 20 years using the straight line method.
Covenants not to compete represent amounts prepaid under non-competition
agreements with the sellers. Where the sellers enter into employment
contracts with the Company as key management personnel, the covenants not
to compete are effective when employment of the key management personnel
ceases. At the time employment ceases these costs are amortized using the
straight line method over the non-compete period. In all other
circumstances the costs are amortized over the term of the non-compete
agreement.
d) Trademarks
Trademarks are amortized over 40 years using the straight line method.
e) Deferred Acquisition Costs
Costs related to the acquisition of clinics are deferred and, upon
successful completion of acquisitions, are allocated to the assets
acquired and are subject to the accounting policies outlined above.
f) Deferred Financing Costs
Costs related to issuing shares are deferred. Upon the issuance of the
related shares, the deferred costs are applied to reduce the net proceeds
of the issue.
g) Income Taxes
Income taxes are accounted for by the asset/liability approach in
accordance with Statement of Financial Accounting Standards No. 109
(Accounting for Income Taxes). Deferred tax assets and liabilities are
established for the temporary differences between the financial reporting
amounts and the tax amounts of the Company's assets and liabilities and
changes to tax rates when those tax rates are enacted. The provision for
income taxes represents the total of income taxes paid or payable for the
current year, plus the change in deferred taxes during the year.
F-12
<PAGE>
HEALTHCARE CAPITAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Stated In U.S. Dollars)
h) Earnings Per Share
Earnings per share is based on the weighted average number of common
shares outstanding in each period. Common share equivalents represented
by convertible debt and contingent shares held in escrow have not been
included in the calculation of earnings per share as the effect would be
anti-dilutive.
i) Fair Value of Financial Instruments
The carrying value of financial instruments such as cash, accounts
receivable, notes payable and accounts payable, approximate their fair
value.
j) Interim Financial Statements
In the opinion of management, the interim financial statements include
all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods
presented.
5. Capital Assets
<TABLE>
<CAPTION>
Net Net
Accumulated January 31, July 31,
Cost Amortization 1997 1996
------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Audiology equipment $ 766,653 $ 208,102 $ 558,551 $ 339,188
Office equipment 405,020 80,319 324,701 91,258
Computer equipment 449,346 80,626 368,720 34,247
Leasehold improvements 312,547 70,634 241,913 109,896
Computer software 18,744 - 18,744 18,603
------------ ------------ ------------ ------------
$ 1,952,310 $ 439,681 $ 1,512,629 $ 593,192
============ ============ ============ ============
</TABLE>
6. Names, Patient Files, Reputations and Covenants Not To Compete
<TABLE>
<CAPTION>
July 31, January 31,
1996 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Names, patient files and reputations, at cost $ 846,012 $6,753,612
Accumulated amortization 50,206 174,865
------------ ------------
795,806 6,593,862
Covenants not to compete 15,000 644,092
------------ ------------
Net book value $ 810,806 $8,703,375
============ ============
</TABLE>
7. Bank Loan
HC HealthCare Hearing Clinics Ltd. maintains a revolving bank demand loan
bearing interest at the bank's prime rate plus 1% per annum, secured by a
general security agreement covering all assets of the Company, the
postponement of claim by the shareholders and the guarantee of a
shareholder. The loan provides for a maximum credit limit of $185,675.
F-13
<PAGE>
HEALTHCARE CAPITAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Stated In U.S. Dollars)
8. Long Term Debt
<TABLE>
<CAPTION>
July 31, January 31,
1996 1997
------------ ------------
(Unaudited)
<S> <C> <C>
A secured bank loan payable in installments of $743 per month plus
interest calculated at the bank prime rate plus 1 1/2% per annum. $ 16,216 $ 11,873
A non-interest bearing equipment loan from a supplier. The loan
requires monthly installments of $1,277 which may be reduced by up
to 50% through the application of purchase discounts. 24,847 15,948
An equipment loan from a supplier. The loan requires fifty-two equal
installments every four weeks of $2,173 including interest calculated
at the rate of 10% per annum. 92,137 86,927
Equipment loans from a supplier. The loans require total monthly
payments of $2,000 including interest calculated at the rate of
9% per annum. - 57,767
A note payable in quarterly installments of $14,060 including
interest calculated at 11% per annum. 26,790 -
An unsecured note payable in annual installments of $50,000 plus
interest calculated at 6% per annum maturing on December 17, 2000. - 150,000
An unsecured, non-interest bearing note payable in quarterly installments
of $9,352 maturing on December 31, 2000. - 112,226
Equipment loans payable. - 21,782
A note payable, requiring annual installments of $1,212 commencing
on July 1, 1997 plus interest calculated at 6% per annum maturing
on July 1, 1999. - 10,775
An unsecured note payable in monthly installments of $1,357 including
interest calculated at the rate of 8% per annum maturing on
February 1, 1999. - 29,998
------------ ------------
$ 159,990 $ 497,296
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
July 31, January 31,
1996 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Balance Forward $ 159,990 $ 497,296
A non-interest bearing note payable due January 5, 1997. 25,430 -
A note payable, requiring annual installments of $120,000 commencing
on July 1, 1997 plus interest calculated at 6% per annum maturing on
July 1, 1999. - 360,000
------------ ------------
185,420 857,296
Current portion 92,946 572,242
------------ ------------
$ 92,474 $ 285,054
============ ============
</TABLE>
F-14
<PAGE>
HEALTHCARE CAPITAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Stated In U.S. Dollars)
9. Convertible Notes Payable
<TABLE>
<CAPTION>
July 31, January 31,
1996 1997
------------ ------------
(Unaudited)
<S> <C> <C>
A non-interest bearing note due September 1, 1997. The note is
convertible into common shares of the Company at a rate of $1.00
per share during the term of the note. $128,993 $129,973
A non-interest bearing note due October 31, 1997. The note is
convertible into common shares of the Company at a rate of $1.30
per share. - 2,600,000
------------ ------------
$ 128,993 $2,792,973
============ ============
</TABLE>
10. Share Capital
a) Authorized
Unlimited common shares without par value
b) Issued
<TABLE>
<CAPTION>
Number Issue Net
Of Shares Price Proceeds
------------ ----------------- ------------
<S> <C> <C> <C>
Balance, July 31, 1994 $ 5,000,000 $ 166
Issued on reverse takeover 6,250,000 $0.03 160,709
Exercise of options 200,000 $0.07 14,508
------------ ------------
Balance, July 31, 1995 11,450,000 175,383
Private placement for cash 3,000,000 $0.14 416,014
Exercise of options 600,000 $0.07 to $0.28 101,889
Conversion of notes payable 872,000 $0.18 160,374
February Special Warrants (Note 10c) 1,905,750 1,071,658
------------ ------------
Balance, July 31, 1996 17,827,750 1,925,318
R&D Tax Credits (Note 10d) 112,800 $0.19 21,763
Exercise of options 325,000 $0.28 to $0.74 195,001
Acquisition of HCA (Note 3g) 2,389,536 $1.00 2,389,536
Less: Contingent consideration withheld (597,384) (597,384)
Acquisition of HD (Note 3h) 408,000 $1.72 701,760
September Special Warrants (Note 10e) 5,467,410 5,778,015
------------ ------------
Balance, January 31, 1997 (Unaudited) 25,933,112 $10,414,009
============ ============
</TABLE>
F-15
<PAGE>
HEALTHCARE CAPITAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Stated In U.S. Dollars)
c) February Special Warrants
On February 28, 1996 the Company issued 1,700,000 Special Warrants at a
price of $0.74 for gross proceeds of $1,250,690. The Special Warrants
provide for the following:
Conversion of each February Special Warrant to one and one-tenth Units.
Each Unit consists of one common share and one share purchase warrant.
The February Special Warrants are convertible at no additional cost to
the holder at the earlier of (i) five business days after the issuance of
receipt of a final prospectus from the Securities Commissions in both
Alberta and British Columbia or (ii ) February 28, 1997.
Each share purchase warrant represents the right to purchase one common
share at a price of $0.93 until February 28, 1997 and thereafter at a
price of $1.10 until expiry on February 28, 1998.
Finders fees totalling $71,371 were paid in connection with the issue, of
which $47,821 was paid in cash and $23,910 by issue of Special Warrants
at a deemed price of $0.74.
d) Research and Development Tax Credits
112,800 shares were issued at a price of $0.19, in connection with the
purchase of T.H. Moore Audiology Consultants Ltd. in 1995. These shares
were issued upon receipt of the Scientific Research and Development Tax
Credits applied for by T.H. Moore Audiology Consultants Ltd. subsequent
to the acquisition.
e) September Special Warrants
A private placement in Canada of 810,000 special warrants was consummated
by the Company in September 1996 and a private placement in the United
States of 4,149,000 special warrants was consummated by the Company in
December 1996. Such special warrants are collectively referred to as the
"September Special Warrants." The aggregate offering price for the
September Special Warrants was $1,012,500 for those sold in Canada and
$5,186,250 for those sold in the United States. Each of the September
Special Warrants placed in Canada entitles the holder to receive one and
one-tenth shares of common stock and one and one-tenth share purchase
warrants, with each such warrant exercisable for one share of common
stock at a price of $2.00 per share. Each of the September Special
Warrants placed in the United States entitles the holder thereof to
receive one share of common stock and one share purchase warrant to
purchase an additional share of common stock for $2.00 per share.
In connection with the offering of the September Special Warrants in
Canada, the Company's placement agent (the "Canadian Agent") received a
selling commission consisting of $48,625 in cash and 34,000 September
Special Warrants exercisable for one share of common stock and one share
purchase warrant to purchase an additional share of common stock for
$2.00 per share and was granted an option to acquire 81,000 share
purchase warrants, each exercisable for one share of common stock at a
price of $1.25 per share. The warrants are subject to certain rights of
the Company to force exercise or cancellation. The Canadian Agent also
received a $61,987 syndication fee and a $37,097 corporate finance fee.
In connection with the placement of the September Special Warrants in the
United States, the Company's two placement agents (the "U.S. Agents")
each received a selling commission equal to 9 percent of the gross
proceeds in the form of September Special Warrants, or a total of 373,410
September Special Warrants. One of the U.S. Agents also received 20,000
September Special Warrants in payment of its corporate finance fee. Such
September Special Warrants are exercisable for one share of common stock
and a share purchase warrant to purchase one additional share of common
stock for $2.00 per share. In addition, the U.S. Agents received an
option to acquire 214,900 and 200,000 share purchase warrants,
respectively, with each warrant exercisable for one share of common stock
at a price of $1.25 per share. The warrants are subject to certain rights
of the Company to force exercise or cancellation.
F-16
<PAGE>
HEALTHCARE CAPITAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Stated In U.S. Dollars)
f) Options
Stock options exercisable at prices representing fair market value at the
time the options were granted are as follows:
<TABLE>
<CAPTION>
Number Exercise Expiry
Of Shares Price Date
------------ ----------------- --------------------
<S> <C> <C> <C>
Balance, July 31, 1995 450,000 $0.07 to $0.28 November 21, 1998
to March 29, 2000
Granted in the period 1,050,000 $0.28 December 19, 2000
350,000 $0.74 February 14, 2001
400,000 $2.02 April 1, 2001
50,000 $2.10 April 29, 2001
Exercised in the period (600,000) $0.07 to $0.28
------------
Balance, July 31, 1996 1,700,000
Granted in the period 325,000 $1.54 August 22, 2001
600,000 $1.30 October 7, 2001
Exercised in the period (325,000) $0.28 and $0.74
------------
Balance, January 31, 1997 (Unaudited) 2,300,000
============
</TABLE>
g) Escrowed Shares
A total of 5,250,000 outstanding shares were held in escrow at January
31, 1997. All such shares are registered in the shareholders' respective
names with all voting rights attached and exercisable by the respective
registered shareholder. The escrowed shares are restricted as to
transferability. The release of 1,000,000 shares is subject to lapse of
time provisions and will be released on October 21, 1997. The release of
the remaining 4,250,000 shares is subject to the following provisions:
i) one share will be released for each $0.08 of cash flow generated
by the Company;
ii) release shall only be made pursuant to a written application to
The Alberta Stock Exchange; and
iii) the maximum number of shares to be released in any year to a
shareholder shall be one-third of the original number of shares
held in escrow on behalf of such shareholder.
11. Foreign Currency Translation
These financial statements have been translated to U.S. dollars from the
Company's functional currency, the Canadian dollar, using the current rate
method.
F-17
<PAGE>
HEALTHCARE CAPITAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Stated In U.S. Dollars)
12. Earnings (Loss) Per Share
<TABLE>
<CAPTION>
Six Month Period
Year Ended July 31 Ended January 31
--------------------------- ---------------------------
1996 1995 1997 1996
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Earnings (loss) per share $ (0.05) $ (0.01) $ (0.06) $ (0.01)
============ ============ ============ ============
Weighted average number of
shares outstanding during the period 10,597,747 6,679,452 17,206,235 8,602,062
============ ============ ============ ============
</TABLE>
Per share amounts are based on the weighted average number of common and
dilutive common equivalent shares assumed to be outstanding during the
period of computation. Common shares issued upon exercise of the special
warrants are included in the weighted average number of shares outstanding
during the period of computation. Contingent shares have been excluded from
the weighted average number of shares outstanding during the period of
computation as their effect would be anti-dilutive.
13. Statement Of Cash Flows
Supplemental non-cash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Six Month Period
Year Ended July 31 Ended January 31
--------------------------- ---------------------------
1996 1995 1997 1996
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Assets acquired in business acquisitions for
non-cash consideration $ (205,832) $ (160,383) $(5,777,282) $ -
Issue of long term debt in business
acquisitions 205,832 - 323,370 -
Issue of convertible notes in business
acquisitions - 160,383 2,960,000 -
Issue of shares in business acquisitions - - 2,493,912 -
------------ ------------ ------------ ------------
$ - $ - $ - $ -
============ ============ ============ ============
</TABLE>
14. Related Party Transactions
A total of $56,445 was due to an officer and director of the Company for
advances made on behalf of the Company at January 31, 1997.
A total of $7,725 of management fees were paid or payable to a company
controlled by a director and shareholder of the Company during the year
ended July 31, 1996.
F-18
<PAGE>
HEALTHCARE CAPITAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Stated In U.S. Dollars)
15. Income Taxes
HealthCare Capital Corp. and its Canadian subsidiaries file separate
corporate income tax returns on a stand alone basis in Canada. HealthCare
Hearing Clinics, Inc. files separate corporate income tax returns in the
United States.
The components of significant temporary differences and net operating loss
carry forwards which give rise to deferred income taxes are as follows:
<TABLE>
<CAPTION>
July 31, January 31,
1996 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Deferred tax assets
Net operating losses carried forward $ 344,000 $ 695,000
Names, patient files, reputations and covenants not to compete 24,000 54,000
------------ ------------
368,000 749,000
------------ ------------
Deferred tax liabilities
Capital assets, due to differences in amortization rates (21,000) (21,000)
------------ ------------
347,000 726,000
Valuation allowance (347,000) (726,000)
------------ ------------
$ - $ -
============ ============
</TABLE>
There was no provision for income taxes for the year ended July 31, 1996 and
for the periods ended January 31, 1997 and 1996 as the Company incurred net
operating losses. The provision for income taxes (recovery) of $13,967 for
the year ended July 31, 1995 results from the carry back of net operating
losses to prior years.
A reconciliation of the Company's expected tax expense using the statutory
income tax rate to the actual effective rate is as follows:
<TABLE>
<CAPTION>
Six Month Period
Year Ended July 31 Ended January 31
--------------------------- ---------------------------
1996 1995 1997 1996
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Computed Canadian statutory tax rate (45)% (45)% (45)% (45)%
Adjustment for tax rate on U.S. losses - - 6 -
Capitalized costs deducted for tax purposes (6) - (5) -
Expenses not deductible for tax purposes 10 - 3 3
Change in valuation allowance 41 30 41 42
------------ ------------ ------------ ------------
Tax rate per financial statements -% (15)% -% -%
============ ============ ============ ============
</TABLE>
F-19
<PAGE>
HEALTHCARE CAPITAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Stated In U.S. Dollars)
At January 31, 1997, the Company had approximate net operating loss
carry-forwards for tax purposes which, if not utilized, expire in the years
ended as follows:
Canada United States Total
------------ ------------ ------------
2001 $ 18,000 $ - $ 18,000
2002 35,000 - 35,000
2003 711,000 - 711,000
2004 143,000 - 143,000
2012 - 756,000 756,000
------------ ------------ ------------
$ 907,000 $ 756,000 $1,663,000
============ ============ ============
16. Commitments
The Company has entered into long term leases for premises which require
approximate minimum payments during the next five years as follows:
July 31, January 31,
1996 1997
------------ ------------
(Unaudited)
1997 $ 170,360 $ 670,093
1998 157,605 616,285
1999 136,973 521,578
2000 59,426 395,189
2001 31,722 334,526
17. Subsequent Events
Business Acquisitions
a) Hearing Care Associates - Arcadia, Inc.
On February 28, 1997, HealthCare Hearing Clinics, Inc. acquired all the
outstanding shares of Hearing Care Associates - Arcadia, Inc. at a cost
of $410,338 paid in cash at closing. The selling shareholders signed a
three-year covenant not to compete, on ceasing employment with HealthCare
Hearing Clinics, Inc., in exchange for $130,170 paid in cash at closing.
b) Hearing Care Associates - Sherman Oaks, Inc.
On March 6, 1997, HealthCare Hearing Clinics, Inc. acquired all the
outstanding shares of Hearing Care Associates - Sherman Oaks, Inc. at a
cost of $26,568 paid in cash at closing. The selling shareholders signed
a three-year covenant not to compete, on ceasing employment with
HealthCare Hearing Clinics, Inc., in exchange for $33,783 paid in cash at
closing.
c) Auditory Vestibular Center, Inc.
On March 14, 1997, HealthCare Hearing Clinics, Inc. acquired all the
outstanding shares of Auditory Vestibular Center, Inc. at a cost of
$56,204 paid in cash at closing. The selling shareholders signed a
three-year covenant not to compete, on ceasing employment with HealthCare
Hearing Clinics, Inc., in exchange for $28,580 paid at in cash closing.
d) Hearing Care Associates - Lancaster, Inc.
On April 8, 1997, HealthCare Hearing Clinics, Inc. acquired all the
outstanding shares of Hearing Care Associates - Lancaster, Inc. at a cost
of $136,751 paid in cash at closing. The selling shareholders signed a
three-year covenant not to compete, on ceasing employment with HealthCare
Hearing Clinics, Inc., in exchange for $61,877 paid in cash at closing.
18. Comparative Figures
Certain of the prior years' comparative figures have been reclassified to
conform with the presentation adopted for the current period.
F-20
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
HealthCare Capital Corp.:
We have audited the accompanying balance sheet of Hearing Care Associates Group
as of July 31, 1996, and the related statements of operations, stockholders'
equity (deficit), and cash flows for each of the years in the two years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our 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 Hearing Care Associates Group
as of July 31, 1996, and the results of its operations and its cash flows for
each of the years in the two year period then ended in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Portland, Oregon
February 14, 1997
F-21
<PAGE>
HEARING CARE ASSOCIATES GROUP
Balance Sheet
July 31, 1996
<TABLE>
<CAPTION>
ASSETS
Current assets:
<S> <C>
Cash and cash equivalents $ 243,167
Trade accounts receivable, net of allowance for doubtful
accounts of $22,130 711,028
Related party receivable 97,372
Prepaid expenses and other current assets 22,013
----------
Total current assets 1,073,580
Equipment and fixtures, net 209,717
Intangible assets, at cost, less accumulated amortization 163,387
Deferred taxes 20,600
Other assets, net 9,678
----------
Total assets $ 1,476,962
==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 575,362
Notes payable 106,438
Related party payable 437,512
Accrued payroll and related costs 141,175
Other accrued expenses and current liabilities 261,719
---------
Total current liabilities 1,522,206
Stockholders' equity (deficit):
Common stock; authorized 24,000 shares;
issued and outstanding 2,600 shares 70,000
Accumulated deficit (115,244)
----------
Total stockholders' deficit (45,244)
----------
$ 1,476,962
==========
See accompanying notes to financial statements.
</TABLE>
F-22
<PAGE>
HEARING CARE ASSOCIATES GROUP
Statements of Operations
Years ended July 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Product sales $ 3,480,056 2,740,612
Product cost of sales 1,393,554 659,941
---------- ----------
2,086,502 2,080,671
Net patient service revenue 673,115 513,129
Expenses:
Selling expenses 2,949,340 2,147,185
General and administrative expenses 320,763 151,433
---------- ----------
3,270,103 2,298,618
---------- ----------
(Loss) income from operations (510,486) 295,182
Other income (expense) net 11,727 (9,817)
---------- ----------
(Loss) income before income taxes (498,759) 285,365
---------- ----------
Income tax (benefit) expense (22,900) 108,883
---------- ----------
Net (loss) income $ (475,859) 176,482
========== ==========
See accompanying notes to financial statements.
</TABLE>
F-23
<PAGE>
HEARING CARE ASSOCIATES GROUP
Statements of Stockholders' Equity (Deficit)
Years ended July 31, 1996 and 1995
<TABLE>
<CAPTION>
Total
stockholders'
Common Stock Accumulated equity
Shares Par Value Deficit (Deficit)
------ --------- ------- ---------
<S> <C> <C> <C> <C>
Balances at July 31, 1994 2,600 $ 70,000 184,133 254,133
Net income - - 176,482 176,482
------- ------- -------- --------
Balances at July 31, 1995 2,600 70,000 360,615 430,615
Net loss - - (475,859) (475,859)
------- ------- ------- -------
Balances at July 31, 1996 2,600 $ 70,000 (115,244) (45,244)
======= ======= ======= ========
See accompanying notes to financial statements.
</TABLE>
F-24
<PAGE>
HEARING CARE ASSOCIATES GROUP
Statements of Cash Flows
Years ended July 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net (loss) income $ (475,859) 176,482
Adjustments to reconcile net (loss) income to
net cash provided by (used in) operations:
Depreciation and amortization 68,091 61,422
Deferred income taxes 54,000 (34,178)
Changes in current assets and liabilities:
Increase in accounts receivable (147,794) (358,299)
Decrease (increase) in notes receivable - related party 57,067 (20,131)
(Increase) decrease in prepaid
expenses and other current assets (37,548) 13,568
Increase in accounts payable 173,483 56,197
Increase in accrued expenses and
other current liabilities 223,671 71,144
-------- --------
Net cash used in operating activities (84,889) (33,795)
------- --------
Cash flows from investing activities:
Purchases of equipment and fixtures (66,597) (17,313)
Acquisition of intangible assets (17,493) (3,245)
-------- --------
Net cash used in investing activities (84,090) (20,558)
-------- --------
Cash flows from financing activities:
Net proceeds from related parties 248,578 255,095
Repayments on notes payable (85,176) (71,800)
-------- --------
Net cash provided by financing activities 163,402 183,295
-------- --------
Net increase (decrease) in cash and
cash equivalents (5,577) 128,942
Cash and cash equivalents at beginning of year 248,744 119,802
-------- --------
Cash and cash equivalents at end of year $ 243,167 248,744
======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 21,104 13,349
======== ========
Income taxes paid $ 0 143,061
======== ========
See accompanying notes to financial statements.
</TABLE>
F-25
<PAGE>
HEARING CARE ASSOCIATES GROUP
Notes to Financial Statements
July 31, 1996
(1) ORGANIZATION AND OPERATIONS
Hearing Care Associates Group (the "Company") consists of three California
corporations: Hearing Care Associates - Northridge, Inc., Hearing Care
Associates - Glendale, Inc., and Hearing Care Associates - Glendora, Inc.
The Company provides hearing rehabilitation services through a network of
eleven clinics located in the Los Angeles, California, metropolitan area.
The accompanying financial statements reflect the combined operations of
these three corporations.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and short-term investments with original maturities of 90
days or less.
(b) NET REVENUES
Revenues from the sale of hearing aid products are recognized at the time
of delivery. Revenues from the provision of hearing care diagnostic
services are recognized at the time that such services are performed.
(c) EQUIPMENT AND FIXTURES
Equipment and fixtures are stated at cost less accumulated depreciation
and amortization. Additions and betterments are capitalized, and
maintenance and repairs are charged to current operations as incurred. The
cost of assets retired or otherwise disposed of and the related
accumulated depreciation and amortization are removed from the accounts,
and the gain or loss on such dispositions is reflected in current
operations. Amortization of leasehold improvements is provided on an
accelerated basis over the term of the lease or estimated useful lives of
the assets, whichever is less. Depreciation is provided on an accelerated
basis. Estimated useful lives of the assets are:
Professional equipment 7 - 10 years
Furniture and fixtures 7 - 10 years
Office equipment 5 - 7 years
Leasehold improvements 7 years
(d) INCOME TAXES
The Company accounts for income taxes under the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(Continued)
F-26
<PAGE>
HEARING CARE ASSOCIATES GROUP
Notes to Financial Statements
(e) INTANGIBLE ASSETS
Intangible assets consist of non-compete agreements, purchased patient
listings and goodwill (the cost in excess of net assets acquired in a
purchase tranasaction). Goodwill and patient listings are being amortized
on a straight-line basis over 15 years. Non-compete agreements are
amortized on a straight-line basis over the life of the contract.
(f) CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of cash and trade
receivables. The Company places its cash with high credit quality
institutions. At times such amounts may be in excess of the FDIC insurance
limits. The Company's trade accounts receivable are derived from numerous
private payors, insurance carriers, health maintenance organizations and
government agencies. Concentration of credit risk relating to trade
accounts receivable is limited due to the diversity and number of patients
and payors.
(g) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments such as cash and cash
equivalents, trade receivables, notes receivable, trade payables and notes
payable, approximate their fair value.
(h) USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results
could differ from those estimates.
(3) EQUIPMENT AND FIXTURES
Equipment and fixtures consist of the following at July 31, 1996:
Professional equipment $ 254,431
Office equipment 193,736
Furniture and fixtures 143,921
Leasehold improvements 76,627
----------
668,715
Less accumulated depreciation 458,998
----------
$ 209,717
==========
Depreciation expense for fiscal 1996 and 1995 was $57,172 and $49,236,
respectively.
(Continued)
F-27
<PAGE>
HEARING CARE ASSOCIATES GROUP
Notes to Financial Statements
(4) NOTES PAYABLE
Equipment loans payable to supplier.
The loans are due April 15, 1998, and
require total monthly installments of
$2,000, including interest calculated
at the rate of 9 percent per annum. $ 106,438
==========
(5) INCOME TAXES
The components of the 1996 and 1995 provision (benefit) for income taxes are
as follows:
Year ended
July 31
-----------------------
1996 1995
-------- --------
Current:
Federal $(76,900) $120,449
State 0 22,612
-------- --------
(76,900) 143,061
-------- --------
Deferred:
Federal 45,465 (28,776)
State 8,535 (5,402)
-------- --------
54,000 (34,178)
-------- --------
Total $(22,900) $108,883
======== ========
At July 31, 1995, the difference between the total income tax expense and
the income tax expense computed using the statutory federal income tax rate
was due primarily to state tax expense, net of federal tax benefit. At July
31, 1996, the difference between the total income tax benefit and the income
tax benefit computed using the statutory federal income tax rate was due
primarily to state tax benefit, net of federal effect, as well as an
increase in the valuation allowance.
The net deferred tax asset of $20,600 at July 31, 1996, consists primarily
of net operating loss carryovers and differences resulting from using the
cash method of accounting for income tax purposes. No valuation allowance
was deemed necessary at July 31, 1995. An increase in the valuation
allowance during the year resulted in a valuation allowance at July 31, 1996
of approximately $156,000.
At July 31, 1996, the Company has a net operating loss carryforward for
federal income tax purposes of approximately $274,000.
(Continued)
F-28
<PAGE>
HEARING CARE ASSOCIATES GROUP
Notes to Financial Statements
(6) OPERATING LEASES
The Company leases offices and equipment under noncancelable operating
leases which require future minimum annual rentals as follows:
Year ending July 31:
1997 $ 241,139
1998 207,000
1999 208,908
2000 212,731
2001 216,665
Thereafter 376,956
----------
$1,463,399
==========
Certain of the leases contain renewal options and escalation clauses which
require payments of additional rent to the extent of increases in related
operating costs. Rent expense for fiscal 1996 and 1995 was $208,868 and
$236,293, respectively.
(7) RELATED PARTY TRANSACTIONS
The Company receives advances to fund operations from stockholders who are
also employees and officers of the Company. The balance due to these
stockholders is $437,512 at July 31, 1996. Employees who are stockholders
have also received periodic advances from the Company. The total amount due
to the Company from these employees is $97,372 at July 31, 1996, all of
which is due within the next fiscal year.
(8) SUBSEQUENT EVENT
As of October 1, 1996, the Company was acquired by HealthCare Hearing
Clinics, Inc., a Washington corporation and a wholly-owned subsidiary of
HealthCare Capital Corp., a corporation organized under the laws of the
province of Alberta, Canada.
As of September 30, 1996, the Company declared a bonus to a clinic manager
in the amount of $236,000. The bonus was payable upon the completion of the
acquisition of the Company by HealthCare Hearing Clinics, Inc.
F-29
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
HealthCare Capital Corp.:
We have audited the accompanying balance sheet of the Midwest Division of
Hearing Health Services, Inc. dba Sonus as of June 30, 1996, and the related
statements of operations and accumulated earnings and cash flows for each of the
years in the two years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our 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 Midwest Division of Hearing
Health Services, Inc. dba Sonus as of June 30, 1996, and the results of its
operations and cash flows for each of the years in the two year period then
ended in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Portland, Oregon
January 16, 1997
F-30
<PAGE>
THE MIDWEST DIVISION OF HEARING
HEALTH SERVICES, INC. dba SONUS
Balance Sheets
<TABLE>
<CAPTION>
June 30, October 31,
ASSETS 1996 1996
------ ---- ----
(Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 139,396 108,240
Trade accounts receivable, net of allowance
for doubtful accounts of $57,297 313,614 301,567
Accounts receivable - other 965 512
Inventory 62,619 43,161
Prepaid expenses and other current assets 11,049 35,808
-------- --------
Total current assets 527,643 489,288
Equipment and fixtures, net 389,523 364,879
Deferred taxes 39,179 39,179
Other assets, net 25,628 24,212
-------- --------
454,330 428,270
-------- --------
Total assets $ 981,973 917,558
======== ========
LIABILITIES AND RETAINED EARNINGS
Current liabilities:
Accounts payable $ 221,399 224,238
Accrued payroll and related costs 127,164 101,433
Patient deposits 23,927 36,330
Other accrued expenses 23,538 27,937
Capital lease obligations 8,875 1,775
-------- --------
Total current liabilities 404,903 391,713
Related party payable 277,923 279,126
-------- --------
Total liabilities 682,826 670,839
-------- --------
Retained earnings 299,147 246,719
-------- --------
Total liabilities and retained earnings $ 981,973 917,558
======== ========
See accompanying notes to financial statements.
</TABLE>
F-31
<PAGE>
THE MIDWEST DIVISION OF HEARING
HEALTH SERVICES, INC. dba SONUS
Statements of Operations and Accumulated Earnings
<TABLE>
<CAPTION>
Years ended Four months ended
June 30 October 31
------- ----------
1996 1995 1996 1995
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Product sales $ 2,983,955 2,878,986 930,926 1,147,596
Product cost of sales 934,038 1,031,409 337,488 355,090
---------- ---------- ---------- ----------
2,049,917 1,847,577 593,438 792,506
Net patient service revenue 478,702 463,383 174,913 166,412
Expenses:
Selling expenses 1,981,736 1,827,201 709,106 687,539
General and administrative expenses 424,943 356,999 142,957 126,731
---------- ---------- ---------- ----------
2,406,679 2,184,200 852,063 814,270
---------- ---------- ---------- ----------
Income (loss) from operations 121,940 126,760 (83,712) 144,648
---------- ---------- ---------- ----------
Interest income 1,593 - 485 -
---------- ---------- ---------- ---------
1,593 - 485 -
---------- ---------- ---------- ---------
Net income (loss) before
income taxes 123,533 126,760 (83,227) 144,648
---------- ---------- ---------- ----------
Income tax expense (benefit) 47,687 41,024 (30,799) 57,298
---------- ---------- ---------- ----------
Net income (loss) 75,846 85,736 (52,428) 87,350
Accumulated earnings, beginning of period 223,301 137,565 299,147 223,301
---------- ---------- ---------- ----------
Accumulated earnings, end of period $ 299,147 223,301 246,719 310,651
========== ========== ========== ==========
See accompanying notes to financial statements.
</TABLE>
F-32
<PAGE>
THE MIDWEST DIVISION OF HEARING
HEALTH SERVICES, INC. dba SONUS
Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended Four months ended
June 30 October 31
------- ----------
1996 1995 1996 1995
---- ---- ---- ----
(Unaudited)
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Net income (loss) $ 75,846 85,736 (52,428) 87,350
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operations:
Depreciation 108,430 90,677 41,200 16,218
Deferred taxes (13,471) 7,226 - -
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable (18,170) (199,543) 12,047 53,717
Decrease (increase) in inventory 49,179 (9,676) 19,458 46,672
Decrease (increase) in prepaids and other assets 11,302 (27,126) (22,890) 1,144
(Decrease) increase in accounts payable (80,598) 94,897 2,839 (117,433)
Increase (decrease) in accrued liabilities 15,918 (2,906) (25,731) (3,536)
(Decrease) increase in patient deposits (20,926) 18,439 12,403 8,897
(Decrease) increase in other liabilities (1,037) 58,974 (26,400) 43,115
-------- -------- --------- --------
Net cash provided by (used in)
operating activities 126,473 116,698 (39,502) 136,144
-------- -------- --------- --------
Cash flows from investing activities:
Purchases of equipment and fixtures (103,853) (202,904) (16,556) (41,243)
------- ------- --------- --------
Net cash used in investing activities (103,853) (202,904) (16,556) (41,243)
------- ------- --------- --------
Cash flows from financing activities:
Net payments on capital leases (24,556) - (7,100) (10,356)
Net (repayments to) proceeds from related parties (6,188) 180,497 32,002 (19,799)
-------- -------- --------- --------
Net cash (used in) provided by
financing activities (30,744) 180,497 24,902 (30,155)
-------- -------- --------- --------
Net (decrease) increase in cash and cash equivalents (8,124) 94,291 (31,156) 64,746
Cash and cash equivalents at beginning of period 147,520 53,229 139,396 147,520
-------- -------- --------- --------
Cash and cash equivalents at end of period $ 139,396 147,520 108,240 212,266
======== ======== ========= ========
Supplemental disclosures of cash flow information:
Interest paid $ 4,068 14,437 820 1,025
======== ======== ========= ========
Income taxes paid $ 61,158 33,798 0 57,298
======== ======== ========= ========
Schedule of non cash investing and financing activities:
Capital lease obligation $ - 33,431 - -
======== ======== ========= ========
See accompanying notes to financial statements.
</TABLE>
F-33
<PAGE>
THE MIDWEST DIVISION OF HEARING
HEALTH SERVICES, INC. dba SONUS
Notes to Financial Statements
(1) ORGANIZATION AND OPERATIONS
The Midwest Division of Hearing Health Services, Inc. dba Sonus (the
Company) consists of the Michigan and Illinois operations of Hearing Health
Services, Inc., a Delaware corporation. The Company provides diagnostic,
rehabilitation and preventative hearing health care products and services to
patients through 14 clinics located in Michigan and Illinois.
The Michigan and Illinois operations of Hearing Health Services, Inc.
operated under separate management independent from other Hearing Health
Services, Inc., locations. The accompanying financial statements reflect all
significant costs of operations for the Midwest Division of Hearing Health
Services, Inc.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash on-hand and short-term investments with original maturities of 90
days or less.
(b) NET REVENUES
Revenues from the sale of hearing aid products are recognized at the
time of delivery. Revenues from the provision of hearing care diagnostic
services are recognized at the time that such services are performed.
(c) INVENTORY
Inventory is stated at the lower of cost, determined on the first-in,
first-out method, or market value. Inventory consists of hearing aids
and batteries, which have been purchased from vendors for resale to
customers.
(Continued)
F-34
<PAGE>
THE MIDWEST DIVISION OF HEARING
HEALTH SERVICES, INC. dba SONUS
Notes to Financial Statements
(d) EQUIPMENT AND FIXTURES
Equipment and fixtures are stated at cost less accumulated depreciation
and amortization. Additions and betterments are capitalized, and
maintenance and repairs are charged to current operations as incurred.
The cost of assets retired or otherwise disposed of and the related
accumulated depreciation and amortization are removed from the accounts,
and the gain or loss on such dispositions is reflected in current
operations. Amortization of leasehold improvements is provided on the
straight-line method over the term of the lease or estimated useful
lives of the assets, whichever is less. Depreciation is provided on the
straight-line method. Estimated useful lives of the assets are:
Professional equipment 7 years
Furniture and fixtures 5 years
Office equipment 5 years
Leasehold improvements 1 - 5 years
(e) INCOME TAXES
The Company accounts for income taxes under the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(f) CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of cash and trade
receivables. The Company places its cash with high credit quality
financial institutions. At times such amounts may be in excess of the
FDIC insurance limits. The Company's trade accounts receivable are
derived from numerous private payors, insurance carriers, health
maintenance organizations and government agencies. Concentration of
credit risk relating to trade accounts receivable is limited due to the
diversity and number of patients and payors.
(g) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments such as cash and cash
equivalents, trade receivables, notes payable and trade payables,
approximate their fair value.
(h) USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure
of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
(i) INTERIM FINANCIAL STATEMENTS
In the opinion of management, the interim financial statements include
all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods
presented.
(Continued)
F-35
<PAGE>
THE MIDWEST DIVISION OF HEARING
HEALTH SERVICES, INC. dba SONUS
Notes to Financial Statements
(3) EQUIPMENT AND FIXTURES
Equipment and fixtures consist of the following at June 30, 1996:
Professional equipment $ 329,453
Office equipment 194,327
Furniture and fixtures 74,445
Leasehold improvements 64,480
----------
662,705
Less accumulated depreciation and amortization (273,182)
----------
$ 389,523
==========
Property and equipment at June 30, 1996 includes assets acquired under
capital leases of $23,402, net of accumulated depreciation of $10,029.
Depreciation expense for fiscal years 1996 and 1995 was $108,430 and
$90,677, respectively.
(4) INCOME TAXES
The Company is a division of, and its operations are included in the tax
return for, Hearing Health Services, Inc. Income taxes on the accompanying
financial statements are provided on a stand-alone basis as if the Company
filed its own tax return.
The components of the 1996 and 1995 provision (benefit) for income taxes are
as follows:
Year
Ended
June 30,
--------
1996 1995
---- ----
Current:
Federal $51,492 $28,456
State 9,666 5,342
------- -------
61,158 33,798
------- -------
Deferred:
Federal (11,342) 6,083
State (2,129) 1,143
------- -------
(13,471) 7,226
------- -------
Total $47,687 $41,024
======= =======
(Continued)
F-36
<PAGE>
THE MIDWEST DIVISION OF HEARING
HEALTH SERVICES, INC. dba SONUS
Notes to Financial Statements
The difference between the total income tax expense and the income tax
expense computed using the statutory federal income tax rate for the years
ended June 30, 1996 and 1995 is as follows:
1996 1995
----- -----
Computed tax expense at
statutory rate 34.0% 34.0%
State tax expense, net of
federal taxes 4.0% 2.1%
Nondeductible expenses 0.6% 4.2%
----- -----
Total 38.6% 40.3%
===== =====
The deferred income tax asset of $39,179 at June 30, 1996 relates primarily
to certain reserves not currently deductible for tax purposes. No valuation
allowance was deemed necessary and there was no change in the valuation
allowance from the prior year. It is more likely than not that the entire
amount of the deferred tax asset will be realized due to the taxable income
from the carryback availability in prior years.
(Continued)
F-37
<PAGE>
THE MIDWEST DIVISION OF HEARING
HEALTH SERVICES, INC. dba SONUS
Notes to Financial Statements
(5) LEASES
(a) OPERATING LEASES
The Company leases office and equipment under noncancellable operating
leases which require future minimum annual rentals as follows:
Year ending June 30
1997 $ 171,811
1998 152,483
1999 101,023
2000 54,387
2001 50,156
Thereafter 89,090
--------
$ 618,950
==========
Certain of the leases contain renewal options and escalation clauses
which require payments of additional rent to the extent of increases in
related operating costs. Rent expense for fiscal 1996 and 1995 was
$195,369 and $194,821, respectively.
(b) CAPITAL LEASES
The Company leases certain professional equipment under capital leases
expiring through 1996. Future minimum lease payments related to capital
leases at June 30, 1996 are as follows:
Total minimum lease payments
(payable in fiscal year 1997) $ 9,900
Amounts representing interest 1,025
------
Present value of net minimum lease payments $ 8,875
======
(6) RELATED PARTY TRANSACTIONS
The Company receives advances to fund operations from related partnerships
managed by Foster Management. The balance due from the Company to these
partnerships is $277,923 at June 30, 1996.
The balance of the related party payable was not assumed by HealthCare
Hearing Clinics, Inc., in its acquisition of the Company subsequent to
year-end (see note 8). Therefore, the related party payable balance is
reflected as a non-current liability on the accompanying financial
statements.
The Company also leases corporate office space from a related party under an
agreement which expires in February, 2003. Rent expense recorded for fiscal
1996 was $12,528.
(7) DEFINED CONTRIBUTION PLAN
The Company sponsors a defined contribution plan that provides eligible
employees (employees that have been employed for 12 months from their date
of hire) the opportunity to accumulate funds for their retirement. The plan
does not require Company contributions, nor have any contributions been made
by the Company for the years ended June 30, 1996 and 1995.
(8) SUBSEQUENT EVENT
As of October 31, 1996, the Company was acquired by HealthCare Hearing
Clinics, Inc., a Washington corporation and a wholly-owned subsidiary of
HealthCare Capital Corp., a corporation organized under the laws of the
Province of Alberta, Canada.
F-38
<PAGE>
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Part 8 of the Registrant's bylaws requires the Registrant to
indemnify, to the extent permitted by the Business Corporations Act (Alberta)
(the "Act"), directors and officers, former directors and officers, and any
person who acts or acted at the Registrant's request as a director or officer of
a body corporate of which the Registrant is or was a shareholder or a creditor,
and his heirs and legal representatives, from and against:
(a) all costs, charges, and expenses, including any amount to
settle an action or satisfy a judgment reasonably incurred by him in
respect of any civil, criminal, or administrative action or proceeding
to which he is made a party by reason of being or having been a
director or officer of the Registrant; and
(b) all other costs, charges, and expenses incurred in connection
with the defense of any civil, criminal, or administrative action or
proceeding to which he is made a party by reason of being or having
been a director or officer of the Registrant.
The effect of this provision of the Registrant's bylaws when
considered in light of Part 9, Section 119 of the Act is to grant a right of
indemnification to the above referenced individuals against all expenses
(including attorney fees and settlement costs) reasonably incurred in each of
the following circumstances:
(a) the individual (i) acted honestly and in good faith with a
view to the best interests of the Registrant and (ii) in the case of a
criminal or administrative action or proceeding that is enforced by a
monetary penalty, had reasonable grounds to believe that his conduct
was lawful;
(b) the individual was substantially successful on the merits on
his defense of the action or proceeding and acted honestly and in good
faith with a view to the best interests of the Registrant, and in the
case of a criminal or administrative action, had reasonable grounds for
believing his conduct was lawful; and
(c) in the case of an action on behalf of the Registrant to
procure a judgment in its favor, to which the individual is made a
party by reason of being or having been a director or officer of the
Registrant, the individual acted honestly and in good faith with a view
to the best interests of the Registrant, and the court approves such
indemnification.
The Act also permits the Registrant to purchase and maintain
insurance for the protection of (i) its directors and officers and (ii) any
director or officer of another body corporate acting at the request of the
Registrant, against liabilities incurred in such person's capacity as a director
or officer of the Registrant or of such other body corporate, except when such
liability relates to such person's failure to act honestly and in good faith
with a view to the best interests of the Registrant or such other body
corporate.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth an itemized statement of expenses of the
Registrant in connection with the sale of the Common Stock being registered
hereby. All of the expenses are estimated, except for the SEC registration fee.
None of the expenses will be borne by the selling shareholders identified in the
prospectus contained in this registration statement.
II-1
<PAGE>
================================================================================
STATEMENT OF EXPENSES OF REGISTRANT
================================================================================
SEC registration fee $13,117
- --------------------------------------------------------------------------------
Printing and engraving expenses 10,000*
- --------------------------------------------------------------------------------
Legal fees and expenses 90,000*
- --------------------------------------------------------------------------------
Auditors' fees and expenses 120,000*
- --------------------------------------------------------------------------------
Transfer Agent and Registrar fees 5,000*
- --------------------------------------------------------------------------------
Miscellaneous expenses 11,883*
- --------------------------------------------------------------------------------
TOTAL $250,000
================================================================================
* Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Within the last three years the Registrant has sold securities without
registration under the Securities Act of 1933 (the "1933 Act") in the
transactions and in reliance on the exemptions described below.
SPECIAL WARRANTS
During 1996, the Registrant undertook two separate offerings of
Special Warrants. The first warrant offering was a private placement in Canada
and the U.S. of 1,700,000 special warrants (the "February Special Warrants")
that closed in February 1996. The aggregate offering price for the February
Special Warrants was $1,241,000 (converted from Canadian dollars at February 28,
1996). Each February Special Warrant entitled the holder to acquire 1.1 shares
of the Registrant's Common Stock and a share purchase warrant to purchase 1.1
additional shares of the Registrant's Common Stock. The number of February
Special Warrants issued to U.S. holders totaled 400,000 and were sold to one
individual and three entities as set forth below. The private placement to U.S.
investors of February Special Warrants was made in reliance on the exemption
from registration contained in Section 4(2) of the 1933 Act. The issuance of
shares and purchase warrants upon the exercise or deemed exercise of the
February Special Warrants occurred on February 28, 1997.
The February Special Warrants were issued with the assistance of
Wood Gundy, Inc. ("Wood Gundy"). In consideration for its services, Wood Gundy
was granted 32,500 February Special Warrants at a deemed issue price of $0.73
per February Special Warrant (converted from Canadian dollars at February 28,
1996) and also received $65,000 in cash.
The purchasers of the February Special Warrants were as follows:
PURCHASER NUMBER OF
SPECIAL
WARRANTS
Sagit Investment Management Ltd. 1,300,000
A. Baron Cass III 121,666
Sands Partnership No. I Money Purchase Pension Plan 121,667
The Curran Companies, Inc. 121,667
Aspen Limited Partnership 35,000
---------
1,700,000
=========
II-2
<PAGE>
The second warrant offering related to a private placement in
Canada of 810,000 special warrants consummated in September 1996 and a private
placement in the U.S. of 4,149,000 special warrants consummated in December
1996. Such special warrants are collectively referred to herein as the
"September Special Warrants." The aggregate offering price for the September
Special Warrants was $1,012,500 for those sold in Canada and $5,186,250 for
those sold in the United States. Each of the September Special Warrants placed
in the United States entitled the holder to acquire one share of the
Registrant's Common Stock and one share purchase warrant to purchase one
additional share of the Registrant's Common Stock for $2.00 per share. Each of
the September Special Warrants placed in Canada entitled the holder to acquire
1.1 shares of the Registrant's Common Stock and a share purchase warrant to
purchase 1.1 additional shares of the Registrant's Common Stock for $2.00 per
share. The September Special Warrants issued to U.S. holders were sold through
two placement agents to the individuals and entities set forth below. The
private placement to U.S. investors of September Special Warrants was made in
reliance on Rule 506 of Regulation D under the 1933 Act. All of the U.S.
investors were accredited investors as defined in Rule 501 of Regulation D under
the 1933 Act.
C.M. Oliver & Company Limited (the "Canadian Agent") acted as
agent for the Registrant in connection with the offering of the September
Special Warrants in Canada. The Canadian Agent received 34,000 September Special
Warrants exercisable for one share of the Registrant's Common Stock and a share
purchase warrant to purchase an additional share for $2.00 per share in partial
payment of its selling commission and was granted an option to acquire 81,000
share purchase warrants (the "Agent's Option"), each exercisable for one share
of Common Stock at a price of $1.25 per share. The warrants are subject to
certain rights of the Registrant to force exercise or cancellation of the
Agent's Option.
Sunrise Securities Corporation ("Sunrise") and Dallas Research &
Trading, Inc. ("Dallas Research"), served as placement agents in connection with
the placement of the September Special Warrants in the United States. Sunrise
and Dallas Research each received a selling commission equal to 9 percent of the
gross proceeds in the form of September Special Warrants, or a total of 373,410
September Special Warrants. Dallas Research also received 20,000 September
Special Warrants in payment of its corporate finance fee. Such September Special
Warrants are exercisable for one share of Common Stock and a share purchase
warrant to purchase one additional share of Common Stock for $2.00 per share. In
addition, Sunrise and Dallas Research received an option to acquire 214,900 and
200,000 share purchase warrants, respectively, with each warrant exercisable for
one share of Common Stock at a price of $1.25 per share. The warrants are
subject to certain rights of the Registrant to force the exercise or
cancellation of the warrants.
The purchasers of the September Special Warrants were as follows:
UNITED STATES
PURCHASER NUMBER OF SPECIAL
WARRANTS ISSUED
Baron & Darlene Cass "Family Foundation" 20,000
A. Baron Cass III "Childrens Trust" 80,000
A. Baron Cass III 300,000
William J. Reik III 40,000
Philip H. Mabry 20,000
Marcus R. Mutz 40,000
James T. Mathis 5,000
Barton J. Cohen 80,000
Barton J. Cohen "Family Foundation" 20,000
II-3
<PAGE>
The Curran Companies, Inc. 100,000
Michael D. & Lisbeth H. Bickford 40,000
Gary B. Downey 8,000
Howard Kaplan 40,000
Leonard M. Riggs Jr., M.D. 66,667
Peggy A. Riggs 33,333
John L. Strauss 400,000
Howard E. Rachofsky 400,000
John C. Stinson 25,000
Alan R. Kanuk 36,000
Paul Lappetito 10,000
William Collins 75,000
Mark W. Hill 50,000
Hill A. Feinberg 20,000
Alfa Life Insurance Co. 200,000
Alfa Mutual Insurance Co. 300,000
Alfa Mutual Fire Insurance Co. 300,000
John W. Holley Grantor Trust 120,000
Barbara Wilson and John W. Holley 28,000
Barbara Holley Art V Trust 20,000
Barbara Holley Art VII Trust 48,000
Rainbow Trading Partners, Ltd. 80,000
Rainbow Trading Venture Partners, L.P. 88,000
Stanford C. Finney, Jr. 80,000
Jerome Gabbert 24,000
John Lemak 40,000
James P. Judge 40,000
Charles McKnight 8,000
Gail King 20,000
Netta Sue King McNight 8,000
Netta Sue King Q-Tip Trust 20,000
Andrea P. Thau Profit Sharing Plan 8,000
Andrea Thau Money Purchase Plan 4,000
II-4
<PAGE>
John R. Lieberman 4,000
Donald J. Aho 8,000
Marvin Kigler 4,000
Stephen Rutledge 5,000
Eli Jacobson 32,000
David Stone 80,000
State Capital Partners 40,000
Christine Ferrer 80,000
Theodore Friedman 40,000
Gross Foundation Inc. 200,000
Howard Milstein 80,000
Edward Milstein 80,000
Paul Scharfer 20,000
Joe Pretlow 20,000
Derek Caldwell 40,000
Aspen Limited Partnership 71,000
4,149,000
CANADA
PURCHASER NUMBER OF SPECIAL
WARRANTS ISSUED
Sharon Woodward 60,000
Tom Kay RRSP 60,000
Kathleen Margaret Kay 60,000
Sandy Pascuzzi 60,000
John B. Lansdell 60,000
Carl Vandenbrink 60,000
230666 Alberta Ltd. 60,000
Denise Nobert 60,000
Clint Stewart 60,000
Fulton Park 90,000
Jim Bresett 60,000
523905 B.C. Ltd. 120,000
---------
810,000
=========
II-5
<PAGE>
PRIVATE PLACEMENT IN CANADA
The Registrant issued 3,000,000 shares of Common Stock in a private
offering in Canada that was completed on December 14, 1995. The following
individuals and corporations received shares of Common Stock:
NUMBER OF
SHARES OF
PURCHASER COMMON STOCK
Douglas F. Good 160,000
Donald Risk 40,000
Marilyn E. Marshall 750,000
Carsam Investments 250,000
Chelsea Capital Corporation 300,000
Harris McLean Financial Group Ltd. 500,000
Pacific Growth Ventures Corp. 250,000
Figtree Investments Limited 750,000
---------
3,000,000
=========
COMMON SHARES ISSUED IN ACQUISITIONS
On June 6, 1997, the Registrant issued 144,844 shares to the two owners
of Hearing Improvement Center, Inc., in connection with its acquisition. On
December 5, 1996, the Registrant issued 408,000 shares to Deborah Law Cross in
connection with the acquisition of Hearing Dynamics, Inc. In connection with the
acquisition of certain hearing care clinics on October 31, 1996, the Registrant
issued promissory notes in the aggregate principal amount of $2,600,000 to four
affiliates of Hearing Health Services, Inc. The notes are due October 31, 1997,
and are convertible into shares of Common Stock at $1.30 principal amount per
share. On October 1, 1996, the Registrant issued 1,217,268 shares of Common
Stock to Gregory J. Frazer, 253,091 shares to Carissa Bennett, and 919,177
shares to Jami Tanihana, to acquire certain hearing care clinics located in
Southern California. The Registrant relied on the exemption provided by Section
4(2) of the 1933 Act with respect to the securities issued in the above
acquisitions.
On May 1, 1996, the Registrant issued a non-interest bearing promissory
note in the principal amount of $126,830 (converted from Canadian dollars at May
30, 1997) that is due September 1, 1997, to a Canadian resident in connection
with the acquisition of all of the issued and outstanding shares of Pacific
Hearing Clinics, Inc., and Oakridge Hearing Clinics, Inc., which operated
hearing care clinics in Vancouver, British Columbia. The note is convertible
into shares of Common Stock at $0.98 per share (converted from Canadian dollars
at May 30, 1997). In January 1995, the Registrant issued convertible notes in
aggregate principal amount of $177,260 to three Canadian residents in connection
with the Registrant's acquisition of Thomas H. Moore Audiology Ltd. These notes
were converted in December 1995, July 1996, and November 1996 into 984,800
shares of Common Stock at $0.18, $0.18, and $0.19 per share, respectively.
On July 31, 1994, the Registrant issued 6,250,000 Common Shares to
Marilyn E. Marshall, Trudy McCaffery, and Douglas F. Good (the "Fraserview
Shareholders"), as part of the acquisition of Fraserview Hearing and Speech
Clinic Ltd. Each of the Fraserview Shareholders was a Canadian resident.
II-6
<PAGE>
EMPLOYEE STOCK OPTIONS
In reliance on Rule 701 under the 1933 Act, the Registrant has granted
options for 3,475,000 shares of Common Stock to certain employees, officers, and
directors under the Registrant's Stock Option Plan ("1993 Plan"). The option
prices range from $0.07 per share to $2.07 per share (converted from Canadian
dollars at May 30, 1997). In addition, the Registrant has granted 917,000
options exercisable at prices ranging from $1.12 to $1.50 per share to 12 United
States residents pursuant to its Stock Award Plan adopted in 1996 (the "1996
Plan") and has relied on Rule 701 to exempt these option grants. The Registrant
has issued a total of 1,175,000 shares of Common Stock to employees, officers,
and directors upon exercise of stock options granted pursuant to the 1993 Plan.
No shares of Common Stock have been issued pursuant to the exercise of options
granted under the 1996 Plan.
ITEM 27. EXHIBITS
The exhibits to this registration statement required by Item 601 of
Regulation S-B are listed in the accompanying index to exhibits.
ITEM 28. UNDERTAKINGS
The Registrant will:
(1) File, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement
to:
(i) Include any prospectus required by Section
10(a)(3) of the 1933 Act;
(ii) Reflect in the prospectus any facts or events
which, individually or together, represent a fundamental change in
the information in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of the securities offered would
not exceed that which was registered) and any deviation from the
low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
and
(iii) Include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the 1933 Act, treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to
be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the 1933 Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the 1933 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
II-7
<PAGE>
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 1933 Act
and will be governed by the final adjudication of such issue. The undertaking of
the Registrant in the preceding sentence does not apply to insurance against
liability arising under the 1933 Act.
II-8
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Amendment No. 2
to Registration Statement on Form SB-2 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Portland, State of
Oregon, on the 6th day of June, 1997.
HEALTHCARE CAPITAL CORP.
By /s/ Brandon M. Dawson
Brandon M. Dawson
President
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 2 to Registration Statement on Form SB-2 has been signed by the
following persons in the capacities indicated on June 6, 1997:
Signature Title
PRINCIPAL EXECUTIVE OFFICER:
/s/ Brandon M. Dawson
BRANDON M. DAWSON President and Director
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
/s/ Edwin J. Kawasaki Vice President, Finance
Edwin J. Kawasaki
A MAJORITY OF THE BOARD OF DIRECTORS:
HUGH T. HORNIBROOK* Director
GENE K. BALZER, Ph.D.* Director
WILLIAM DeJONG* Director
DOUGLAS F. GOOD* Director
GREGORY FRAZER, Ph.D.* Director
*By/s/ Edwin J. Kawasaki
Edwin J. Kawasaki
Attorney-in-fact
II-9
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION OF EXHIBIT
- ------- ----------------------
3.1 Articles of Incorporation of the Registrant.*
3.2 Bylaws of the Registrant.*
5 Opinion of Ballem MacInnes as to legality of securities.*
8 Opinion of Felesky Flynn as to certain Canadian tax matters.*
10.1 Form of agreement for purchase of February Special Warrants.*
10.2 Special Warrant Indenture between the Registrant and The R-M Trust
Company dated February 28, 1996.*
10.3 Warrant Indenture between the Registrant and The R-M Trust Company dated
February 28, 1996.*
10.4 Form of agreement for purchase of September Special Warrants (British
Columbia).*
10.5 Form of agreement for purchase of September Special Warrants (United
States).*
10.6 Special Warrant Indenture between the Registrant and The R-M Trust
Company dated September 17, 1996 ("September Special Warrant
Indenture").*
10.7 Supplemental Indenture to September Special Warrant Indenture.*
10.8 Second Supplemental Indenture to September Special Warrant Indenture.*
10.9 Warrant Indenture between the Registrant and the R-M Trust Company dated
September 17, 1996. ("September Warrant Indenture").*
10.10 Supplemental Indenture to September Warrant Indenture.*
10.11 Sponsorship Agreement dated March 13, 1996.*
10.12 Escrow Agreement dated January 14, 1994, between the Registrant, The R-M
Trust Company, Michael G. Thomson, Craig R. Thomson, Murray T.A.
Campbell, William DeJong, and Bruce A. Ramsay.*
10.13 Escrow Agreement dated October 7, 1994, among the Registrant, The R-M
Trust Company, Marilyn E. Marshall, Douglas F. Good, and Trudy
McCaffery.*
10.14 Bill of Sale, Security Agreement and Promissory Note between HC
HealthCare Hearing Clinics Ltd. ("HC HealthCare") and Claude C. Fuller,
R. Patrick Greenwood and Robert A. Hunter carrying on business in a
partnership under the trade name Langley Hearing Clinic dated effective
January 2, 1996.*
10.15 Share Purchase Agreement between HC HealthCare, the Registrant, and Neil
C. Walton dated for reference April 15, 1996, respecting the purchase by
the Registrant and HC HealthCare of all of the issued and outstanding
shares of Pacific Hearing Clinic Inc. and Oakridge Hearing Clinic Inc.*
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10.16 Agency Agreement dated for reference August 22, 1996, between the
Registrant and the C.M. Oliver & Company Limited.*
10.17 U.S. Placement Agreement dated for reference October 14, 1996, between
the Registrant and Dallas Research & Trading, Inc.*
10.18 U.S. Placement Agreement dated for reference October 14, 1996, between
the Registrant and Sunrise Securities Corporation.*
10.19 Stock Purchase and Sale Agreement dated as of February 28, 1997, between
Gregory J. Frazer and Laurie Van Duivenbode and HealthCare Hearing
Clinics, Inc.*
10.20 Merger Agreement dated as of October 1, 1996, among the Registrant,
Hearing Care Associates- Glendale, Inc., Hearing Care
Associates-Glendora, Inc., and Hearing Care Associates-Northridge, Inc.,
and Gregory J. Frazer, Carissa Bennett, and Jami Tanihana.*
10.21 Asset Purchase Agreement effective as of October 31, 1996, among the
Registrant, HealthCare Hearing Clinics, Inc., and Hearing Health
Services, Inc., and Audio-Vestibular Testing Center, Inc. ("SONUS
Agreement").*
10.22 Merger Agreement dated as of December 2, 1996, by and among the
Registrant, HealthCare Hearing Clinics, Inc., and Hearing Dynamics and
Deborah Law Cross.*
10.23 Stock Purchase and Sale Agreement dated as of December 17, 1996, by and
between certain selling shareholders and HealthCare Hearing Clinics,
Inc.*
10.24 Stock Purchase and Sale Agreement dated as of January 9, 1997, by and
between Gregory J. Frazer and Stephen Martinez and HealthCare Hearing
Clinics, Inc.*
10.25 Form of Convertible Subordinated Note relating to the SONUS Agreement.*
10.26 1993 Stock Option Plan.*
10.27 Amended and Restated Stock Award Plan.*
10.28 Employment Agreement dated October 1, 1996, between HealthCare Hearing
Clinics, Inc., and Gregory J. Frazer.*
10.29 Employment Agreement dated as of November 1, 1996, among the Registrant,
HealthCare Hearing Clinics, Inc., and Kathy Foltner.*
10.30 Terms of employment between the Registrant and Edwin J. Kawasaki dated
August 8, 1996.*
10.31 Revolving Demand Loan Agreement between Fraserview Hearing and Speech
Clinics Ltd and Royal Bank of Canada, dated August 21, 1995.*
10.32 Revolving Demand Loan Agreement between HC HealthCare and Royal Bank of
Canada, dated February 12, 1997.*
10.33 Consulting Agreement effective as of January 1, 1997, between the
Registrant and Hugh T.Hornibrook.*
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10.34 Stock Purchase and Sale Agreement dated as of March 6, 1997, between
Gregory J. Frazer, Alfred S. Gaston and HealthCare Hearing Clinics,
Inc.*
10.35 Stock Purchase and Sale Agreement dated as of March 14, 1997, by and
between Gregory J. Frazer, David N. Jankins, and Jami Tanihana and
HealthCare Hearing Clinics, Inc.*
10.36 Stock Purchase and Sale Agreement dated as of April 6, 1997, by and
between Susan Diaz, Gregory J. Frazer, and Jami Tanihana and HealthCare
Hearing Clinics, Inc.*
10.37 Equipment Lease Agreement made April 1, 1997, between Siemens Hearing
Instruments, Inc., and HealthCare Hearing Clinics, Inc.*
10.38 Merger Agreement dated as of June 6, 1997 by and among HealthCare
Hearing Clinics, Inc., a Washington corporation ("HealthCare"), and
Hearing Improvement Center, Inc., a California corporation (the
"Company"), and Gary R. Dorf and David Majit.
16 Letter of Shikaze Ralston, Chartered Accountants, regarding change in
certifying accountant.*
21 Subsidiaries of the Registrant.*
23.1 Consent of Shikaze Ralston, Chartered Accountants.
23.2 Consent of KPMG Peat Marwick LLP.
23.3 Consent of Ballem MacInnes (included in Exhibit 5).*
23.4 Consent of Felesky Flynn regarding tax (included in Exhibit 8).*
24 Power of attorney of certain officers and directors.*
27 Financial Data Schedule.
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* Previously filed.
II-12
MERGER AGREEMENT
AGREEMENT dated as of June 6, 1997, by and among HEALTHCARE HEARING
CLINICS, INC., a Washington corporation, ("HealthCare"), and HEARING IMPROVEMENT
CENTER, INC., a California corporation (the "Company"), and GARY R. DORF and
DAVID MAJIT who are the shareholders of the Company (the "Shareholders").
RECITALS
A. HealthCare is a wholly owned subsidiary of HealthCare Capital Corp.,
a corporation organized under the laws of the Province of Alberta, Canada
("HCC").
B. The Shareholders own all the issued and outstanding capital stock of
the Company.
C. The Company operates audiology and hearing aid clinics in Seal Beach
and Long Beach, California, which perform testing and evaluation of patients'
hearing, prescribe and fit hearing aids, and provide related services and
products.
D. HealthCare and the Shareholders desire that the Company be merged
into HealthCare.
AGREEMENT:
In consideration of the premises and of the mutual covenants contained
herein, the parties agree as follows:
ARTICLE I
MERGER
1.1 Agreement and Plan of Merger. The parties agree that the Company
shall be merged into HealthCare pursuant to an Agreement and Plan of Merger
prepared in accordance with Section 1101 of the California General Corporation
Law and Section 23B.11.010 of the Washington Business Corporation Act which
shall be in the form of Schedule 1.1 attached hereto (the "Agreement and Plan of
Merger"). The merger of the Company into HealthCare (the "Merger") shall be on
the terms set forth in the Agreement and Plan of Merger and in this Agreement.
1.2 Terms of Merger. Upon the consummation of the Merger:
(a) HealthCare shall be the surviving corporation (the
"Surviving Corporation") and shall continue its existence as a
Washington corporation under the name "HealthCare Hearing Clinics,
Inc.";
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(b) The separate corporate existence of the Company shall
terminate;
(c) The presently issued and outstanding stock of the Company
shall be converted into shares of the common stock of HCC, cash, and
HealthCare promissory notes as provided in Section 1.4(a) hereof; and
(d) The presently issued and outstanding stock of HealthCare
shall be converted into shares of the stock of Surviving Corporation as
provided in Section 1.4(b) hereof.
1.3 Consummation. The consummation of the Merger shall take place at
Closing (as defined in Section 2.1 hereof). The Merger shall be consummated by
filing:
(a) A copy of the Agreement and Plan of Merger accompanied by
an appropriate officer's certificate with the Secretary of State of the
state of California; and
(b) Articles of Merger with the Secretary of State of the
state of Washington.
The term "Effective Time" shall mean the time when the second of the two filings
is completed and the Merger becomes effective.
1.4 Conversion of Shares. The basis for converting and exchanging the
issued and outstanding shares of the Company and HealthCare upon the
consummation of the Merger will be as follows:
(a) The 200 issued and outstanding shares of the Company which
are owned by the Shareholders shall, as of the Effective Time by virtue
of the Merger and without any action on the part of the holders
thereof, be converted into and exchanged for (i) 141,844 shares of HCC
common stock (the "HCC Shares"), (ii) cash in the amount of $500,000,
(iii) HealthCare's promissory note in the face amount of $132,624 in
the form attached hereto as Schedule 1.4(a)-1, and (iv) HealthCare's
promissory note in the face amount of $282,036 in the form attached
hereto as Schedule 1.4(a)-2 with such HCC Shares, the cash, and the
notes apportioned between the Shareholders pro rata based upon their
ownership of the Company's shares; and
(b) Each share of HealthCare stock issued and outstanding at
the Effective Time shall, as of the Effective Time by virtue of the
Merger and without any action on the part of the holder thereof, be
converted into and exchanged for one share of the stock of the
Surviving Corporation.
1.5 Restrictions on Transfer of the HCC Shares. Following the Closing,
the HCC Shares shall be subject to the restrictions set forth in Article VI
hereof.
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1.6 Post-Closing Adjustments.
The HCC Shares, the cash, and the promissory notes to be
received by the Shareholders as provided in Section 1.4(a) shall be subject to
adjustment as provided in Subsections (a), (b), and (c) below.
(a) Net Working Capital Adjustment. For purposes of this
Agreement, "Net Working Capital" shall equal (i) cash, money market
accounts, accounts receivable (net of reasonable provisions for
doubtful accounts), inventory, prepaid expenses (including for magazine
advertising) and all other current assets of the Company as of Closing
less (ii) all current liabilities of the Company as of Closing
including but not limited to liabilities for inventory, office
supplies, ordinary compensation payables, employee benefits and taxes
(excluding accrued sick and vacation pay), bonuses (including all
related payroll taxes and employee benefits), accrued taxes due federal
and state and other governments based on income, personal and real
property taxes, water, gas, electric and other utility charges,
business and other license fees and taxes, merchants' association dues,
rental payments under any leases, any refunds due customers for hearing
aids delivered prior to Closing, and all other operating liabilities
(including legal, accounting, and other professional fees and expenses
incurred in the ordinary course of business), and vendor accounts
payable. As promptly as practicable following the Closing, but in no
event later than 45 days thereafter, the Shareholders and HealthCare
shall cooperate in preparing a mutually agreeable statement of Net
Working Capital which shall set forth the computation and components
thereof in reasonable detail (the "Statement of Net Working Capital").
On the fifteenth day after the date on which the Statement of Net
Working Capital is completed (or such earlier date as such statement is
mutually agreed upon by Shareholders and HealthCare in writing), (i) in
the event that the Net Working Capital exceeds $50,000, then HealthCare
shall pay to the Shareholders in cash an amount equal to the excess, or
(ii) in the event that the Net Working Capital is less than $50,000,
then the Shareholders shall pay to HealthCare the amount by which the
Net Working Capital is less than $50,000.
(b) Accounts Receivable. On the 200th day following the
Closing, the Shareholders shall reimburse HealthCare on a pro rata
basis in an amount equal to the total of the accounts receivable
reflected on the Statement of Net Working Capital (as defined in
subsection 1.6(a) above) net of the reserve for bad debts, which remain
uncollected as of such date. Upon such reimbursement, the uncollected
accounts shall be assigned to the Shareholders. During such 200-day
period, the Shareholders may participate in the collection process of
such accounts receivable.
(c) Long-Term Debt. The Shareholders acknowledge that the
consideration they are to receive pursuant to Section 1.4(a) hereof was
negotiated on the assumption that the Company would have no long-term
liabilities including debt as of the Closing. In the event that, in
preparing the Statement of Net Working Capital, it is determined that
Company had long-term liabilities as of the Closing, the Shareholders
shall pay to
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HealthCare on a pro rata basis an amount equal to the total of any such
long-term liabilities on the date the Net Working Capital Adjustment is
made.
All adjustments due from the Shareholders to HealthCare shall be payable in cash
provided that in the event adjustments due from the Shareholders exceed in the
aggregate the sum of $300,000, the Shareholders may pay any excess by tendering
to HealthCare HCC Shares at a deemed value of $1.41 per share.
1.7 Shareholders' Loans. As of the date hereof, the Company is indebted
to the Shareholders as set forth on Schedule 1.7. Notwithstanding any other
provision of this Agreement, the Shareholders shall have the option, on or prior
to the Closing, to (i) contribute such indebtedness to the capital of the
Company or (ii) cause the Company to repay such indebtedness to the extent the
Company has funds available for such purpose.
ARTICLE II
CLOSING
2.1 Closing. The closing of the transaction provided for herein (the
"Closing") shall occur on June 6, 1997, or on such other date as the parties may
mutually agree. The Closing shall take place at such place and at such time as
the parties shall mutually agree. Notwithstanding the foregoing, HealthCare
shall have the right to postpone the Closing for up to 90 days if, in its
judgment, it becomes necessary to do so as a result of requirements of the
securities laws, regulations, or rules of the Province of Alberta, the Alberta
Stock Exchange, the United States, the state of Washington or the state of
California.
2.2 Closing Transactions. The following actions shall be taken at the
Closing, each of which shall be conditional on completion of all the others and
all of which shall be deemed to have taken place simultaneously:
(a) Deliveries by Shareholders. The Shareholders shall deliver
to HealthCare:
(i) Certificates representing the shares of the
Company or appropriate affidavits of loss respecting such
certificates;
(ii) An opinion of counsel to the Shareholders, dated
as of the Closing date, substantially in the form of Schedule
2.2(a)(ii);
(iii) Copies of resolutions adopted by the Company's
board of directors and shareholders, certified by its
corporate secretary, which resolutions shall be in full force
and effect on the Closing date, authorizing the execution,
delivery and performance of this Agreement, the Merger, and
the other agreements and transactions contemplated hereby; and
(iv) All consents required in connection with the
transactions contemplated hereunder.
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<PAGE>
(b) Deliveries by HealthCare. HealthCare shall deliver to the
Shareholders:
(i) Certified or cashier's checks for the cash
specified in Section 1.4(a) hereof allocated between the
Shareholders pro rata based upon their ownership of the shares
of the Company;
(ii) The two promissory notes provided for in Section
1.4(a) hereof;
(iii) An opinion of counsel to HealthCare, dated as
of the Closing date, substantially in the form of Schedule
2.2(b)(ii); and
(iv) Copies of the resolutions of the boards of
directors of HealthCare and HCC as the shareholder of
HealthCare, certified by their corporate secretaries, which
resolutions shall be in full force and effect on the Closing
date, authorizing the execution, delivery and performance of
this Agreement, the Merger, and the other agreements and
transactions contemplated hereby.
(c) Joint Delivery. HealthCare and the Shareholders shall
deliver to each other counterparts of (i) the Shareholders'
Noncompetition Agreements provided for in Section 7.6(a) hereof, (ii)
the Shareholders' Employment Agreements provided for in Section 7.6(b)
hereof.
(d) HCC Share Certificate Delivery. Not later than 20 business
days following the Closing, HealthCare shall deliver to the
Shareholders certificates representing the HCC Shares provided for in
Section 1.4(a) hereof.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS
Except as otherwise set forth in the Disclosure Statement attached
hereto as Schedule III, the Shareholders hereby jointly and severally represent
and warrant to HealthCare as follows:
3.1 Corporate.
(a) Organization. The Company is a corporation duly organized
and existing under the laws of the state of California.
(b) Capitalization. The authorized capital stock of the
Company consists of 100,000 shares of a single class of common stock,
of which 200 shares are issued, and outstanding. All issued and
outstanding shares of the Company have been validly issued and are
fully paid and nonassessable. The Shareholders are the owners
(beneficially and of record) of all the issued and outstanding shares
of the common
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stock of the Company hereof free and clear of all liens, claims, and
encumbrances whatsoever as follows:
Shareholder Number of Shares
Gary R. Dorf 100
David Majit 100
No person has any agreement, option or other right, present or future,
to purchase or otherwise acquire any of the shares of the Company.
(c) Corporate Power. The Company has all requisite corporate
power and authority to own, operate and lease its properties and to
carry on its business as and where such is now being conducted, to
enter into this Agreement and the other documents and instruments to be
executed and delivered by it pursuant hereto and to carry out the
transactions contemplated hereby and thereby.
(d) No Subsidiaries. The Company does not own an interest in
any corporation, partnership or other entity.
(e) Articles of Incorporation; Bylaws. The copies of the
Company's articles of incorporation and bylaws which have heretofore
been delivered to HealthCare are complete and correct as amended or
restated to the date hereof.
3.2 Authorization. The execution and delivery of this Agreement and the
other documents and instruments to be executed and delivered by the Company
pursuant hereto and the consummation of the transactions contemplated hereby and
thereby have been duly authorized and approved by the board of directors of the
Company and the Shareholders. This Agreement constitutes and, when executed and
delivered, the other documents and instruments to be executed and delivered by
the Company and the Shareholders pursuant hereto, will constitute valid and
binding agreements of the Company and the Shareholders enforceable against the
Company and the Shareholders in accordance with their respective terms.
3.3 No Violation. Neither the execution and delivery of this Agreement
or the other documents and instruments to be executed and delivered by the
Company or the Shareholders pursuant hereto, nor the consummation by the Company
and the Shareholders of the transactions contemplated hereby and thereby (a)
will violate any statute or law or any rule, regulation, order, writ, injunction
or decree of any court or governmental authority, (b) will require any
authorization, consent, approval, exemption or other action by or notice to any
court, administrative or governmental agency, instrumentality, commission,
authority, board or body or (c) will violate or conflict with, or constitute a
default (or an event which, with notice or lapse of time, or both, would
constitute a default) under, or will result in the termination of, or accelerate
the performance required by, or result in the creation of any material Lien (as
defined in Section 3.18(b)) upon any of the assets of the Company under, any
term or provision of the articles of incorporation or bylaws of the Company or
of any
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material contract, commitment, understanding, arrangement, agreement or
restriction of any kind or character to which the Company is a party or by which
the Company or the Company's assets or properties or the shares of the Company
may be bound or affected.
3.4 Financial Statements. The Shareholders have heretofore delivered to
HealthCare the following financial statements of the Company including balance
sheets and statements of income (the "Financial Statements"):
(a) Financial statements for the Company's fiscal years ended
October 31, 1994, 1995, and 1996;
(b) Financial Statements for the interim period ended February
28, 1997.
The Financial Statements are correct and complete in all material respects and
fairly present the financial condition of the Company at the dates indicated and
results of its operations for the periods then ended in accordance with
generally accepted accounting principles consistently applied.
3.5 Books and Records. The books of account of the Company reflect all
material items of income and expense and the assets, liabilities, and accruals
of its business and operations. The minute books and stock transfer records of
the Company contain records which are complete and accurate in all material
respects of all minutes and consents of shareholders and directors and all stock
transfers of the Company.
3.6 Absence of Certain Changes. Since the date of the most recent
balance sheet included in the Financial Statements, there has not been:
(a) Adverse Change. Any material adverse change in the
financial condition, assets, liabilities, business, prospects or
operations of the Company;
(b) Damage. Any material loss, damage or destruction, whether
covered by insurance or not, affecting the Company's businesses or
assets;
(c) Increase in Compensation. Any increase in the
compensation, salaries or wages payable or to become payable to any
employee or agent of the Company (including, without limitation, any
increase or change pursuant to any bonus, pension, profit sharing,
retirement or other plan or commitment), or any bonus or other employee
benefit granted, made or accrued;
(d) Labor Disputes. Any labor dispute or disturbance, other
than routine individual grievances which are not material to the
business, financial condition or results of operations of the Company;
(e) Commitments. Any commitment or transaction by the Company
(including, without limitation, any capital expenditure) other than in
the ordinary course of business consistent with past practice;
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(f) Dividends. Any declaration, setting aside, or payment of
any dividend or any other distribution in respect of the Company's
capital stock; any redemption, purchase or other acquisition by the
Company of any of its capital stock or any security relating thereto;
or any other payment to the Shareholders as shareholders;
(g) Disposition of Property. Any sale, lease or other transfer
or disposition of any properties or assets of the Company except for
sales of inventory, consumption of supplies, and nonmaterial
dispositions of worn or broken parts and equipment all in the ordinary
course of business;
(h) Indebtedness. Any indebtedness for borrowed money
incurred, assumed or guaranteed by the Company other than changes in
the Company's lines of credit in the ordinary course of business;
(i) Amendment of Contracts. Any entering into, amendment or
termination by the Company of any contract, or any waiver of material
rights thereunder, other than in the ordinary course of business;
(j) Loans, Advances, or Credit. Any loan or advance or any
grant of credit by the Company; or
(k) Unusual Events. Any other event or condition specifically
related to the Company not in the ordinary course of business which
would have a material adverse effect on the assets or the business of
the Company.
3.7 Adverse Conditions. There are no conditions known to the
Shareholders with respect to the markets, products, facilities, or personnel of
the Company which might materially and adversely affect its business or
prospects other than such conditions as may affect the industry in which the
Company participates as a whole.
3.8 No Litigation. There is no action, suit, arbitration, proceeding,
investigation or inquiry pending or to the knowledge of the Shareholders
threatened against the Company, its directors (in such capacity), its business
or any of its assets. Schedule 3.8 identifies all actions, suits, proceedings,
investigations and inquiries to which the Company or either of the Shareholders
has been a party since January 1, 1993. Neither the Company nor its business or
any of its assets is subject to any judgment, order, writ or injunction of any
court, arbitrator or federal, state, foreign, municipal or other governmental
department, commission, board, bureau, agency or instrumentality.
3.9 Compliance With Laws.
(a) Compliance. The Shareholders warrant that the Company
(including each and all of its operations, practices, properties and
assets) is in material compliance with all applicable federal, state,
local and foreign laws, ordinances, orders, rules and regulations
(collectively, "Laws"), including, without limitation, those applicable
to discrimination in employment, occupational safety and health,
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trade practices, environmental protection, competition and pricing,
product warranties, zoning, building and sanitation, employment,
retirement and labor relations, and product advertising except to the
extent any noncompliance would not have a material adverse effect upon
the assets or the business of the Company taken as a whole. The Company
has not received notice of any violation or alleged violation of, and
are not subject to liability for past or continuing violation of, any
Laws. All reports and returns required to be filed by the Company with
any governmental authority have been filed, and were accurate and
complete when filed except to the extent any deficiency would not have
a material adverse effect upon the assets or the business of the
Company taken as whole.
(b) Licenses and Permits. The Company has obtained all
licenses, permits, approvals, authorizations and consents of all
governmental and regulatory authorities and all certification
organizations required for the conduct of its businesses (as presently
conducted) except to the extent failure to do so would not have a
material adverse effect upon the assets or the business of the Company
taken as a whole. All such licenses, permits, approvals, authorizations
and consents are described in Schedule 3.9(b) and are in full force and
effect. The Company (including its operations, properties and assets)
is and has been in compliance with all such permits and licenses,
approvals, authorizations and consents, except to the extent any
noncompliance would not have a material adverse effect upon the assets
or the business of the Company taken as a whole.
3.10 Environmental Compliance. The Shareholders have delivered to
HealthCare a copy of every written communication given or received by the
Company to or from any environmental agency with respect to the Company or with
respect to any property which is now being used or which has heretofore been
used by the Company in the operation of its business. The Shareholders have at
all times operated the Company in compliance with all applicable federal, state
and local laws and regulations relating to pollution control and environmental
contamination including, without limitation, all laws and regulations governing
the generation, use, collection, treatment, storage, transportation, recovery,
removal, discharge or disposal of hazardous materials (as defined below) and all
laws and regulations with regard to record keeping, notification and reporting
requirements respecting Hazardous Materials (as defined below), except for such
noncompliance as would not have a material adverse effect on Company's business
or assets. The Company has not received notice of any administrative or judicial
proceeding pursuant to such laws or regulations. There is no basis for the
assertion of a valid claim against the Company relating to environmental matters
including, without limitation, any claim arising from past or present
environmental practices, asserted under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended from time to time
("CERCLA"), the Resource Conservation and Recovery Act, as amended from time to
time ("RCRA") or any other federal, state, or local statute, code, rule,
regulation, ordinance, order, decree, or other governmental authority as now or
at any time hereafter in effect. For purposes of this Section 3.10, the term
"Hazardous Materials" means materials defined as "hazardous wastes" or "solid
wastes" in CERCLA, RCRA or in any similar federal, state, or local statute,
code, rule, regulation,
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ordinance, order, decree, or other governmental authority as now or at any time
hereafter in effect.
3.11 No Undisclosed Liabilities. Except (a) as described on the
Schedules attached hereto as an item which can be reasonably construed as a
liability or obligation or (b) items not required to be disclosed on the
Schedules by reason of exceptions, exclusions, or other qualifications contained
in the representations and warranties of this Agreement, the Company has no
liabilities or obligations of any nature (absolute, accrued, contingent or
otherwise) which are not properly reflected or reserved against in the Financial
Statements (except for liabilities or obligations which have been incurred in
the ordinary course of business since the date of the most recent Financial
Statements) in a manner consistent with past practice; and the reserves
reflected in the Financial Statements are adequate, appropriate and reasonable.
3.12 Tax Matters.
(a) Except with respect to current Taxes (as defined below)
for which adequate reserves have been accrued, the Company has timely
paid all federal, state, county, local and foreign taxes, including,
without limitation, income taxes, excise taxes, sales taxes, use taxes,
gross receipts taxes, franchise taxes, employment and payroll taxes,
withholding taxes, property taxes, import duties, and all other taxes
of any nature whatsoever and however denominated together with all
penalties, additions to tax, interest, assessment or other damages
imposed thereon with respect to the Company (collectively, "Tax" or
"Taxes") required to be paid or deposited by the Company through the
Closing. For purposes of this Section 3.12(a), timely payment shall
include payment in accordance with any available extensions and
recording of balances due as payables.
(b) The Company has filed on or before the applicable due date
(including extensions) all tax returns which it is required to have
filed through the date hereof and has timely paid all Taxes due for the
periods covered by such returns including any deficiencies or other
additional amounts subsequently assessed by any taxing authority with
respect to each such tax return. All such returns are correct and
complete.
(c) The Company has not waived any statute of limitations
applicable to its Taxes or agreed to any extension of time with respect
to a Tax assessment or deficiency of the Company, and the assessment of
any additional Taxes of the Company with respect to periods for which
returns have been filed is not expected.
(d) There are no proposed deficiencies or unresolved claims
concerning the Company's liability for Taxes.
(e) Complete and correct copies of the Company's federal and
California income tax returns for 1993, 1994, and 1995 have been
delivered by the Shareholders to HealthCare.
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3.13 Product Warranty. Set forth in Schedule 3.13 is a true, correct
and complete copy of the Company's standard warranty or warranties for sales of
its products.
3.14 Product Liability. No action is pending or, to the knowledge of
the Shareholders, threatened against or involving the Company relating to any
product alleged to have been sold by the Company and alleged to have been
defective, or improperly designed or manufactured. To the knowledge of the
Shareholders, there exists no design, manufacturing or other defects in products
sold in the course of the Company's business or held as inventory.
3.15 Insurance. The Company maintains policies of fire, liability,
product liability, malpractice, workers compensation, health and other forms of
insurance with such coverage limits and deductible amounts as are reasonable and
prudent in light of the nature of its assets and the risks of its business. The
Company has received no notification of cancellation, modification or denial of
renewal of any material policies of fire, product liability, malpractice or
other forms of insurance.
3.16 Suppliers. The Company has not received from any material supplier
a notice of termination or intent to terminate its relationship with the
Company.
3.17 Patents, Trademarks, etc. Set forth in Schedule 3.17 is a list of
all United States and foreign trademarks, service marks, trade names, brand
names, copyrights, including registrations and applications, patent and patent
applications, and employee covenants and agreements respecting intellectual
property ("Trade Rights") in which the Company now has any interest, specifying
the basis on which such Trade Rights are owned, controlled, used or held (under
license or otherwise) by the Company, and also indicating which of such Trade
Rights are registered. All Trade Rights shown as registered in Schedule 3.17
have been properly registered, all pending registrations and applications have
been properly made and filed and all annuity, maintenance, renewal and other
fees relating to registrations or applications are current. In order to conduct
the business of the Company, as such is currently being conducted, the Company
does not require any Trade Rights that it does not already have. The Company is
not infringing and has not infringed on any Trade Rights of another in the
operation of its business. To the knowledge of the Shareholders no person is
infringing on the Trade Rights of the Company. The Company has not granted any
license or made any assignment of any Trade Right and no other person has any
right to use any Trade Right owned or held by the Company. The Company does not
pay any royalties or other consideration for the right to use any Trade Rights
of others. Except as set forth in Schedule 3.17, to the knowledge of
Shareholders, there are no inquiries, investigations or claims or litigation
challenging or threatening to challenge the Company's right, title and interest
with respect to its continued use and right to preclude others from using any
Trade Rights of the Company. To the knowledge of Shareholders, all Trade Rights
of the Company are valid, enforceable and in good standing, and there are no
equitable defenses to enforcement based on any act or omission of the Company.
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3.18 Contracts and Commitments.
(a) Leases.
(i) Set forth in Schedule 3.18(a) is a list of all
real and personal property leases (the "Leases") to which the
Company is party. Complete and correct copies of each lease
listed on the schedule, and all amendments thereto, have
heretofore been delivered to HealthCare. The Leases are
currently in full force and effect.
(ii) Company is not in default under the Leases; to
the knowledge of the Shareholders, there are no defaults by
the lessors under any of the Leases; and no event has occurred
which with the passage of time or the giving of notice would
constitute a default under any of the Leases. The Company has
not waived any rights under any of the Leases.
(b) Purchase Commitments. Set forth in Schedule 3.18(b) is a
list of all agreements (written or oral) between the Company and third
parties for the purchase of goods and supplies by the Company which
individually call for the payment by the Company after the date hereof
of more than $5,000 or which obligate the Company for a period
extending over a period of more than 90 days from the date hereof.
Complete and correct copies of all such written agreements have
heretofore been delivered to HealthCare.
(c) Sales Commitments. Set forth in Schedule 3.18(c) is a list
and description of all presently effective agreements (written or oral)
between the Company and third parties for the distribution and sale of
its products. Complete and correct copies of all such written contracts
have heretofore been delivered to HealthCare.
(d) Contracts With the Shareholders and Certain Others. Except
for the employment relationship which exists between the Shareholders
and the Company, the Company has no agreement, understanding, contract
or commitment (written or oral) with the Shareholders, or any relative
of the Shareholders.
(e) Collective Bargaining Agreements. The Company is not party
to any collective bargaining agreement with any union.
(f) Loan Agreements. The Company is not obligated under any
loan agreement, promissory note, letter of credit, or other evidence of
indebtedness as a signatory, guarantor or otherwise.
(g) Guarantees. The Company has not under any instrument which
is presently effective guaranteed the payment or performance of any
person, firm or corporation, agreed to indemnify any person or act as a
surety, or otherwise agreed to be contingently or secondarily liable
for the obligations of any person.
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(h) Restrictive Agreements. The Company is not party to nor is
it bound by any agreement requiring it to assign any interest in any
trade secret or proprietary information, or prohibiting or restricting
it from competing in any business or geographical area or soliciting
customers or otherwise restricting them from carrying on its business
anywhere in the world.
(i) Other Material Contracts. The Company is not party to any
lease, license, contract (including without limitation contracts with
health maintenance organizations) or commitment of any nature involving
consideration or other expenditure in excess of $5,000, or involving
performance over a period of more than 90 days, or which is otherwise
individually material to the operations of the Company, except as set
forth in Schedule 3.18(i).
(j) No Default. The Company is not in default under any lease,
agreement, contract or commitment, nor has any event or omission
occurred which through the passage of time or the giving of notice, or
both, would constitute a default thereunder or cause the acceleration
of any of the Company's obligations or result in the creation of any
Lien (as defined in Section 3.19(b) below) on any of the assets owned,
used or occupied by the Company. To the knowledge of the Shareholders,
no third party is in default under any lease, agreement, contract or
commitment to which the Company is a party, nor has any event or
omission occurred which, through the passage of time or the giving of
notice, or both, would constitute a default thereunder or give rise to
an automatic termination, or the right of discretionary termination
thereof.
3.19 Title to and Condition of Properties.
(a) Real Property. The Company does not own any interest in
any real property other than under the leases referred to in Section
3.18(a) hereof.
(b) Personal Property. The Company has good and marketable
title to all its assets, free and clear of all mortgages, liens
(statutory or otherwise), security interests, claims, pledges,
equities, options, conditional sales contracts, assessments, levies,
easements, covenants, reservations, restrictions, exceptions,
limitations, charges or encumbrances of any nature whatsoever
(collectively, "Liens"). All the Company's tangible assets are located
at the business premises leased by it and all tangible assets located
at such premises are owned by the Company.
(c) Condition. All the Company's tangible assets are, taken as
a whole, in good operating condition and repair, normal wear and tear
excepted.
(d) Land Use Regulations. There are no condemnation, zoning,
land use, or other regulatory proceedings, pending or, to the knowledge
of the Shareholders, planned to be instituted, that could detrimentally
affect the use or occupancy of the real property presently occupied by
the Company or the continued operation of the Company's business as it
is presently being conducted.
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3.20 Employee Benefit Plans. Set forth in Schedule 3.20, is a
description of all pension, profit sharing, retirement, bonus, executive or
deferred compensation, hospitalization and other similar fringe or employee
benefit plans, programs and arrangements, and any employment or consulting
contracts, "golden parachutes", severance agreements or plans, vacation and sick
leave plans including, without limitation, all "employee benefit plans" (as
defined in Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA")), all employee manuals, and all written or binding oral
statements of policies, practices or understandings relating to employment,
which are provided to, for the benefit of, or relate to, any persons employed by
the Company. The items described in the foregoing sentence are hereinafter
sometimes referred to collectively as "Employee Plans/Agreements." True and
correct copies of all written Employee Plans/Agreements, including all
amendments thereto, have heretofore been provided to HealthCare. The Company is
in compliance with and has made all payments due under all Employee
Plans/Agreements and with respect thereto the Company is in compliance with all
applicable federal and state laws and regulations. The Company is not a
contributor to any multi-employer pension plan which has an unfunded liability
with respect to benefits due its participants.
3.21 Employment Compensation. Set forth in Schedule 3.21 is a true and
correct list of:
(a) All employees to whom the Company is paying compensation;
such list identifies the current annual rate of compensation for each
salaried employee and in the case of hourly or commission employees
identifies certain reasonable ranges of rates and the number of
employees falling within each such range; and
(b) All amounts owed to employees of the Company (including
the Shareholders) for accrued sick pay, vacation pay, and bonus pay.
3.22 Key Employees; Bank; Etc. Set forth in Schedule 3.22 is a list
showing:
(a) The names of all the Company's officers and directors;
(b) The name of each bank at which the Company has (i) an
account and the numbers of all accounts, (ii) a line of credit, or
(iii) a safe deposit box and the name of each person authorized to draw
thereon or have access thereto; and
(c) The name of each person holding a power of attorney from
the Company and a summary of the terms thereof.
3.23 Inventory. The inventories of the Company are of a quality and
quantity usable and salable in the ordinary course of business and have a
commercial value at least equal to the value shown on the Financial Statements.
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3.24 Disclosure. No representation or warranty by the Shareholders in
this Agreement, nor any statement, certificate, schedule, or exhibit hereto
furnished or to be furnished by or on behalf of the Shareholders pursuant to
this Agreement, nor any document or certificate delivered to HealthCare pursuant
to this Agreement or in connection with transactions contemplated hereby,
contains or shall contain any untrue statement of material fact or omits or
shall omit a material fact necessary to make the statements contained therein
not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF HEALTHCARE
HealthCare hereby represents and warrants to the Shareholders as
follows:
4.1 Corporate.
(a) Organization. HealthCare is a corporation duly authorized
and validly existing under the laws of the state of Washington.
(b) Corporate Power. HealthCare has all requisite corporate
power and authority to own, operate and lease its properties, to carry
on its business as and where such is now being conducted, to enter into
this Agreement and the other documents and instruments to be executed
and delivered by it pursuant hereto and to carry out the transactions
contemplated hereby and thereby.
(c) Qualification. HealthCare is duly licensed or qualified to
do business as a foreign corporation, and is in good standing, in each
jurisdiction wherein the character of the properties owned or leased by
it, or the nature of its business, makes such licensing or
qualification necessary.
4.2 Capitalization. As of the date thereof, the authorized and issued
capital stock of HCC is as set forth in HCC's Registration Statement on Form
SB-2 (the "Registration Statement") filed with the Securities and Exchange
Commission March 12, 1997, referred to in Section 6.1(a)(ii). All of such issued
and outstanding shares have been validly issued and are fully paid and
nonassessable. The HCC Shares to be issued to the Shareholders pursuant to this
Agreement will, upon issuance, be validly issued, fully paid, and nonassessable
and free and clear of any lien or restriction except as set forth herein.
4.3 Authorization. The execution and delivery of this Agreement and the
other documents and instruments to be executed and delivered by HealthCare
pursuant hereto and the consummation of the transactions contemplated hereby and
thereby have been duly authorized and approved by the board of directors and HCC
as the shareholder of HealthCare. This Agreement constitutes and, when executed
and delivered, the other documents and instruments to be executed and delivered
by HealthCare pursuant hereto, will constitute valid and binding agreements of
HealthCare enforceable against HealthCare in
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accordance with their respective terms. The issuance of the HCC Shares as
provided herein has been duly approved by the board of directors of HCC.
4.4 No Violation. Neither the execution and delivery of this Agreement
or the other documents and instruments to be executed and delivered by
HealthCare pursuant hereto, nor the consummation by it of the transactions
contemplated hereby and thereby (a) will violate any statute or law or any rule,
regulation, order, writ, injunction or decree of any court or governmental
authority, (b) will require any authorization, consent, approval, exemption or
other action by or notice to any court, administrative or governmental agency,
instrumentality, commission, authority, board or body (except the Alberta Stock
Exchange), or (c) will violate or conflict with, or constitute a default (or an
event which, with notice or lapse of time, or both, would constitute a default)
under, or will result in the termination of, or accelerate the performance
required by, or result in the creation of any material Lien upon any of the
assets of HealthCare under any term or provision of its articles of
incorporation or bylaws or of any material contract, commitment, understanding,
arrangement, agreement or restriction of any kind or character to which it is a
party or by which it or any of its assets or properties may be bound or
affected.
4.5 Disclosure. No representation or warranty by HealthCare in this
Agreement nor any statement, certificate, schedule, or exhibit hereto furnished
or to be furnished by or on behalf of HealthCare pursuant to this Agreement, nor
any document or certificate delivered to HealthCare pursuant to this Agreement
or in connection with transactions contemplated hereby, contains or shall
contain any untrue statement of material fact or omits or shall omit a material
fact necessary to make the statements contained therein not misleading.
ARTICLE V
COVENANTS
5.1 Covenants of the Shareholders.
(a) Access to Information and Records. The Shareholders agree
that during the period between the date hereof and to the Closing,
HealthCare, its counsel, accountants and other representatives shall be
provided (i) reasonable access during normal business hours to all of
the properties, books, records, contracts and documents of the Company
for the purpose of such inspection, investigation and testing as
HealthCare deems appropriate (and the Shareholders shall furnish or
cause to be furnished to HealthCare and its representatives all
information with respect to the business and affairs of the Company as
HealthCare may reasonably request), (ii) reasonable access to employees
and agents of the Company for such meetings and communications as
HealthCare reasonably desires, and (iii) with the prior consent of the
Company in each instance (which consent shall not be unreasonably
withheld), access to vendors, customers, and others having business
dealings with the Company.
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(b) Conduct of Business Pending the Closing. The Shareholders
agree that from the date hereof until the Closing, except as otherwise
approved in writing by HealthCare:
(i) No Changes. The Company will carry on its
business diligently and in the same manner as heretofore and
will not make or institute any changes in its methods of
purchase, sale, management, accounting or operation.
(ii) Maintain Organization. The Company will use its
best efforts to maintain, preserve, renew and keep in force
and effect the existence, rights and franchises of the Company
and to preserve the business organization of the Company
intact, to keep available to HealthCare the present officers
and employees of the Company, and to preserve for HealthCare
its present relationships with suppliers and customers and
others having business relationships with the Company.
(iii) No Breach. The Company will use its best
efforts to avoid any act, or any omission to act, which may
cause a breach of any material contract, commitment or
obligation, or any breach of any representation, warranty,
covenant or agreement made by the Shareholders herein.
(iv) No Material Contracts. No contract or commitment
will be entered into, and no purchase of assets (tangible or
intangible) will be made, by or on behalf of the Company,
except contracts, commitments, purchases or sales which are in
the ordinary course of business and consistent with past
practice.
(v) No Corporate Changes. The Company shall not amend
its articles of incorporation or bylaws or make any changes in
its authorized or issued capital stock nor grant any right or
option to acquire any shares of its capital stock.
(vi) Maintenance of Insurance. The Company shall
maintain all of its insurance in effect as of the date hereof
or replace such insurance with comparable coverage.
(vii) Maintenance of Property. The Company shall use,
operate, maintain and repair all its assets and properties in
a normal business manner consistent with the Company's past
practices.
(viii) Interim Financials. The Company will provide
HealthCare with interim monthly financial statements and other
management reports as and when they are available.
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(ix) No Dividends. The Company shall not declare or
pay any dividend (whether in cash, stock or property) or make
any other distribution to the Shareholders.
(x) Compensation. The Company shall not increase the
compensation or benefits of any of its employees nor make any
other change in the terms of their employment.
(c) Reimbursement of Vacation Pay. In consideration for
excluding accruals for vacation pay entitlements for employees of the
Company from the definition of Net Working Capital, the Shareholders
agrees to reimburse HealthCare for any vacation pay payments HealthCare
is required to make to former employees of the Company who become
employees of HealthCare as of the Closing and whose employment
terminates for any reason within the first six months following the
Closing to the extent such payments relate to accruals of vacation pay
prior to the Closing.
(d) HCC Shares. The Shareholders agree to retain the HCC
shares for one year after the Closing Date.
(e) Plan Audit. Company's defined contribution benefit plan
referred to in Section 5.2(b) is currently being audited by the
Internal Revenue Service. Shareholders agree to retain responsibility
for the conduct of this audit on behalf of the plan and Company and to
indemnify and hold HealthCare harmless from and against all loss,
costs, fees, expenses, penalties, and interest which might result from
such audit.
5.2 Covenants of HealthCare.
(a) The Shareholders have provided personal guarantees or have
otherwise become individually liable with respect to certain leases,
line of credit agreements, purchase agreements with manufacturers, or
other agreements for the benefit for the Company, including, without
limitation, those described on Schedule 5.2(a). Following the Merger,
HealthCare will use its best efforts to obtain the release of the
Shareholders from all such personal liabilities. To the extent that any
such release cannot be obtained, HealthCare will indemnify and hold the
Shareholders harmless with respect to any loss, cost, or expense the
Shareholders may incur as a result of not being released.
(b) Company has heretofore maintained a defined contribution
benefit plan for its employees. Promptly after the Closing, HealthCare
shall take such action as may be necessary or appropriate to terminate
the plan and arrange for the distribution to the participants of their
account balances. Until the plan is terminated, Shareholders shall be
permitted to remain as its trustees subject to their reasonable
performance of their duties as trustees.
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5.3 Acknowledgment. HealthCare and the Shareholders acknowledge that
the rules governing the practice of audiology by corporations in the state of
California and the policies of the administrative agencies charged with the
enforcement of such rules are unclear and their application of the transaction
provided for herein are uncertain. Accordingly, the parties agree that,
notwithstanding any other provision hereof, the parties shall make no claim
against each other related to or arising out of such rules or policies.
ARTICLE VI
SECURITIES LAWS
6.1 Securities Laws.
(a) Investment Representations. The Shareholders represent to
HealthCare as follows:
(i) The Shareholders are acquiring the HCC Shares for
their own account and for investment only, and not with a view
to the distribution of all or any part of the HCC Shares, and
the acquisition of the HCC Shares by the Shareholders and
their continued holding thereof as may be required by law and
the terms hereof are consistent with their financial position.
(ii) The Shareholders have had access to complete
information regarding the business and finances of HCC, have
met and discussed the business and finances of HCC with its
management employees to the extent they deem necessary, have
received, read, and understood the contents of the
Registration Statement, and the Shareholders believe they have
received all the information they consider necessary or
appropriate for deciding whether to receive the HCC Shares as
consideration in the Merger.
(iii) The Shareholders can bear the economic risk of
receiving the HCC Shares as consideration in the Merger, and
have such knowledge and experience in financial or business
matters that they are capable of evaluating the merits and
risks of receiving such shares.
(iv) The Shareholders are "accredited investors" as
that term is defined in Rule 501 of Regulation D promulgated
by the Securities and Exchange Commission pursuant to the
Securities Act of 1933, as a result of the following:
(A) Each of the Shareholders has an
individual net worth, or joint worth with the
Shareholder's spouse, which exceeds $1,000,000;
and/or
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(B) Each of the Shareholders has had an
individual income in excess of $200,000 in each of
the two most recent years or joint income with
Shareholder's spouse in excess of $300,000 in each of
those years and has a reasonable expectation of
reaching the same income level in the current year.
(b) Limitations on Transfer. Except as expressly provided in this
Agreement, the Shareholders shall not, directly or indirectly, offer or sell,
pledge, transfer, or otherwise dispose of all or any portion of the HCC
Shares, or solicit any offer to buy, purchase, or otherwise acquire or take a
pledge of all or any portion of the HCC Shares, except (A) in the manner and
to the extent described in (i) a registration statement in effect under the
Securities Act of 1933 (the "Act") covering the HCC Shares and as to which a
prospectus meeting the requirements of the Act is duly delivered and filed as
necessary with any state agency or (ii) an opinion of counsel for the
Shareholders reasonably acceptable to HCC, which opinion is in form and
substance satisfactory to counsel for HCC, to the effect that such proposed
offer, sale, pledge, transfer, or other disposition of HCC Shares may
lawfully be made without such registration, delivery or state filing or (B)
pursuant to trades made on the Alberta Stock Exchange ("ASE") after 90 days
following the Closing pursuant to Rule 904 of Regulation S under the Act. The
Shareholders acknowledge that they have consulted with counsel concerning the
limited availability of exemptions from registration under the Act or
exemptions from qualification under state securities laws and they understand
that they (i) may bear the economic risk of investment in the HCC Shares for
an indefinite period of time because the HCC Shares have not been registered
under the Act or qualified under state securities laws and, therefore, cannot
be sold unless they are subsequently registered under the Act or qualified
under state securities laws or an exemption from such registration, such as
that contained in Rule 904, or from state qualification is available, (ii)
HCC is not obligated to register the HCC Shares under the Act or qualify them
under state securities laws, (iii) that absent registration, the HCC Shares
ordinarily may not be sold in the United States for at least one year after
the Closing and then only in accordance with Rule 144 under the Act, and
absent qualification under state securities laws may be subject to similar
restrictions and (iv) the HCC Shares may not be sold, transferred or
otherwise disposed of in the province of Alberta, Canada, or traded through
the facilities of the ASE for a period of 90 days following the Closing.
(c) Legends on Certificates. Certificates representing the HCC Shares
shall be endorsed with legends, (i) substantially in the form set forth in
Schedule 6.1(c) hereto, and (ii) to the effect that the HCC Shares may not be
traded in Canada for 90 days following the Closing. HCC need not recognize
any person other than the Shareholders as having any interest in or to the
HCC Shares unless the acquisition thereof shall have been made in compliance
with Subsection 6.1(b) above. HCC may issue appropriate stop transfer
instructions to the transfer agent for the HCC Shares to prevent transfers in
violation of Subsection 6.1(b) hereof.
(d) Removal of Legends.
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(i) At any time while the HCC Shares are registered under the
Act, HCC shall, upon written request, cause the certificates
representing the HCC Shares to be reissued free of all legends and
withdraw all stop transfer instructions. Upon the termination of any
such registration, if the Shareholders own HCC Shares represented by
a certificate without such legends, the Shareholders shall, upon
written request, promptly return such certificate to HCC for
reissuance on a certificate endorsed with the legends specified in,
and otherwise subject to, the provisions of Subsection 6.1(c). Three
years after the Closing, HCC's right to request the return of
unlegended certificates for previously registered HCC Shares shall
terminate and HCC shall, upon written request of the Shareholders,
cause any certificates bearing one or more legends to be reissued
free of such legends and withdraw all stop transfer instructions,
provided that Rule 144(k) under the Act, or a comparable rule, is in
effect in substantially its present form and the Shareholders
furnishes to HCC evidence satisfactory to HCC and its counsel that
they meet the requirements of such rule.
(ii) HealthCare shall, upon written request, cause a
certificate representing all or a portion of the HCC Shares to be
reissued free of all legends and shall withdraw all stop transfer
instructions upon the provision by the Shareholders of a declaration
to The R-M Trust Company as transfer agent in substantially the form
set forth in Schedule 6.1(d)(ii) hereto.
ARTICLE VII
CONDITIONS PRECEDENT TO HEALTHCARE'S OBLIGATIONS
Each and every obligation of HealthCare to be performed at Closing
shall be subject to the satisfaction prior to or at the Closing (or the written
waiver by HealthCare) of each of the following conditions:
7.1 Representations and Warranties True at Closing. Each of the
representations and warranties made by the Shareholders in this Agreement, or in
any instrument, schedule, list, certificate or writing delivered by Shareholders
pursuant to this Agreement, shall be true and correct when made and shall be
true and correct in all material respects at and as of the Closing as though
such representations and warranties were made as of the Closing.
7.2 Compliance With Agreement. The Shareholders shall have in all
material respects performed and complied with all of their agreements and
obligations under this Agreement which are to be performed or complied with by
them prior to or on the Closing, including the delivery of the Closing documents
specified in Section 2.2(a) hereof.
7.3 Absence of Suit. No action, suit, investigation or proceeding
before any court or any governmental authority shall have been commenced or
threatened, against HealthCare, the Company or any of the affiliates, officers
or directors of any of them, seeking to restrain, prevent or change the
transactions contemplated hereby, or questioning the validity or legality of any
such transactions, or seeking damages in connection with, or imposing any
condition on, any such transactions; provided that the obligations of HealthCare
shall not be
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affected unless there is a reasonable likelihood that as a result of such
action, suit, investigation, or proceeding HealthCare will be unable to retain
substantially all the practical benefits of the transaction to which it is
entitled under this Agreement.
7.4 Approvals; Consents. All consents (including without limitation
those of Harriman Jones Medical Group, a California professional corporation,
and Ayres & Son, a California limited partnership), permits, approvals, licenses
or orders from any governmental or regulatory body or other third party required
to be obtained by the Shareholders for the lawful consummation of the
transactions contemplated by this Agreement shall have been obtained except
where failure to obtain such consents, permits, approvals, licenses or orders
would not have a material adverse effect (whether or not such effect is referred
to or described in any Schedule) on the business, prospects, financial
conditions, assets, reserves or operations of the Company taken as a whole.
7.5 No Material Adverse Change. From the date of the most recent
Financial Statements to the Closing, the Company shall not have suffered any
change which has a material adverse effect (whether or not such effect is
referred to or described in any Schedule) on the business, prospects, financial
condition, assets, reserves or operations of the Company taken as a whole.
7.6 Agreements.
(a) Noncompetition Agreement. Each of the Shareholders shall
have executed and delivered to HealthCare a Noncompetition Agreement
substantially in the form attached hereto as Schedule 7.6(a).
(b) Employment Agreement. Each of the Shareholders shall have
executed and delivered to HealthCare an Employment Agreement
substantially in the form of Schedule 7.6(b) hereto.
7.7 Alberta Stock Exchange. The issuance of the HCC Shares to the
Shareholders shall have been conditionally approved by the ASE.
7.8 Investor Questionnaires. Shareholders shall each have delivered to
HealthCare a completed investor questionnaire in the form heretofore provided by
HealthCare.
ARTICLE VIII
CONDITIONS PRECEDENT TO THE SHAREHOLDERS'S OBLIGATIONS
Each and every obligation of the Shareholders to be performed at
Closing shall be subject to the satisfaction prior to or at the Closing (or the
written waiver by the Shareholders) of the following conditions:
8.1 Representations and Warranties True at Closing. Each of the
representations and warranties made by HealthCare in this Agreement, or in any
instrument, list, certificate or writing delivered by HealthCare pursuant to
this Agreement, shall be true and correct
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when made and shall be true and correct at and as of the Closing as though such
representations and warranties were made as of the Closing.
8.2 Compliance With Agreement. HealthCare shall have in all material
respects performed and complied with all of HealthCare's agreements and
obligations under this Agreement which are to be performed or complied with by
HealthCare prior to or on the Closing, including the delivery of the closing
documents specified in Section 2.2(b) hereof.
8.3 Absence of Suit. No action, suit, investigation, or proceeding
before any court or any governmental authority shall have been commenced or
threatened against HealthCare, the Company or any of the affiliates, officers or
directors of any of them, seeking to restrain, prevent or change the
transactions contemplated hereby, or questioning the validity or legality of any
such transactions, or seeking damages in connection with, or imposing any
condition on, any such transactions; provided that the obligations of the
Shareholders shall not be affected unless there is a reasonable likelihood that
as a result of such action, suit, proceeding or investigation, the Shareholders
will be unable to retain substantially all the consideration to which they are
entitled under this Agreement.
8.4 Agreements. HealthCare shall have executed and delivered to each of
the Shareholders the Employment and Noncompetition Agreements referred to in
Section 7.6(a) and (b) hereof.
8.5 Alberta Stock Exchange. The issuance of the HCC Shares to the
Shareholders shall have been conditionally approved by the ASE.
ARTICLE IX
INDEMNIFICATION; SURVIVAL OF REPRESENTATIONS
9.1 Indemnification by Shareholders. The Shareholders hereby agree to
indemnify, defend, and hold HealthCare harmless from and against all Claims (as
defined below) asserted against, resulting to, imposed upon, or incurred by
HealthCare directly or indirectly by reason of, arising out of, or resulting
from (a) the inaccuracy or breach of any representation or warranty of the
Shareholders contained in or made pursuant to this Agreement, or (b) the breach
of any covenant of the Shareholders contained in this Agreement. As used in this
Section 9.1, the term "Claim" shall include all losses, damages, judgments,
awards, settlements, costs, and expenses (including without limitation
penalties, court costs, and attorneys fees and expenses at trial and on appeal)
awarded by the arbitrator or arbitrators pursuant to Section 10.12 hereof.
9.2 Indemnification by HealthCare. HealthCare hereby agrees to
indemnify, defend, and hold harmless the Shareholders from and against all
Claims (as defined in Section 9.1) asserted against, resulting to, imposed upon,
or incurred by the Shareholders directly or indirectly by reason of, arising out
of, or resulting from (a) the inaccuracy or breach of any representation or
warranty of HealthCare contained in or made pursuant to this Agreement, or (b)
the breach of any covenant of HealthCare contained in this Agreement.
- 23 -
<PAGE>
9.3 Notice; Defense of Claims. If a claim is to be made by a party
entitled to indemnification hereunder, the party entitled to such
indemnification shall give written notice to the indemnifying party immediately
after the party entitled to indemnification becomes aware of any fact, condition
or event which may give rise to a matter for which indemnification may be
sought; provided that the failure of any indemnified party to give timely notice
shall not affect the rights to indemnification hereunder except to the extent
that the indemnifying party demonstrates actual damage caused by such failure.
If any lawsuit or enforcement action is filed against any party entitled to the
benefit of indemnity hereunder, and if the indemnifying party shall acknowledge
in writing to the indemnified party that the indemnifying party shall be
obligated under the terms of its indemnity hereunder in connection with such
lawsuit, action or claim, then the indemnifying party shall be entitled, if it
or they so elects, to take control of the defense and investigation of such
lawsuit or action and to employ and engage attorneys of its or their own choice
to handle and defend the same, at the indemnifying party's cost, risk and
expense provided that the indemnifying party and its or their counsel shall
proceed with diligence and in good faith with respect thereto. The indemnified
party shall cooperate in all reasonable respects with the indemnifying party and
such attorneys in the investigation, trial and defense of such lawsuit or action
and any appeal arising therefrom; provided, however, that the indemnified party
may, at its or their own cost, participate in the investigation, trial and
defense of such lawsuit or action and any appeal arising therefrom.
9.4 Survival of Representations. All representations and warranties
made by the parties in this Agreement are made only as of the date of this
Agreement but will survive the consummation of the transactions contemplated by
this Agreement for a period ending 90 days after the second fiscal year end
(July 31) of HealthCare which occurs after the Closing (except for the
representations and warranties of the Shareholders set forth in Section 3.12
hereof which shall expire 90 days after the applicable statutes of limitation
shall have run with respect to all tax returns filed by the Company for all
periods ended on or before the Closing) after which all such representations and
warranties shall expire except with respect to claims asserted in writing prior
to such date.
ARTICLE X
MISCELLANEOUS
10.1 Termination.
(a) Right of Termination Without Breach. This Agreement may be
terminated without further liability of any party at any time prior to
the Closing:
(i) By mutual written agreement of the parties, or
(ii) By either HealthCare or the Shareholders if the
Closing shall not have occurred on or before the 90th day
after the date hereof, provided the terminating party has not,
through breach of a representation, warranty or covenant,
prevented the Closing from occurring on or before such date.
- 24 -
<PAGE>
(b) Termination for Breach.
(i) Termination by HealthCare. If there has been a
material breach by the Shareholders of any of their
agreements, representations or warranties contained in this
Agreement which has not been waived in writing by HealthCare,
then HealthCare may, by written notice to the Shareholders at
any time prior to the Closing that such breach is continuing,
terminate this Agreement with the effect set forth in Section
10.1(b)(iii) hereof.
(ii) Termination by Shareholders. If there has been a
material breach by HealthCare of any of its agreements,
representations or warranties contained in this Agreement
which has not been waived in writing by the Shareholders, then
the Shareholders may, by written notice to HealthCare at any
time prior to the Closing that such breach is continuing,
terminate this Agreement with the effect set forth in Section
10.1(b)(iii).
(iii) Effect of Termination. Termination of this
Agreement pursuant to this Section 10.1 shall not in any way
terminate, limit or restrict the rights and remedies of any
party hereto against any other party which has breached or
failed to perform any of the representations, warranties,
covenants, or agreements of this Agreement prior to
termination hereof.
10.2 Waiver. The Shareholders or HealthCare may (a) extend the time for
the performance of any of the obligations or other acts of the other, (b) waive
any inaccuracies in the representations and warranties of the other contained
herein or in any document delivered pursuant hereto and (c) waive compliance
with any of the agreements of the other or satisfaction of any of the conditions
to its obligations contained herein. Any extension or waiver made pursuant to
this Section 10.2 must be by an instrument in writing signed on behalf of the
party granting the extension or waiver. A waiver by any party of any provision
hereof or breach hereof shall not operate or be construed as the waiver of any
other provision or any subsequent breach.
10.3 Binding Effect; No Assignment. This Agreement shall be binding
upon and inure to the benefit of the parties and their respective successors and
legal representatives. This Agreement is not assignable and any purported
assignment shall be null and void. Nothing contained in this Agreement shall be
deemed to confer any right or benefit upon any person other than the parties
hereto to the extent herein provided.
10.4 Dollars. "Dollars" and "$" mean lawful money of the United States
of America, which shall be legal tender on the date of payment for all public
and private debts.
10.5 Variations in Pronouns. All pronouns and any variations thereof
refer to the masculine, feminine or neuter, singular or plural, as the context
may require.
10.6 Headings; Severability. The headings in this Agreement are for
reference only, and shall not affect the interpretation of this Agreement. Each
and every provision of
- 25 -
<PAGE>
this Agreement shall be treated as separate and distinct and, in the event of
any provision hereof being declared invalid, such invalid provision shall be
deemed to be severable and all other provisions hereof shall remain in full
force and effect.
10.7 Schedules. The Schedules are a part of this Agreement as if fully
set forth --------- herein.
10.8 Disclosures and Announcements. Both the timing and the content of
all disclosures to third parties and public announcements concerning the
transactions provided for in this Agreement by either the Shareholders or
HealthCare shall be subject to the approval of the other in all essential
respects, except that the Shareholders's approval shall not be required as to
any announcements or filings HealthCare may be required to make under applicable
laws or regulations.
10.9 Confidential Information. Following the Closing, the Shareholders
shall use their best efforts to cause all of their agents, officers, directors
and employees to treat and safeguard all Confidential Information concerning the
Company and, except as required by law, agree not to disclose or reveal any
Confidential Information to any third party or otherwise use such Confidential
Information. For purposes of this Agreement, "Confidential Information" shall
mean information of a valuable, proprietary and confidential nature relating
directly to the Company, asset lists and valuations of any kind, customer lists,
trade secrets, formulae, methods or processes, channels of distribution, pricing
policies and records. The term "Confidential Information" does not include
information that (a) is or becomes generally available to the public or is a
recognized standard industry practice; or (b) becomes available subsequent to
the date hereof to Shareholders on a non-confidential basis from a source other
than HealthCare or the Company.
10.10 Expenses. The Shareholders agrees to pay all fees and expenses
incurred by them in connection with this Agreement including, without
limitation, all fees of counsel and accountants.
10.11 Notice. All notices, requests, demands and other communications
hereunder shall be given in writing and shall be: (a) personally delivered; (b)
sent by telecopier, facsimile transmission or other electronic means of
transmitting written documents; or (c) sent to the parties at their respective
addresses indicated herein by private overnight courier service. The respective
addresses and telephone numbers to be used for all such notices, demands or
requests are as follows:
If to HealthCare HealthCare Hearing Clinics, Inc.
111 S.W. Fifth Avenue, Suite 2390
Portland, Oregon 97204
Attn: President
Personal & Confidential
Facsimile: (503) 225-9309
- 26 -
<PAGE>
with a copy to: G. Todd Norvell
Miller, Nash, Wiener, Hager & Carlsen
111 S.W. Fifth Avenue, Suite 3500
Portland, Oregon 97204
Facsimile: (503) 224-0155
If to Shareholders: Gary R. Dorf
2100 Windward Lane
Newport Beach, California 92660
Facsimile:
and David Majit
25 Sunrise
Irvine, California 92612
Facsimile:
with a copy to: Mr. Robert Alban
4001 Atlantic Avenue
Long Beach, California 90807
Facsimile (310) 492-6800
If personally delivered, such communication shall be deemed delivered
upon actual receipt; if electronically transmitted, such communication shall be
deemed delivered the next business day after transmission (and the sender shall
bear the burden of proof of delivery); if sent by overnight courier pursuant to
this paragraph, such communication shall be deemed delivered upon receipt. Any
party to this Agreement may change its address for the purposes of this
Agreement by giving notice thereof in accordance with this section.
10.12 Resolution of Disputes.
(a) Arbitration. Any dispute, controversy or claim arising out
of or relating to this Agreement or the performance by the parties of
its terms shall be settled by binding arbitration held in Long Beach,
California, in accordance with the Commercial Arbitration Rules of the
American Arbitration Association then in effect, except as specifically
otherwise provided in this Section 10.12. Notwithstanding the
foregoing, HealthCare, in its discretion, apply to a court of competent
jurisdiction for equitable relief from any violation or threatened
violation of the provisions of the Shareholders under any
noncompetition and confidentiality agreements executed pursuant to this
Agreement.
(b) Arbitrators. If the matter in controversy (exclusive of
attorney fees and expenses) shall appear, as at the time of the demand
for arbitration, to exceed Fifty Thousand Dollars ($50,000), then the
panel to be appointed shall consist of three neutral arbitrators,
otherwise one neutral arbitrator.
- 27 -
<PAGE>
(c) Procedures; No Appeal. The arbitrator(s) shall allow such
discovery as the arbitrator(s) determine appropriate under the
circumstances and shall resolve the dispute as expeditiously as
practicable, and if reasonably practicable, within 120 days after the
selection of the arbitrator(s). The arbitrator(s) shall give the
parties written notice of the decision, with the reasons therefor set
out, and shall have thirty (30) days thereafter to reconsider and
modify such decision if any party so requests within ten (10) days
after the decision. Thereafter, the decision of the arbitrator(s) shall
be final, binding, and nonappealable with respect to all persons,
including (without limitation) persons who have failed or refused to
participate in the arbitration process.
(d) Authority. The arbitrator(s) shall have authority to award
relief under legal or equitable principles, including interim or
preliminary relief, and to allocate responsibility for the costs of the
arbitration and to award recovery of attorney fees and expenses in such
manner as is determined to be appropriate by the arbitrator(s).
(e) Entry of Judgment. Judgment upon the award rendered by the
arbitrator(s) may be entered in any court having in personam and
subject matter jurisdiction. The Shareholders and HealthCare hereby
submit to the in personam jurisdiction of the federal and state courts
in California for the purpose of confirming any such award and entering
judgment thereon.
(f) Confidentiality. All proceedings under this Section 10.12,
and all evidence given or discovered pursuant hereto, shall be
maintained in confidence by all parties.
(g) Continued Performance. The fact that the dispute
resolution procedures specified in this Section 10.12 shall have been
or may be invoked shall not excuse any party from performing its
obligations under this Agreement, and during the pendency of any such
procedure all parties shall continue to perform their respective
obligations in good faith, subject to any rights to terminate this
Agreement that may be available to any party.
10.13 Brokers and Finders. HealthCare on the one hand and Shareholders
jointly on the other, each agree to indemnify and hold the other harmless from
and against any claim made for a broker's or a finder's fee or other similar
compensation (and all related costs and expenses) asserted against an
indemnified party which arises out of or results from an action taken by an
indemnifying party.
10.14 Governing Law. This Agreement may not be modified or terminated
orally, and shall be construed and interpreted according to the internal law of
the state of California, excluding any choice of law rules that may direct the
application of the laws of another jurisdiction.
10.15 Counterparts. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument. Each counterpart
- 28 -
<PAGE>
may consist of a number of copies hereof each signed by less than all, but
together signed by all, of the parties hereto.
10.16 Entire Agreement. This Agreement (including the Schedules) and
the agreements, certificates and other documents delivered pursuant hereto
contain the entire agreement between the parties hereto. All parties
collaborated in the preparation of this Agreement and it has been reviewed by
attorneys for each party. No one party should be considered the author of any
specific language for purposes of legal presumptions.
10.17 Further Assurances. Both before and after the Closing, each party
will cooperate in good faith with the others and will take all appropriate
action and execute any documents, instruments, or conveyances of any kind that
may be reasonable necessary or desirable to carry out any of the transactions
contemplated hereunder.
10.18 Action of Shareholders. Whenever in this Agreement the
Shareholders are given the discretion to take or not take any action, the
decision of the Shareholders shall be made pursuant to the vote of the
Shareholders holding a majority of the shares of the Company.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement effective as of the date first above written.
COMPANY: HEALTHCARE:
HEARING IMPROVEMENT CENTER, HEALTHCARE HEARING CLINICS, INC.
INC.
By --------------------------- By /s/ Edwin J. Kawasaki
--------------, President Edwin J. Kawasaki, Vice President
SHAREHOLDERS:
/s/ Gary R. Dorf
- ------------------------------
Gary R. Dorf
/s/ David Majit
- ------------------------------
David Majit
The undersigned, being the spouses of the Shareholders named in the foregoing
Merger Agreement, hereby relinquish all right, title, and interest, including,
without limitation, any
- 29 -
<PAGE>
community property rights under California law to the shares of the Company and
hereby consent and agree to the transfer of such shares pursuant to such
Agreement
/s/ Deborah Dorf /s/ Gale Majit
- ------------------------------ --------------------------------------
Deborah Dorf Gale Majit
- 30 -
<PAGE>
SCHEDULES
[omitted]
Schedule 1.1 Agreement and Plan of Merger
Schedule 1.4(a)-1 Promissory Note for $132,624
Schedule 1.4(a)-2 Promissory Note for $282,036
Schedule 1.7 Shareholders' Loans
Schedule 2.2(a)(ii) Opinion of Shareholders's Counsel
Schedule 2.2(b)(ii) Opinion of HealthCare's Counsel
Schedule III Disclosure Statement
Schedule 3.8 No Litigation
Schedule 3.9(b) Licenses and Permits
Schedule 3.13 Product Warranty
Schedule 3.17 Patents, Trademarks, etc.
Schedule 3.18(a) Real Property and Personal Property Leases
Schedule 3.18(b) Purchase Commitments
Schedule 3.18(c) Sales Commitments
Schedule 3.18(i) Other Material Contracts
Schedule 3.20 Employee Benefit Plans
Schedule 3.21 Employment Compensation
Schedule 3.22 Key Employees, Bank, Etc.
Schedule 5.2(a) Shareholders Personal Liability
Schedule 6.1(c) Legends on Certificates
Schedule 6.1(d)(ii) Declaration for Removal of Legends
Schedule 7.6(a) Noncompetition Agreement
Schedule 7.6(b) Employment Agreement
- 31 -
Exhibit 23.1
INDEPENDENT AUDITOR'S CONSENT
June 6, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-1004
The Board of Directors
HealthCare Capital Corp.
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts".
Yours very truly,
SHIKAZE RALSTON
/s/ Shikaze Ralston
Ron D. Miller, C.A., C.B.V.
Partner
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
HealthCare Capital Corporation:
We consent to the use of our reports included herein and to the references to
our firm under the heading "Experts" in the prospectus.
/S/ KPMG PEAT MARWICK LLP
Portland, Oregon
June 6, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for HealthCare Capital Corp. and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001029260
<NAME> HealthCare Capital Corp.
<MULTIPLIER> 1
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> JUL-31-1996 JUL-31-1997
<PERIOD-START> AUG-01-1995 AUG-01-1996
<PERIOD-END> JUL-31-1996 JAN-31-1997
<CASH> 11,196 3,327,146
<SECURITIES> 0 0
<RECEIVABLES> 407,579 1,970,098
<ALLOWANCES> (4,743) (150,767)
<INVENTORY> 143,597 317,031
<CURRENT-ASSETS> 607,349 5,634,579
<PP&E> 895,853 1,952,310
<DEPRECIATION> (302,661) (439,681)
<TOTAL-ASSETS> 2,322,114 14,633,910
<CURRENT-LIABILITIES> 588,677 2,436,796
<BONDS> 221,467 3,071,472
0 0
0 0
<COMMON> 1,925,318 10,414,009
<OTHER-SE> (413,348) (1,288,367)
<TOTAL-LIABILITY-AND-EQUITY> 2,322,114 14,633,910
<SALES> 2,389,453 4,201,372
<TOTAL-REVENUES> 2,389,453 4,201,372
<CGS> 1,017,414 1,546,626
<TOTAL-COSTS> 2,978,803 1,851,362
<OTHER-EXPENSES> (7,684) 23,589
<LOSS-PROVISION> 11,832 35,690
<INTEREST-EXPENSE> 15,177 15,293
<INCOME-PRETAX> (581,666) (947,371)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (581,666) (947,371)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (581,666) (947,371)
<EPS-PRIMARY> (0.05) (0.06)
<EPS-DILUTED> (0.05) (0.06)
</TABLE>
