SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 10-KSB
(Mark one)
[X] Annual report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended July 31, 1997
OR
[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from -------- to --------
Commission File No. 0-22367
HEALTHCARE CAPITAL CORP.
(Name of small business issuer in its charter)
Alberta, Canada Not Applicable
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
111 S.W. Fifth Avenue, Suite 2390
Portland, Oregon 97204
(Address of principal executive offices) (Zip code)
(503) 225-9152
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Shares, without nominal or par value
Check whether the issuer: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No ----
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B contained herein, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State the issuer's revenues for its most recent fiscal year:
$13,462,000.
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant, computed by reference to the
price at which the common equity was sold, or the average bid and asked price of
such common equity, as of October 1, 1997: $24,088,027.
State the number of shares outstanding of each of the issuer's classes
of common equity: Common Shares, without nominal or par value, 27,259,517
shares, as of October 20, 1997.
Transitional Small Business Disclosure Format: Yes----- No [X]
Documents Incorporated by Reference:
Portions of the issuer's Management Information Circular and Proxy
Statement dated October 29, 1997, are incorporated by reference into Part III of
this Form 10-KSB.
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TABLE OF CONTENTS
PAGE
PART I
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ITEM 1. Description of Business.......................................................................... 1
ITEM 2. Description of Property.......................................................................... 8
ITEM 3. Legal Proceedings................................................................................ 8
ITEM 4. Submission of Matters to a Vote of Security Holders.............................................. 8
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters ........................................ 9
ITEM 6. Management's Discussion and Analysis or Plan of Operation........................................14
ITEM 7. Financial Statements.............................................................................19
ITEM 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............60
PART III
ITEM 9. Directors, Executive Officers, Promoters, and Control Persons; Compliance with Section 16(a)
of the Exchange Act .............................................................................60
ITEM 10. Executive Compensation...........................................................................61
ITEM 11. Security Ownership of Certain Beneficial Owners and Management...................................61
ITEM 12. Certain Relationships and Related Transactions...................................................61
ITEM 13. Exhibits, List and Reports on Form 8-K...........................................................61
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FORWARD-LOOKING STATEMENTS
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Statements in this report, to the extent they are not based on historical
events, are forward-looking statements. Forward-looking statements include,
without limitation, statements containing the words "believes," "anticipates,"
"intends," "expects," and words of similar import. Investors are cautioned that
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance, or achievements of
HealthCare Capital Corp. (the "Company") to be materially different from those
described herein. Factors that may result in such variance, in addition to those
accompanying the forward-looking statements, 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, development
of new or improved medical or surgical treatments for hearing loss or of
technological advances in hearing instruments, 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 care clinics, product and
professional liability claims brought against the Company that exceed its
insurance coverage, and the availability of and costs associated with potential
sources of financing. 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.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
OVERVIEW
HealthCare Capital Corp. (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, when it acquired nine hearing care clinics in British Columbia.
The Company did not begin operating in the United States until it purchased two
hearing care clinics near Santa Maria, California, in July 1996. From August 1,
1996, to September 30, 1997, the Company acquired 40 additional hearing care
clinics - 24 in Southern California, eight in Illinois, five in Michigan, one in
Indiana, one in North Dakota, and one in New Mexico.
The Company, through its primary operating subsidiaries Sonus-Canada
Ltd., a British Columbia corporation, and Sonus-USA, Inc., a Washington
corporation ("Sonus-USA"), currently owns and operates a network of 52 hearing
care clinics in the United States and Western Canada. In September 1997,
Sonus-USA and Sonus-Canada Ltd. changed their names from HealthCare Hearing
Clinics, Inc., and HC HealthCare Hearing Clinics Ltd., respectively. Clinics
owned by the Company 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.
Each of the Company's hearing care clinics provides its hearing
impaired patients with a full range of audiological products and services.
During the fiscal year ended July 31, 1997, approximately 86% of the Company's
revenues were derived from product sales, including hearing instruments,
batteries, and accessories, while the remaining 14% 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.
Unless otherwise noted herein, all dollar amounts 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.
INDUSTRY BACKGROUND
Professionals and Clinics. Hearing instruments may be dispensed by
either a dispensing audiologist or a hearing instrument specialist ("HIS").
Although both audiologists and HISs may be licensed to dispense hearing
instruments, 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
1997 issue of The Hearing Review, a hearing industry trade journal, indicates
that approximately 27% of HISs in the U.S. are at least 61 years of age, 37% are
51-60 years of age, 25% are 41-50 years of age and only 11% are age 40 or under,
compared to 8%, 19%, 43% and 30%, 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.
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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
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 instrument sales
and audiological services and that the demand for hearing instruments that are
less visible and for newer and superior hearing instrument technology, such as
digital and programmable hearing instruments, 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 instrument and that the demand for hearing instrument 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.
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
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audiological testing, fitting and dispensing of hearing instruments, follow-up
rehabilitative assistance, the sale of hearing instrument batteries, hearing
instrument 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. Due to
the contacts of management with audiologists in the industry, the Company is
frequently presented with opportunities to acquire hearing care clinics. From
August 1, 1996, to September 30, 1997, the Company acquired 40 clinics, all
located in the United States.
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.
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; 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. 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.
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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.
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. 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.
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.
Recruiting Qualified and Productive Audiologists. Audiologists employed
by the Company are primarily responsible for clinic profitability as well as for
attracting and retaining customers. 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. However, the
Company recruits audiologists from a limited pool of available applicants. A
failure to attract and retain qualified audiologists would have a material
adverse effect on the business, financial condition, and results of operations
of the Company.
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
instrument 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 has developed an on-line
management information system to 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.
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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. 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. 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.
Many third-party 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 instrument 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.
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. At October 1, 1997, the Company employed a total
of 93 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
licensed by the appropriate state or province to dispense hearing instruments
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.
PRODUCTS AND SUPPLIERS
The hearing instrument manufacturing industry is highly competitive
with approximately 40 manufacturers serving the worldwide market. Few
manufacturers offer significant product differentiation. The Company currently
purchases hearing instruments 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 instruments in
order to achieve greater volume discounts. In addition to hearing instruments,
the Company's clinics also offer a limited selection of other assistive
listening devices and hearing instrument accessories.
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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.
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 instruments.
However, the Company also competes with other networks of hearing care clinics
and with large distributors of hearing instruments such as Bausch & Lomb, a
hearing instrument 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 instrument 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 is no assurance that one or more of these competitors will not seek to
compete directly in the markets targeted by the Company, nor is there 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.
REGULATION
The sale of hearing instrument 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 instruments may only be sold to individuals
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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 instruments provide customers with certain warning statements and
notices in connection with the sale of hearing instruments 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, Sonus-USA and Sonus-Canada Ltd. These 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
Sonus-USA 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 Sonus-USA 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 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 seven 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
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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 instrument to
the Company and obtain a full refund up to 30 days after the date of purchase.
Some of the Company's clinics offer a 60-day refund period. In general, the
Company can return hearing instruments 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 October 1, 1997, the Company had 163 full-time and 47 part-time
employees, of which 93 were practicing audiologists. None of the Company's
employees are represented by a labor union. Management believes it maintains
good relationships with its employees.
ITEM 2. DESCRIPTION OF PROPERTY
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
July 31, 1997, for the subsequent five-year period is approximately $2.1
million.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON SHARES
The Company's common shares ("Common Shares") are traded on The Alberta
Stock Exchange (the "ASE"). The following table sets forth the reported high and
low sales prices in Canadian and United States dollars for the Common Shares on
the ASE for the periods indicated:
<TABLE>
<CAPTION>
CANADIAN $ UNITED STATES $(1)
FISCAL YEAR PERIOD HIGH LOW HIGH LOW
<S> <C> <C> <C> <C> <C>
1996 First Quarter 0.30 0.14 0.22 0.11
Second Quarter 0.70 0.28 0.51 0.21
Third Quarter 4.00 0.62 2.95 0.45
Fourth Quarter 4.00 2.00 2.94 1.45
1997 First Quarter 2.85 2.00 2.08 1.46
Second Quarter 2.58 1.86 1.89 1.40
Third Quarter 2.45 1.25 1.79 0.89
Fourth Quarter 1.97 1.25 1.42 0.90
</TABLE>
(1) The high and low sales prices were converted to United States dollars as of
the date of sale.
As of October 1, 1997, there were 94 holders of record of the Common
Shares.
CANADIAN FEDERAL INCOME TAX
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 of Common Shares 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 Shares will be
considered to be capital property to a holder provided the holder does not hold
the Common Shares in the course of carrying on a business and has not acquired
the shares 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 the
Company'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 holders 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.
9
<PAGE>
The following applies to holders 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 Shares 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 Shares, not be subject to taxation
in Canada on any gain realized on the disposition unless the shares are "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 Shares are listed on a prescribed stock exchange
for the purposes of the Tax Act, Common Shares held by a non-resident holder
will generally not be "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 of Canada 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 Shares, 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 Shares as "taxable
Canadian property" should consult their own tax advisers with respect to the
income tax consequences of a disposition of their Common Shares.
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 Shares so
purchased. Such deemed dividend will be excluded from the holder's proceeds of
disposition of such Common Shares 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 Shares
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 that owns at least 10% of the voting shares of the Company.
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
10
<PAGE>
"voting interests" of an entity that controls, directly or indirectly, another
entity carrying on a Canadian business.
Apart from the ICA, there are no other limitations on the right of
non-resident 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 non-resident holders of the Common Shares, except as
discussed elsewhere herein.
SALES OF UNREGISTERED SECURITIES DURING FISCAL 1997
During the fiscal year ended July 31, 1997, the Company sold securities
without registration under the Securities Act of 1933 (the "1933 Act") in the
transactions and in reliance on the exemptions described below.
The Company completed a warrant offering that consisted of a private
placement in Canada of 810,000 special warrants consummated in September 1996
and a private placement in the United States 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 Common
Share and one purchase warrant to purchase one additional Common Share for $2.00
per share. Each of the September Special Warrants placed in Canada entitled the
holder to acquire 1.1 Common Shares and a purchase warrant to purchase 1.1
additional Common Shares 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 Company in connection with the offering of the September Special Warrants in
Canada. The Canadian Agent received 34,000 September Special Warrants
exercisable for one Common Share and a purchase warrant to purchase an
additional Common Share for $2.00 per share in partial payment of its selling
commission and was granted an option to acquire 81,000 purchase warrants (the
"Agent's Option"), each exercisable for one Common Share at a price of $1.25 per
share. The warrants are subject to certain rights of the Company 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 Common Share and a purchase warrant to purchase
one additional Common Share for $2.00 per share. In addition, Sunrise and Dallas
Research received an option to acquire 214,900 and 200,000 purchase warrants,
respectively, with each warrant exercisable for one Common Share at a price of
$1.25 per share. The warrants are subject to certain rights of the Company to
force the exercise or cancellation of the warrants.
11
<PAGE>
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
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
John R. Lieberman 4,000
Donald J. Aho 8,000
Marvin Kigler 4,000
12
<PAGE>
PURCHASER NUMBER OF SPECIAL
WARRANTS ISSUED
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
========
COMMON SHARES ISSUED IN ACQUISITIONS
On June 6, 1997, the Company issued 141,844 Common Shares to the two
owners of Hearing Improvement Center, Inc., in connection with its acquisition.
On December 6, 1996, the Company issued 408,000 Common Shares to Deborah Law
Cross in connection with the acquisition of Hearing Dynamics. In connection with
the acquisition of certain hearing care clinics on October 31, 1996, the Company
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 Common Shares at $1.30 principal amount per share. On
October 1, 1996, the Company issued 1,217,268 Common Shares to Gregory J.
Frazer, 253,091 Common Shares to Carissa Bennett, and 919,177 Common Shares to
Jami Tanihana as consideration for the acquisition of certain hearing care
clinics located in Southern California. The Company relied on the exemption
provided by Section 4(2) of the 1933 Act with respect to the securities issued
in the above acquisitions.
13
<PAGE>
EMPLOYEE STOCK OPTIONS
In reliance on Rule 701 under the 1933 Act, during the fiscal year
ended July 31, 1997, the Company granted options for a total of 600,000 Common
Shares at an option price of $1.30 per share to certain employees, officers, and
directors under the Company's Stock Option Plan (the "1993 Plan"). In addition,
the Company granted a total of 1,242,000 options (of which 325,000 options were
subsequently canceled) exercisable at prices ranging from $1.12 to $1.50 per
share to 12 United States residents who are officers or employees of the Company
pursuant to its Stock Award Plan adopted in 1996 (the "1996 Plan") and has
relied on Rule 701 to exempt these option grants. During the fiscal year ended
July 31, 1997, the Company issued a total of 775,000 Common Shares upon exercise
of stock options granted pursuant to the 1993 Plan for an aggregate exercise
price of approximately $316,000. No Common Shares have been issued pursuant to
the exercise of options granted under the 1996 Plan.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
During the past fiscal year, the Company has achieved significant
growth in revenues, primarily due to the acquisition and operation of additional
hearing care clinics. For the fiscal year ended July 31, 1997, the Company
generated total revenues of $13.5 million. As of July 31, 1997, the Company's
cumulative deficit was $2.1 million and its total shareholders' equity was $8.8
million. For the fiscal year ended July 31, 1997, the Company incurred a net
loss of $1.7 million.
RECENT ACQUISITIONS
On August 1, 1996, Sonus-USA 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
$76,000.
On October 1, 1996, Hearing Care Associates Group ("HCA"), consisting
of 11 hearing care clinics located in Los Angeles, California, merged with
Sonus-USA. 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
$2,831,000.
On October 31, 1996, Sonus-USA acquired the assets of the Midwest
Division of Hearing Health Services, Inc. (the "Midwest Division"), 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 $2,379,000.
On December 6, 1996, Sonus-USA 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 seller for a covenant not to
compete. The intangible assets recorded in the transaction, including the
covenant not to compete, amounted to $840,000.
On December 17, 1996, Sonus-USA acquired all of the common stock of
FHC, Inc. ("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
14
<PAGE>
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 $472,000.
On January 9, 1997, Sonus-USA purchased all of the outstanding shares
of Hearing Care Associates-Los Angeles, Inc., for total consideration of
$301,000. 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 $466,000.
On February 28, 1997, Sonus-USA 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 $404,000.
On March 6, 1997, Sonus-USA 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 $103,000.
On March 14, 1997, Sonus-USA acquired all of the outstanding shares of
Auditory Vestibular Center, Inc., for total consideration of $84,306. 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 $67,000.
On April 8, 1997, Sonus-USA 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 $140,000.
On June 6, 1997, Sonus-USA 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, 141,844 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 $1,108,000.
On July 8, 1997, Sonus-USA acquired for cash certain assets of Dakota
Hearing Aid Service for $40,000 in cash. An additional $10,000 was paid to the
seller for a covenant not to compete. The intangible assets recorded in the
acquisition , including the covenant not to compete, amounted to $31,000.
On August 27, 1997, Sonus-USA acquired all the outstanding shares of
Hearing Care Associates-Santa Monica, Inc., for $258,268 in cash. An additional
$114,135 was paid to the sellers to enter into covenants not to compete. The
intangible assets recorded in the acquisition of the clinic, including covenants
not to compete, amounted to $260,000.
As of July 31, 1997, the Company had recorded $9,921,000 in intangible
assets, including $955,000 in covenants not to compete, which represented 58% of
the Company's total assets. The amortization of the unamortized balance of
$9,519,000 at July 31, 1997 will result in an annual non-cash charge to earnings
of approximately $490,000 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 $229,000 in each of the current and
next two fiscal years would also be incurred.
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Company's
audited consolidated financial statements and the notes thereto contained in
Item 7 of this Form 10-KSB.
15
<PAGE>
RESULTS OF OPERATIONS
Year Ended July 31, 1997, Compared to Year Ended July 31, 1996
Accounts Receivable Turnover. The Company's accounts receivable
turnover increased to 74 days for the fiscal year ended July 31, 1997 from 61
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.
Revenues. Total revenues for the fiscal year ended July 31, 1997, were
$13,462,000, representing a 463% increase over revenues of $2,389,000 for the
prior fiscal year. Of this increase, $10,015,000 was attributable to the 39
clinics acquired during fiscal 1997. Product sales revenues were $11,627,000 for
the 1997 fiscal year, up 395% from the $2,345,000 for fiscal 1996. Audiological
service revenues increased from $44,000, or 2% of total revenues in fiscal 1996,
to $1,835,000, or 14% of total revenues, for the 1997 fiscal year. Substantially
all of the clinics acquired in the United States separately charge for the
performance of audiological services when a hearing instrument is purchased. The
Company's policy in the past was to waive the fee if a hearing instrument was
purchased.
Gross Profit on Product Sales. Product gross profit for the fiscal year
ended July 31, 1997, was $6,617,000 compared to $1,328,000 for the prior fiscal
year. Gross profit percentage was 58% for both fiscal 1997 and fiscal 1996. The
Company expects its gross profit percentage to improve in fiscal 1998 due to
higher volume discounts and improved product sales management.
Operating Expenses. Operating expenses for the fiscal year ended July
31, 1997, were $10,185,000, representing an increase of 419% over operating
expenses of $1,961,000 for the prior fiscal year. As a percentage of total
revenues, operating expenses decreased to 76% for the fiscal year ended July 31,
1997, from 82% for fiscal 1996, primarily due to fixed costs being spread over a
larger revenue base.
LIQUIDITY AND CASH RESERVES
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 uses of the proceeds of the September
and December 1996 private placements are as follows (in thousands):
Working capital $1,500
Capital expenditures 600
Acquisitions 3,400
Offering and registration costs 700
-------
$6,200
=======
During the fiscal year ended July 31, 1997, the Company acquired 39
hearing care clinics located in California, Illinois, Michigan, New Mexico and
North Dakota. The acquisitions were funded primarily through the issuance of
Common Stock valued at $3.3 million, the issuance of convertible subordinated
16
<PAGE>
notes in an aggregate principal amount of $2.6 million, the issuance of $565,000
in promissory notes, cash payments totaling $2.1 million, and the assumption of
debt totaling $460,000. Consideration paid for covenants not to compete amounted
to $955,000.
During the fiscal 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 $127,000, the issuance of $77,000 in promissory notes, and cash
payments totaling $196,000. Consideration paid for covenants not to compete
amounted to $15,000.
Sonus-Canada Ltd., the Company's Canadian operating subsidiary, has a
revolving demand loan with the Royal Bank of Canada providing for borrowings up
to $182,000 at July 31,1997. As of July 31, 1997, there were no advances
outstanding against this line, compared to advances totaling $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 4.75% at July 31, 1997. Advances under the
revolving line of credit are secured by all the assets of Sonus-Canada Ltd. and
are personally guaranteed by a shareholder.
In July 1997, Sonus-USA obtained a $500,000 line of credit from Phonak,
Inc., a hearing instrument manufacturer. The line of credit is secured by a
portion of Sonus-USA's accounts receivable, is guaranteed by the Company, and
bears interest at the prime rate on a fully floating basis. Debt service is
interest only payable monthly until July 16, 1998, when all amounts outstanding
under the line of credit will be due. At July 31, 1997, no amounts were
outstanding under the line of credit.
During fiscal 1997, the Company expended approximately $800,000 to
develop a management information system to link each clinic with the Company's
headquarters. Approximately $500,000 of this amount was financed by means of a
four-year capital lease, requiring payments of approximately $10,000 per month.
The Company believes that its existing cash balances, amounts available
under its revolving lines of credit, and cash from operations will be sufficient
to fund its existing operations. 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) issuing
debt; (iii) raising additional privately placed equity; and (iv) the exercise of
outstanding share purchase warrants. In the event the Company ultimately fails
to consummate any of the foregoing 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 October 21, 1997, 4,250,000 Common Shares (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 Common Share will be released for each
$0.08 (converted from Canadian dollars at October 1, 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
17
<PAGE>
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.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB")
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.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which established requirements for disclosure of comprehensive income.
The objective of SFAS No. 130 is to report all changes in equity that result
from transactions and economic events other than transactions with owners.
Comprehensive income is the total of net income and all other non-owner changes
in equity. The Company does not anticipate any significant impact on reported
results of operations due to the adoption of SFAS No. 130. The Company plans to
adopt SFAS No. 130 at January 31, 1998, for the quarter then ended and at that
time earlier financial statements will be reclassified for comparative purposes.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information," which changes the way segment
information is reported for public companies and requires those companies to
report selected segment information in interim financial reports to
shareholders. The Statement is effective for financial statements for fiscal
years beginning after December 15, 1997. The Statement was only recently issued,
and although the Company has not fully determined its complete impact, the
Company does not foresee any material change due to adoption of this statement
on its financial presentation to shareholders. The Company plans to adopt SFAS
No. 131 at January 31, 1998, for the quarter then ended and at that time earlier
financial statements will be reclassified for comparative purposes if necessary.
18
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
REPORT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS
HEALTHCARE CAPITAL CORP.:
We have audited the accompanying consolidated balance sheet of
HealthCare Capital Corp. and subsidiaries as of July 31, 1997, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
HealthCare Capital Corp. and subsidiaries as of July 31, 1997, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Portland, Oregon
October 24, 1997
19
<PAGE>
AUDITORS' REPORT
To the Shareholders of
HealthCare Capital Corp.
We have audited the consolidated balance sheet of HealthCare Capital Corp. and
subsidiaries as of July 31, 1996, and the related statements of operations and
retained earnings (deficit), cash flows and shareholders' equity for the year
then ended. These consolidated 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 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 consolidated financial statements referred to above present
fairly, in all material respects, the results of the consolidated financial
position of HealthCare Capital Corp. and subsidiaries as of July 31, 1996, and
the consolidated results of their operations, and their cash flows for the year
then ended in accordance with generally accepted accounting principles as
adopted in the United States of America.
/s/ Shikaze Ralston
Chartered Accountants
Vancouver, Canada
October 24, 1996
20
<PAGE>
HEALTHCARE CAPITAL CORP.
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
July 31,
1997
-----------
ASSETS
Current assets:
Cash and cash equivalents $ 1,099
Accounts receivable, net of allowance
for doubtful accounts and contractual
write downs of $361 2,514
Other receivables 314
Inventory 425
Prepaid expenses 260
-------
Total current assets 4,612
Property and equipment, net 2,277
Other assets 136
Goodwill and covenants not to compete, net 9,519
-------
$16,544
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank loans and short-term notes payable $ 59
Accounts payable and accrued liabilities 3,395
Convertible notes payable 2,600
Capital lease obligation, current portion 101
Long term debt, current portion 357
-------
Total current liabilities 6,512
Capital lease obligation, non-current portion 305
Long term debt, non-current portion 765
Convertible notes payable 127
-------
Total liabilities 7,709
Commitments and contingencies
Shareholders' equity:
Common stock, no par value per share,
unlimited number of shares authorized,
27,138,288 shares issued and outstanding 11,131
Notes receivable from shareholders (124)
Accumulated deficit (2,117)
Treasury stock, 19,800 shares at cost (33)
Cumulative translation adjustment (22)
-------
Total shareholders' equity 8,835
-------
$16,544
=======
See accompanying notes to consolidated financial statements.
21
<PAGE>
HEALTHCARE CAPITAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years ended July 31,
-----------------------
1997 1996
-------- -------
Net revenues $13,462 $ 2,389
------- -------
Costs and expenses:
Cost of products sold 5,010 1,017
Clinical expenses 5,985 1,197
General and administrative expenses 3,410 639
Depreciation and amortization 790 125
------- -------
Total costs and expenses 15,195 2,978
------- -------
Loss from operations (1,733) (589)
Other income (expense):
Interest income 76 8
Interest expense (47) -
Other, net 3 -
------- -------
Net loss $(1,701) $ (581)
======= =======
Weighted average outstanding shares 20,049 10,598
======= =======
Net loss per share $ (0.08) $ (0.05)
======= =======
See accompanying notes to consolidated financial statements.
22
<PAGE>
HEALTHCARE CAPITAL CORP.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Shareholder Cumulative Total
Common Notes Accumulated Translation Treasury Shareholders'
Stock Receivable Deficit Adjustment Stock Equity
---------- ------------ ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 31, 1995 $ 175 $ -- $ 165 $ (2) $ -- $ 338
Issuance of 3,000,000 shares of
common stock under private
placement (net proceeds) 416 -- -- -- -- 416
Exercise of stock options for
600,000 shares of common 102 -- -- -- -- 102
stock
Issuance of 872,000 shares of
common stock upon conversion
of Company's promissory note 160 -- -- -- -- 160
Issuance of 1,905,748 shares of
common stock under private
placement (net proceeds) 1,072 -- -- -- -- 1,072
Translation adjustment -- -- -- 5 -- 5
Net loss -- -- (581) -- -- (581)
------- ------- ------- ------- ------- -------
BALANCE AT JULY 31, 1996 1,925 -- (416) 3 -- 1,512
Issuance of 112,800 shares of
common stock in connection
with receipt of tax credit 38 -- -- -- -- 38
Exercise of stock options for
775,000 shares of
common stock 316 (124) -- -- -- 192
Issuance of 2,939,380 shares of
common stock in connection
with acquisitions 3,291 -- -- -- -- 3,291
Issuance of 5,467,410 shares of
common stock under private
placement (net proceeds) 5,529 -- -- -- -- 5,529
Exercise of warrants for
35,750 shares of common 32 -- -- -- -- 32
stock
Repurchase of 19,800 shares of
treasury stock -- -- -- -- (33) (33)
Translation adjustment -- -- -- (25) -- (25)
Net loss -- -- (1,701) -- -- (1,701)
------- ------- ------- ------- ------- -------
BALANCE AT JULY 31, 1997 $ 11,131 $ (124) $(2,117) $ (22) $ (33) $ 8,835
======= ======= ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
HEALTHCARE CAPITAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years ended July 31,
---------------------------
1997 1996
--------- ------
Cash flows from operating activities:
<S> <C> <C>
Net loss $(1,701) $ (581)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Provision for bad debt expense 47 --
Depreciation and amortization 790 125
Changes in non-cash working capital:
Accounts receivable (2,158) (7)
Other receivables (314) --
Inventory (281) (16)
Prepaid expenses (219) (25)
Income taxes recoverable 9 14
Accounts payable and accrued liabilities 2,932 45
Deferred purchase discounts -- (23)
------- ------
Net cash used in operating activities (895) (468)
------- ------
Cash flows from investing activities:
Purchase of property and equipment (1,941) (293)
Deferred acquisition costs, net 132 (268)
Net cash paid on business acquisitions (3,389) (238)
------- ------
Net cash used in investing activities (5,198) (799)
------- ------
Cash flows from financing activities:
Net proceeds (repayments) of long term debt
and capital lease obligations 1,382 (101)
Deferred financing costs, net 42 (42)
Advances (repayments) of bank loans and short-term notes payable 26 (75)
Advances from (repayments to) shareholders (124) (235)
Issuance (redemption) of convertible notes -- (33)
Issuance of common stock for cash,
net of costs 5,915 1,750
Acquisition of treasury stock (33) --
------- ------
Net cash provided by financing activities 7,208 1,264
------- ------
Net increase (decrease) in cash and cash equivalents 1,115 (3)
Effect on cash and cash equivalents of changes in foreign translation rate (27) (2)
Cash and cash equivalents at the beginning of the year 11 16
------- ------
Cash and cash equivalents at the end of the year $ 1,099 $ 11
======= ======
Required supplemental disclosures:
Interest paid during year $ 41 $ 14
Non-cash financing activities:
Issuance of long-term debt in acquisitions $ 1,025 $ 206
Issuance of convertible notes in acquisitions $ 2,600 $ --
Issuance of common stock in acquisitions $ 3,291 $ --
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
HEALTHCARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Company
----------------------
HealthCare Capital Corp. doing business as Sonus (the "Company"), an
Alberta, Canada corporation, through its primary operating subsidiaries,
Sonus-Canada Ltd. (formerly HC HealthCare Hearing Clinics Ltd.), a British
Columbia, Canada corporation, and Sonus-USA, Inc. (formerly HealthCare Hearing
Clinics, Inc.), a Washington corporation, currently owns and operates a network
of 52 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. Each of the Company's
hearing care clinics provides its hearing impaired patients with a full range of
audiological products and services. The Company intends to expand its network of
hearing care clinics by acquiring clinics in its existing, as well as new,
geographic markets.
Principles of Consolidation
---------------------------
The consolidated financial statements include the Company's wholly
owned subsidiaries. All significant intercompany accounts have been eliminated.
The functional currency of all of the Company's Canadian operations is the
Canadian dollar while the functional currency of the Company's U.S. operations
is the U.S. dollar. In accordance with Statement of Financial Accounting
Standards No. 52, "Foreign Currency Translation", assets and liabilities
recorded in Canadian dollars are remeasured at current rates in existence on
July 31, 1997. Exchange gains and losses from remeasurement of assets and
liabilities recorded in Canadian dollars are treated as unrealized gains and
losses and reported as a separate component of stockholders' equity.
Revenue Recognition
-------------------
Revenues from the sale of hearing instrument 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. As of July
31, 1997 and 1996, net revenues consisted of the following (in thousands):
1997 1996
---- ----
Product revenue $ 11,627 $ 2,345
Service revenue 1,835 44
--------- ---------
$ 13,462 $ 2,389
========= =========
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
25
<PAGE>
HEALTHCARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Cash and Cash Equivalents
-------------------------
Cash equivalents consist of short-term, highly liquid investments with
original maturities of 90 days or less.
Inventory
---------
Inventories are stated at the lower of cost (first in, first out) or
net realizable value.
Property and Equipment
----------------------
Property and equipment are recorded at cost and depreciated as follows:
Professional equipment 20% declining balance
Office equipment 30% declining balance
Automotive equipment 30% declining balance
Leasehold improvements Straight line over five years
Computer equipment 30% declining balance
In the year of acquisition, depreciation is calculated at one-half the
above noted rates. Property and equipment purchased under capitalized leases are
amortized over the shorter of the lease term or their estimated useful life and
such depreciation is included with depreciation expense. Property and equipment
at July 31, 1997 consists of the following (in thousands):
Professional equipment $ 930
Office equipment 481
Automotive equipment 16
Leasehold improvements 405
Computer equipment 1,144
---------
2,976
Less accumulated depreciation (699)
---------
$ 2,277
=========
Advertising Expenses
--------------------
The Company defers its advertising costs until the advertisement is
actually run, at which time the full expense is recognized. Deferred advertising
costs were $89,000 and $0 for the years ended July 31, 1997 and 1996,
respectively. Advertising expense was $786,000 and $207,000 for the years ended
July 31, 1997 and 1996, respectively.
26
<PAGE>
HEALTHCARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill and Covenants not to Compete
-------------------------------------
The unallocated purchase costs in excess of the net assets acquired
(goodwill) is being amortized on the straight-line basis over twenty years.
Non-compete agreements are amortized on the straight-line basis upon termination
of the contracted employee for any reason. Goodwill and covenants not to compete
as of July 31, 1997 are as follows (in thousands):
Goodwill $ 8,966
Covenants not to compete 955
Less: accumulated amortization (402)
---------
$ 9,519
=========
The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its remaining
life can be recovered through discounted projected future cash flows of the
acquired businesses from which the goodwill arose. Amortization charged to
operations was $364,000 and $17,000 for the years ended July 31, 1997 and 1996,
respectively.
Deferred Acquisition and Financing 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. Costs related to
potential acquisitions that are unsuccessful are expensed in the periods in
which it is determined that such acquisitions are unlikely to be consummated.
Costs related to issuing shares are deferred and upon the issuance of the
related shares, are applied to reduce the net proceeds of the issue.
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.
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 payers, 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 payers.
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.
27
<PAGE>
HEALTHCARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Reclassifications
-----------------
Certain amounts in the 1996 financial statements have been reclassified
in order to conform to the 1997 presentation.
NOTE 2. ACQUISITIONS
During the fiscal year ended July 31, 1997, the Company purchased 39
hearing care clinics based in the United States in 12 separate transactions. In
each transaction, the acquisitions were accounted for as purchase transactions.
The acquired assets and liabilities were recorded at their estimated fair values
at the date of acquisition, and the unallocated excess purchase price (goodwill)
is being amortized on a straight line basis over 20 years. Purchase price
adjustments may arise in the event working capital on the closing date deviates
from the minimum working capital requirement specified in the purchase
agreement. The operating results of each acquired clinic have been included in
the consolidated statements of operations from each respective acquisition date.
Certain acquisitions have been structured using the Company's common
shares or debt convertible into the Company's common shares as a portion of the
consideration of the transaction. The valuation of the Company's common shares
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 regulatory authorities.
Santa Maria Hearing Associates
------------------------------
On August 1, 1996, Sonus-USA, Inc. acquired for cash certain assets of
Santa Maria Hearing Associates at a cost of $50,000. The seller entered into a
three year covenant not to compete with Sonus-USA, Inc. for consideration of
$25,000 which was paid on January 5, 1997.
Hearing Care Associates Group
-----------------------------
On October 1, 1996, Sonus-USA, Inc. completed the merger of Hearing
Care Associates -Northridge, Inc., Hearing Care Associates - Glendora, Inc., and
Hearing Care Associates - Glendale, Inc. (collectively "HCA") through a merger
of these HCA corporations at a cost of $2,704,260. 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. For cash consideration of $314,724
paid on closing plus $36,137 paid on November 1, 1996, the sellers entered into
covenants not to compete for a period of three years after their employment
terminates.
28
<PAGE>
HEALTHCARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1997
NOTE 2. ACQUISITIONS (CONTINUED)
Hearing Health Services, Inc.
-----------------------------
On October 31, 1996, Sonus-USA, Inc. purchased substantially all of the
assets of the Midwest Division of Hearing Health Services, Inc. at a cost of
$2,960,000. Consideration for this acquisition was in the form of a secured
$2,600,000 convertible note payable due October 31, 1997 and assumption of a
$360,000 note payable. The former note is convertible into 2,000,000 common
shares of the Company at a rate of $1.30 per share.
Hearing Dynamics
----------------
On December 6, 1996, Sonus-USA, Inc. merged with Hearing Dynamics
("HD"), a California corporation. The merger of HD into Sonus-USA, 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.
Consideration for this acquisition was $102,600 cash paid on closing and 408,000
common shares of the Company issued at a price of $1.72 per share. 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 HD 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, the seller 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. For cash consideration of
$25,000 paid on closing, the seller entered into a covenant not to compete for a
period of one year after employment terminates.
FHC, Inc.
---------
On December 17, 1996, Sonus-USA, Inc. acquired all of the outstanding
shares of FHC, Inc., a New Mexico corporation, at a cost of $400,000.
Consideration for this acquisition was $250,000 cash paid on closing and a
three-year promissory note of $150,000 bearing interest at 6 1/2% per annum. For
consideration of $112,233 payable over a three-year period, the sellers also
entered into covenants not to compete for a period of three years from the date
of closing.
Hearing Care Associates - Los Angeles, Inc.
-------------------------------------------
On January 9, 1997, Sonus-USA, Inc. purchased all of the outstanding
shares of Hearing Care Associates - Los Angeles, Inc. for total consideration of
$301,000. For cash consideration of $112,500, the sellers entered into covenants
not to compete for a period of three years after employment terminates.
Hearing Care Associates - Arcadia, Inc.
---------------------------------------
On February 28, 1997, Sonus-USA, Inc. purchased all of the outstanding
shares of Hearing Care Associates - Arcadia, Inc. at a cost of $410,338 cash
paid on closing. For cash consideration of $130,170, the sellers entered into
covenants not to compete for a period of three years after employment
terminates.
29
<PAGE>
HEALTHCARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1997
NOTE 2. ACQUISITIONS (CONTINUED)
Hearing Care Associates - Sherman Oaks, Inc.
--------------------------------------------
On March 6, 1997, Sonus-USA, Inc. purchased all of the outstanding
shares of Hearing Care Associates - Sherman Oaks, Inc. at a cost of $26,568 cash
paid on closing. For cash consideration of $33,783, the sellers entered into
covenants not to compete for a period of three years after employment
terminates.
Auditory Vestibular Center, Inc.
--------------------------------
On March 14, 1997, Sonus-USA, Inc. purchased all of the outstanding
shares of Auditory Vestibular Center, Inc. for total consideration of $84,306.
For cash consideration of $28,580, the sellers entered into covenants not to
compete for a period of three years after employment terminates.
Hearing Care Associates - Lancaster, Inc.
-----------------------------------------
On April 8, 1997, Sonus-USA, Inc. purchased all of the outstanding
shares of Hearing Care Associates - Lancaster, Inc. for total consideration of
$136,751. For cash consideration of $61,877, the sellers entered into covenants
not to compete for a period of three years after employment terminates.
Hearing Improvement Center, Inc.
--------------------------------
On June 6, 1997, Sonus-USA, Inc. purchased all of the outstanding
shares of Hearing Improvement Center, Inc. for consideration of $500,000 cash
paid on closing, 141,844 common shares of the Company issued at a price of $1.41
per share, a two-year promissory note in the amount of $132,624 payable in
quarterly installments including interest at 6% per annum and a three-year
promissory note in the amount of $282,036 with accrued interest at a 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. For cash consideration of $50,000, the sellers entered into covenants not
to compete for a period of three years after employment terminates.
Dakota Hearing Aid Service
--------------------------
On July 8, 1997, Sonus-USA, Inc. acquired for cash certain assets of
Dakota Hearing Aid Service at a cost of $40,000. The seller entered into a
three-year covenant not to compete with Sonus-USA, Inc. for cash consideration
of $10,000.
NOTE 3. FINANCING ARRANGEMENTS
Bank Loan
---------
Sonus-Canada Ltd. maintains a revolving bank demand loan bearing
interest at the bank's prime rate plus 1% per annum (5.75% at July 31, 1997),
secured by a general security agreement covering all assets of Sonus-Canada
Ltd., the postponement of claim by the shareholders and the guarantee of a
shareholder. The loan provides for a maximum credit limit of $182,000. At July
31, 1997, no amounts were outstanding under the loan.
30
<PAGE>
HEALTHCARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1997
NOTE 3. FINANCING ARRANGEMENTS (CONTINUED)
Line of Credit
--------------
In July 1997, Sonus-USA, Inc. obtained a $500,000 line of credit from
Phonak, Inc., a hearing instrument manufacturer. The line of credit is secured
by a portion of Sonus-USA, Inc.'s accounts receivable, is guaranteed by the
Company, and bears interest at the prime rate on a fully floating basis. Debt
service is interest only, payable monthly until July 16, 1998, when all amounts
outstanding under the line of credit will be due. At July 31, 1997, no amounts
were outstanding under the line of credit.
Short-term Notes Payable
------------------------
Sonus-USA, Inc. and Sonus-Canada Ltd. have entered into short-term,
non-interest bearing notes with certain hearing instrument manufacturers. The
outstanding balance of the notes as of July 31, 1997 was $59,000.
NOTE 4. LONG-TERM DEBT
Long-term debt consists of the following at July 31, 1997 (in thousands
except for installment amounts):
Secured bank loan payable in installments of $726 per
month plus interest calculated at the bank prime rate
plus 1-1/2% per annum $ 7
Equipment loan from a supplier. The loan requires
fifty-two equal installments every four weeks of $2,124
including interest calculated at the rate of 10% per
annum 75
Unsecured note payable in annual installments of $50,000
plus interest calculated at 6.5% per annum, maturing on
December 17, 1999 150
Unsecured, non-interest bearing note payable in
quarterly installments of $9,352, maturing on December
31, 1999 94
Equipment loans from suppliers, with maturities ranging
from October, 1999 to December, 2018 and monthly
payments, including interest at rates ranging from 0% to
9% per annum aggregating $3,165 82
Unsecured note payable in monthly installments of $1,357
including interest calculated at the rate of 8% per
annum, maturing on February 1, 1999 23
Note payable requiring monthly installments of $351
including interest calculated at 18% per annum, maturing
on April 15, 2002 13
Note payable requiring payment of accrued interest of
$17,395 on June 6, 1998, and monthly installments
thereafter of $12,500 including interest calculated at
6% per annum compounded monthly, maturing on June 6,
2000 282
Note payable requiring quarterly installments of $17,716
including interest calculated at 6% per annum, maturing
on June 6, 1999 133
Secured note payable requiring monthly installments of
$1,000 including interest calculated at 6% per annum,
maturing February 1, 1999 23
31
<PAGE>
HEALTHCARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1997
NOTE 4. LONG-TERM DEBT (CONTINUED)
Note payable requiring annual installments of $120,000
plus interest calculated at 6% per annum, maturing on
July 1, 1999
240
-----------
1,122
Less current portion
(357)
-----------
$ 765
===========
The maturities of long-term debt are as follows (in thousands): 1998 -
$357; 1999 - $459; 2000 - $237; 2001 - $11; 2002 - $4; thereafter $54.
NOTE 5. CAPITAL LEASES
The following is a schedule by year of future minimum lease payments
under capital leases together with the present value of the net minimum lease
payments as of July 31, 1997 (in thousands):
1998 $ 132
1999 127
2000 126
2001 88
------------
Total minimum lease payments 473
Less: amount representing interest (67)
------------
Present value of minimum lease payments 406
Less current portion (101)
------------
$ 305
============
Total assets under capitalized leases at July 31, 1997, were $305,000,
net of accumulated depreciation of $131,000.
NOTE 6. CONVERTIBLE NOTES PAYABLE
Convertible notes payable consist of the following at July 31, 1997 (in
thousands except for per share amounts):
Non-interest bearing note due on demand; convertible
into common shares of the Company at a rate of $1.00 per
share $ 127
Non-interest bearing note due October 31, 1997;
convertible into common shares of the Company at a rate
of $1.30 per share 2,600
-----------
$ 2,727
===========
32
<PAGE>
HEALTHCARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1997
NOTE 7. SHAREHOLDERS' EQUITY
Common Stock
------------
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 provided
for the conversion of each February special warrant to 1.1 units. Each unit
consisted of one common share and one share purchase warrant. The February
special warrants were converted into common shares at no additional cost to the
holder on February 28, 1997. Each share purchase warrant represents the right to
purchase one common share at a price of $1.10 until expiration on February 28,
1998.
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 entitled the holder to receive 1.1 common shares and 1.1 share
purchase warrants, with each such warrant exercisable for one common share at a
price of $2.00 per share. Each of the September special warrants placed in the
United States entitled the holder thereof to receive one common share and one
share purchase warrant to purchase an additional common share 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 common share and one share purchase warrant to purchase an
additional common share for $2.00 per share and was granted an option to acquire
81,000 share purchase warrants, each exercisable for one common share at a price
of $1.25 per share. 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 common share and a share purchase warrant to purchase one
additional common share 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 common share at a price of
$1.25 per share. All of the share purchase warrants issued in September or
December of 1996 are subject to certain rights of the Company to force exercise
or cancellation.
A total of 5,250,000 outstanding shares were held in escrow at July 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 was subject to lapse of time provisions; the shares
were released on October 21, 1997. The release of the remaining 4,250,000 shares
is subject to the following provisions:
o One share will be released for each $0.08 of cash flow
generated by the Company;
o Release shall only be made pursuant to a written application to
The Alberta Stock Exchange; and
33
<PAGE>
HEALTHCARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1997
NOTE 7. SHAREHOLDERS' EQUITY (CONTINUED)
o 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.
Stock Option Plans
------------------
The Company has two stock option plans, the Stock Option Plan ("1993
Plan") and the Stock Award Plan ("1996 Plan") pursuant to which the Company may
grant to officers, directors, employees and consultants incentive and
non-qualified options to purchase up to 10% of the outstanding common shares
under the 1993 Plan and up to 3,000,000 common shares under the 1996 Plan,
subject to applicable regulatory limits. The 1996 Plan is subject to shareholder
approval at the Company's 1997 annual meeting. The exercise price of options
granted under the plans may not be less than 75% of the fair market value of the
Company's common shares at the date of grant (100% for tax-qualified incentive
stock options). Options become exercisable at the date of grant or in equal
annual installments over a period of one to four years from the date of grant.
The options generally expire five years after the date of grant.
The 1996 Plan also provides for the granting of stock appreciation rights,
restricted units, performance awards and other stock-based awards. The Company
had no such awards or rights outstanding at July 31, 1997 or 1996.
The activity during the years ended July 31, 1997 and 1996 was as follows:
1997 1996
-------------------------- --------------------------
Weighted- Weighted-
Average Average
Options Exercise Options Exercise
Price Price
---------- ------------ --------- ----------
Outstanding - beginning 1,700,000 $0.83 450,000 $0.28
of year
Granted 1,842,000 $1.37 1,850,000 $0.79
Exercised (775,000) $0.41 (600,000) $0.17
Canceled (325,000) $1.50 - $ -
--------- ------------ --------- ----------
Outstanding - end of 2,442,000 $1.28 1,700,000 $0.83
year ========== ============= ========= ==========
Exercisable at end of 887,500 $1.19
year
Weighted-average fair
value of options granted
during the year $0.89 $1.23
34
<PAGE>
HEALTHCARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1997
NOTE 7. SHAREHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about stock options outstanding at
July 31, 1997:
Options Outstanding Options Exercisable
-------------------------------------- -------------------------
Weighted-
Number Average Weighted- Number Weighted -
Range of Outstanding Remaining Average Exercisable Average
Exercise as of Contractual Exercise as of Exercise
Prices July 31, 1997 Life Price July 31, 1997 Price
- -------------- ------------- ----------- ----------- ------------ -----------
$0.05 -- $0.20 50,000 2.66 $0.18 50,000 $0.18
$0.25 -- $0.30 300,000 3.39 $0.28 300,000 $0.28
$0.70 -- $0.75 125,000 3.55 $0.72 87,500 $0.72
$1.10 -- $1.15 250,000 4.77 $1.12 - $ -
$1.25 -- $1.35 600,000 4.18 $1.30 - $ -
$1.40 -- $1.50 667,000 4.49 $1.46 - $ -
$1.95 -- $2.10 450,000 3.57 $2.00 450,000 $2.00
- ----------------- --------- ---------- ---------- ----------- -----------
$0.05 -- $2.10 2,442,000 4.05 $1.28 887,500 $1.19
========= =======
The Company accounts for stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, no compensation cost has been recognized for its stock
option grants. Pro forma information regarding net income (loss) and net income
(loss) per share is required under Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and has been
determined as if the Company had accounted for all 1997 and 1996 stock option
grants based on the fair value method. The pro forma information presented below
is not representative of the effect stock options will have on pro forma net
income (loss) or net income (loss) per share for future years.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes multiple option-pricing model. The following weighted
average assumptions were used for grants in 1997 and 1996: risk-free interest
rates of 5.94% and 6.43%, respectively, an expected option life of 4.92 years
and 4.24 years, respectively, expected volatility of 96% and dividend yield of
zero.
The Black-Scholes method is one of many models used to calculate the fair
value of options that are freely tradable, fully transferable and that have no
vesting restrictions. These models also require highly subjective assumptions,
including future stock price volatility and expected time until exercise, which
greatly affect the calculated values.
35
<PAGE>
HEALTHCARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1997
NOTE 7. SHAREHOLDERS' EQUITY (CONTINUED)
Had compensation cost for these plans been determined based on the fair
value of awards at the grant date, as prescribed by SFAS 123, net loss or net
loss per share would have been as follows:
1997 1996
-------- --------
(in thousands, except
per share data)
Net loss applicable to common shareholders:
As reported $(1,701) $(581)
Pro forma (1) $(2,121) $(1,172)
Net loss per share:
As reported $(0.08) $(0.05)
Pro forma (1) $(0.11) $(0.11)
- --------------------------
(1) SFAS 123 applies to awards granted in fiscal years that begin after December
15, 1994. Consequently, the effects of applying SFAS 123 shown here are not
likely to be representative of the effects in future years due to the
exclusion of awards granted in prior years but vesting (and therefore
expensed) in 1996 and 1997.
NOTE 8. INCOME TAXES
HealthCare Capital Corp. and its Canadian subsidiaries file separate
corporate income tax returns on a stand-alone basis in Canada. Sonus-USA, Inc.
files separate corporate income tax returns in the United States.
There was no provision for income taxes for the years ended July 31,
1997 and 1996 as the Company incurred net operating losses.
The components of temporary differences that give rise to significant
portions of deferred income taxes at July 31, 1997 and 1996 are as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating losses carried forward $ 39 $ 344
Allowance for doubtful accounts 44 --
Other -- 24
--------- --------
883 368
Deferred tax liabilities:
Goodwill and start-up costs (54) --
Other -- (21)
--------- --------
829 347
Less valuation allowance (829) (347)
--------- ---------
$ -- $ --
========== ==========
</TABLE>
36
<PAGE>
HEALTHCARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1997
A reconciliation of the Company's expected tax expense using the
statutory income tax rate to the actual effective rate is as follows:
1997 1996
---- ----
Tax benefit at statutory rate (34)% (34)%
Adjustment for higher Canadian tax rate -- (11)
Capitalized costs deducted for tax purposes -- (6)
Expenses not deductible for tax purposes 5 10
Change in valuation allowance 29 41
-- --
Tax rate per financial statements --% --%
==== ====
At July 31, 1997, the Company had approximate net operating loss
carryforwards for tax purposes which, if not utilized, expire in the years ended
as follows (in thousands):
UNITED
CANADA STATES TOTAL
------ ------ -----
2001 $ 18 $ -- $ 18
2002 35 -- 35
2003 711 -- 711
2004 45 -- 45
2011 -- 303 303
2012 -- 906 906
----------- --------- ---------
$ 809 $ 1,209 $ 2,018
=========== ========= =========
NOTE 9. RELATED PARTY TRANSACTIONS
William DeJong is a partner in the Calgary, Alberta law firm of Ballem
MacInnes and is a director of the Company. Total fees, disbursements and
government sales tax paid to Ballem MacInnes by the Company for legal services
as of July 31, 1997 and 1996 were $168,000 and $37,000, respectively (converted
from Canadian dollars at July 31, 1997 and 1996).
In connection with the acquisition of the Midwest Division of Hearing
Health Services, Inc., Sonus-USA, Inc. assumed a promissory note with a balance
of $360,000 payable to Kathy Foltner, an officer 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.
Gregory J. Frazer, Ph.D., an officer and director of the Company, was a
shareholder in certain Hearing Care Associates corporations which the Company
acquired during the year ended July 31, 1997. Total consideration paid to Mr.
Frazer and his wife in connection with the acquisitions and related
noncompetition agreements totaled $933,000 in cash and 1,470,359 common shares
of the Company at a price of $1.00 per share.
Brandon M. Dawson, an officer and director of the Company, 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.
The loan is secured by the stock underlying the exercise of the options and
accrues interest at 10% per annum. Gene K. Balzer, Ph.D., a director of the
Company, exercised options for 200,000 common shares
37
<PAGE>
HEALTHCARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1997
NOTE 9. RELATED PARTY TRANSACTIONS (CONTINUED)
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. The loan is secured by the stock
underlying the exercise of the options and accrues interest at 10% per annum.
NOTE 10. 401(K) PLAN
The Company sponsors a 401(k) plan for all employees who have satisfied
minimum service and age requirements. Employees may contribute up to 20% of
their compensation to the plan. The Company does not match employee
contributions.
NOTE 11. COMMITMENTS AND CONTINGENCIES
Operating Leases
----------------
The following is a schedule by year of future minimum lease payments
for non-cancelable operating leases at July 31, 1997 (in thousands):
1998 $ 658
1999 531
2000 468
2001 229
2002 107
Thereafter 146
-------
Total minimum lease payments $ 2,139
=======
Rental expense under operating leases was $810,000 and $208,000 for the
years ended July 31, 1997 and 1996, respectively.
Insurance
---------
In the normal course of business, the Company may become a defendant or
plaintiff in various lawsuits. Although a successful claim for which the Company
is not fully insured could have a material effect on the Company's financial
condition, management is of the opinion that it maintains insurance at levels
sufficient to insure itself against the normal risk of operations.
NOTE 12. SUBSEQUENT EVENTS
On August 27, 1997, Sonus-USA, Inc. purchased all of the outstanding
shares of Hearing Care Associates - Santa Monica, Inc. at a cost of $258,268
cash paid on closing. For cash consideration of $114,135, the sellers entered
into covenants not to compete for a period of three years after employment
terminates.
NOTE 13. CANADIAN VERSUS U.S. GAAP
As of July 31, 1997 and 1996, there were no material differences between
Canadian generally accepted accounting principles ("GAAP") and U.S. GAAP.
38
<PAGE>
HEALTHCARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1997
NOTE 14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a tabulation of the unaudited quarterly results of
operations for the year ended July 31, 1997 (in thousands, except per share
data):
<TABLE>
<CAPTION>
Quarter ended
------------------------------------------------------------
October January April July
1996 1997 1997 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue $ 1,268 $ 2,933 $ 4,355 $ 4,906
Operating loss (299) (672) (444) (318)
Net loss (298) (649) (432) (322)
Earnings before interest,
depreciation and amortization (1) (247) (454) (251) 9
Net loss per share $ (0.02) $ (0.03) $ (0.02) $ (0.01)
</TABLE>
- -----------------
(1) Earnings before interest, depreciation and amortization is provided because
it is a measure commonly used by acquisition companies. It is presented to
enhance an understanding of the Company's operating results and is not
intended to represent cash flow or results of operations in accordance with
generally accepted accounting principles for the periods indicated.
39
<PAGE>
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, 1997,
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. on October 31, 1996 (the "Acquisitions"), had occurred on August 1, 1996.
The unaudited pro forma combined financial information includes all of the
operations of the 25 clinics acquired in the Acquisitions.
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 Company's consolidated
financial statements and related notes thereto included elsewhere in this
report.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1997
<TABLE>
<CAPTION>
ACQUIRED PRO FORMA HEALTHCARE
HEALTHCARE CLINICS(B) ADJUSTMENTS COMBINED
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net revenues $ 13,462 $ 1,565 $ 15,027
Costs and expenses:
Product cost of sales 5,010 517 5,527
Operational expenses 9,395 1,265 (c) (276) 10,384
Depreciation and 790 53 (a) 52 895
-------- -------- -------- --------
amortization
Total operating expenses 15,195 1,835 (224) 16,806
-------- -------- -------- --------
Loss from operations (1,733) (270) 224 (1,779)
Other income 32 8 - 40
-------- -------- -------- --------
Loss before income taxes (1,701) (262) 224 (1,739)
Income tax expense - (31) - (31)
-------- -------- -------- --------
Net loss $ (1,701) $ (231) $ 224 $ (1,708)
======== ======== ======== ========
Pro forma:
Net loss per common share $ (0.08)
========
Weighted average number of
shares outstanding
20,455
========
</TABLE>
40
<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 for the year ended July 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 $52,000 for the year ended July 31, 1997, as if the
Acquisitions had occurred on August 1, 1996.
(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.
ACQUISITIONS (FOR PERIODS FROM AUGUST 1, 1996 TO DATE OF ACQUISITION)
HEARING CARE MIDWEST DIVISION
AUGUST 1, 1996 AUGUST 1, 1996
THROUGH THROUGH
SEPTEMBER 30, OCTOBER 31,
1996 1996 TOTAL
---- ---- -----
(in thousands)
STATEMENT OF
OPERATIONS DATA:
Net patient service revenues $ 789 $ 776 $1,565
Costs and expenses:
Product cost of sales 248 269 517
Operational expenses 697 568 1,265
Depreciation and amortization 20 33 53
----- ----- ------
Total operating expenses 965 870 1,835
----- ----- ------
Loss from operations (176) (94) (270)
Other income, net 8 - 8
----- ----- ------
Net loss before income taxes (168) (94) (262)
Income tax benefit - (31) (31)
----- ----- ------
Net loss $(168) $ (63) $ (231)
===== ===== ======
41
<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
42
<PAGE>
HEARING CARE ASSOCIATES GROUP
Balance Sheet
July 31, 1996
ASSETS
Current assets:
<TABLE>
<CAPTION>
<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
============
</TABLE>
See accompanying notes to financial statements.
43
<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
============= =============
</TABLE>
See accompanying notes to financial statements.
44
<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)
============= ============= ============= ============
</TABLE>
See accompanying notes to financial statements.
45
<PAGE>
HEARING CARE ASSOCIATES GROUP
Statements of Cash Flows
Years ended July 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
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
============ ============
</TABLE>
See accompanying notes to financial statements.
46
<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 instrument 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.
47
<PAGE>
HEARING CARE ASSOCIATES GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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 transaction). 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.
48
<PAGE>
HEARING CARE ASSOCIATES GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1996
(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.
49
<PAGE>
HEARING CARE ASSOCIATES GROUP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1996
(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.
50
<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
51
<PAGE>
THE MIDWEST DIVISION OF HEARING
HEALTH SERVICES, INC. dba SONUS
BALANCE SHEETS
<TABLE>
<CAPTION>
July 31, October 31,
1996 1996
------------- -------------
(Unaudited)
ASSETS
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
============= =============
</TABLE>
See accompanying notes to financial statements.
52
<PAGE>
THE MIDWEST DIVISION OF HEARING
HEALTH SERVICES, INC. dba SONUS
STATEMENTS OF OPERATIONS AND ACCUMULATED EARNINGS
<TABLE>
<CAPTION>
Four Months
Years Ended June 30 Ended 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
============= ============= ============== ============
</TABLE>
See accompanying notes to financial statements.
53
<PAGE>
THE MIDWEST DIVISION OF HEARING
HEALTH SERVICES, INC. dba SONUS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Four Months
Years Ended June 30 Ended 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 $ - $ -
========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
54
<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 instrument 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
instruments and batteries, which have been purchased from vendors for
resale to customers.
(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
55
<PAGE>
THE MIDWEST DIVISION OF HEARING
HEALTH SERVICES, INC. dba SONUS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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.
56
<PAGE>
THE MIDWEST DIVISION OF HEARING
HEALTH SERVICES, INC. dba SONUS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(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
============= ============
57
<PAGE>
THE MIDWEST DIVISION OF HEARING
HEALTH SERVICES, INC. dba SONUS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(4) INCOME TAXES (CONTINUED)
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.
(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
============
58
<PAGE>
THE MIDWEST DIVISION OF HEARING
HEALTH SERVICES, INC. dba SONUS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(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.
59
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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 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 for the
year ended July 31, 1996 included in this Form 10-KSB 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.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Information with respect to the directors of the Company and compliance
with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein
by reference to the Company's definitive Management Information Circular and
Proxy Statement dated October 29, 1997 ("Proxy Statement"), under the headings
"Share Ownership By Principal Shareholders and Management - Section 16(a)
Beneficial Ownership Reporting Compliance" and " Election of Directors."
EXECUTIVE OFFICERS OF THE COMPANY
Information with respect to each of the executive officers of the Company,
including his or her 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 Chief Executive Officer and Director
Gregory J. Frazer, Ph.D. 45 Vice President - Business Development and Director
Randall E. Drullinger 34 Vice President - Marketing
Edwin J. Kawasaki 39 Vice President - Finance and Chief Financial Officer
Kathy A. Foltner 44 Vice President - Operations
</TABLE>
BRANDON M. DAWSON. Mr. Dawson has served as President and Chief Executive
Officer 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"), a multi-national manufacturer, distributor, and marketer of custom
"in-the-ear" hearing instruments and related hearing and diagnostic equipment.
GREGORY J. FRAZER, PH.D. Mr. Frazer has served as Vice President -
Business Development and as a director of the Company since October 1996, when
the Company acquired 11 audiology based hearing clinics which were among 22
clinics in Southern California of which Mr. Frazer was part owner and operator.
The Company has since acquired six of the remaining 11 clinics. Mr. Frazer has
spent his entire career as a hearing care professional since receiving his
doctoral degree in audiology from Wayne State School of Medicine in 1981.
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.
60
<PAGE>
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 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 the Midwest Division of Hearing Health Services, Inc. Ms. Foltner
served as vice president of Hearing Health Services, Inc., since January 1995
and as director of its 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.
ITEM 10. EXECUTIVE COMPENSATION
The required information is incorporated herein by reference to the Proxy
Statement under the heading "Executive Compensation."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The required information is incorporated herein by reference to the Proxy
Statement under the heading "Share Ownership By Principal Shareholders and
Management."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The required information is incorporated herein by reference to the Proxy
Statement under the heading "Interests of Insiders in Material Transactions."
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Exhibits are listed in the Exhibit Index beginning on page 63 of this
report. Each management contract or compensatory plan or arrangement required to
be filed as an exhibit to this report is marked with an asterisk in the Exhibit
Index.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company
during the fiscal year ended July 31, 1997.
61
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: October 29, 1997 HEALTHCARE CAPITAL CORP.
By /s/ Brandon M. Dawson
Brandon M. Dawson
President and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities indicated as of October 29, 1997.
Signature Title
PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR:
/s/ Brandon M. Dawson
<TABLE>
<S> <C>
Brandon M. Dawson President and Chief Executive Officer and
Director
</TABLE>
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
/s/ Edwin J. Kawasaki
Edwin J. Kawasaki Vice President-Finance
OTHER DIRECTORS:
*GENE K. BALZER, Ph.D. Director
*WILLIAM DeJONG Director
*GREGORY J. FRAZER, Ph.D. Director
*DOUGLAS F. GOOD Director
*HUGH T. HORNIBROOK Director
*/s/ Edwin J. Kawasaki
Edwin J. Kawasaki, as attorney-in-fact
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EXHIBIT INDEX
EXHIBIT DESCRIPTION OF EXHIBIT
3.1 Articles of Incorporation of the Company. Incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form SB-2 (File
No. 333-23137) (the "SB-2").
3.2 Bylaws of the Company.
10.1 Form of agreement for purchase of special share purchase warrants in
connection with Exhibit 10.2. Incorporated by reference to Exhibit
10.1 to the SB-2.
10.2 Special Warrant Indenture between the Company and The R-M Trust
Company dated February 28, 1996. Incorporated by reference to Exhibit
10.2 to the SB-2.
10.3 Warrant Indenture between the Company and The R-M Trust Company dated
February 28, 1996. Incorporated by reference to Exhibit 10.3 to the
SB-2.
10.4 Form of agreement for purchase of special share purchase warrants
(British Columbia, Alberta and Offshore) in connection with Exhibit
10.6. Incorporated by reference to Exhibit 10.4 to the SB-2.
10.5 Form of agreement for purchase of special share purchase warrants
(United States) in connection with Exhibit 10.6. Incorporated by
reference to Exhibit 10.5 to the SB-2.
10.6 Special Warrant Indenture between the Company and The R-M Trust
Company dated September 17, 1996 ("September Special Warrant
Indenture"). Incorporated by reference to Exhibit 10.6 to the SB-2.
10.7 Supplemental Indenture to September Special Warrant Indenture.
Incorporated by reference to Exhibit 10.7 to the SB-2.
10.8 Second Supplemental Indenture to September Special Warrant Indenture.
Incorporated by reference to Exhibit 10.8 to the SB-2.
10.9 Warrant Indenture between the Company and The R-M Trust Company dated
September 17, 1996 ("September Warrant Indenture"). Incorporated by
reference to Exhibit 10.9 to the SB-2.
10.10 Supplemental Indenture to September Warrant Indenture. Incorporated by
reference to Exhibit 10.10 to the SB-2.
10.11 Sponsorship Agreement between the Company and C.M. Oliver & Company
Limited dated March 13, 1996. Incorporated by reference to Exhibit
10.11 to the SB-2.
10.12 Escrow Agreement dated October 7, 1994, among the Company, The R-M
Trust Company, Marilyn E. Marshall, Douglas F. Good, and Trudy
McCaffery. Incorporated by reference to Exhibit 10.13 to the SB-2.
10.13 Agency Agreement dated as of August 22, 1996, between the Company and
C.M. Oliver & Company Limited. Incorporated by reference to Exhibit
10.16 to the SB-2.
10.14 U.S. Placement Agreement dated as of October 14, 1996, between the
Company and Dallas Research & Trading, Inc. Incorporated by reference
to Exhibit 10.17 to the SB-2.
10.15 U.S. Placement Agreement dated as of October 14, 1996, between the
Company and Sunrise Securities Corporation. Incorporated by reference
to Exhibit 10.18 to the SB-2.
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10.16 Stock Purchase and Sale Agreement dated as of February 28, 1997,
between Gregory J. Frazer and Laurie Van Duivenbode and Sonus-USA,
Inc. (formerly HealthCare Hearing Clinics, Inc.). Incorporated by
reference to Exhibit 10.19 to the SB-2.
10.17 Merger Agreement dated as of October 1, 1996, among the Company,
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.
Incorporated by reference to Exhibit 10.20 to the SB-2.
10.18 Asset Purchase Agreement effective as of October 31, 1996, among the
Company, Sonus-USA, Inc., and Hearing Health Services, Inc., and
Audio-Vestibular Testing Center, Inc. (the "SONUS Agreement").
Incorporated by reference to Exhibit 10.21 to the SB-2.
10.19 Stock Purchase and Sale Agreement dated as of December 17, 1996, by
and between certain selling shareholders and Sonus-USA, Inc.
Incorporated by reference to Exhibit 10.23 to the SB-2.
10.20 Stock Purchase and Sale Agreement dated as of January 9, 1997, by and
between Gregory J. Frazer and Stephen Martinez and Sonus-USA, Inc.
Incorporated by reference to Exhibit 10.24 to the SB-2.
10.21 Form of Convertible Subordinated Note relating to the SONUS Agreement.
Incorporated by reference to Exhibit 10.25 to the SB-2.
*10.22 1993 Stock Option Plan. Incorporated by reference to Exhibit 10.26 to
the SB-2.
*10.23 Second Amended and Restated Stock Award Plan effective October 15,
1997.
*10.24 Employment Agreement dated October 1, 1996, between Sonus-USA, Inc.,
and Gregory J. Frazer, Ph.D. Incorporated by reference to Exhibit
10.28 to the SB-2.
*10.25 Employment Agreement dated as of November 1, 1996, among the Company,
Sonus-USA, Inc., and Kathy A. Foltner. Incorporated by reference to
Exhibit 10.29 to the SB-2.
*10.26 Terms of employment between the Company and Edwin J. Kawasaki dated
August 8, 1996. Incorporated by reference to Exhibit 10.30 to the
SB-2.
10.27 Revolving Demand Loan Agreement between Fraserview Hearing and Speech
Clinics Ltd and Royal Bank of Canada, dated August 21, 1995.
Incorporated by reference to Exhibit 10.31 to the SB-2.
10.28 Revolving Demand Loan Agreement between Sonus-Canada Ltd. and Royal
Bank of Canada, dated February 12, 1997. Incorporated by reference to
Exhibit 10.32 to the SB-2.
*10.29 Consulting Agreement effective as of January 1, 1997, between the
Company and Hugh T. Hornibrook. Incorporated by reference to Exhibit
10.33 to the SB-2.
10.30 Stock Purchase and Sale Agreement dated as of March 6, 1997, between
Gregory J. Frazer, Alfred S. Gaston and Sonus-USA, Inc. Incorporated
by reference to Exhibit 10.34 to the SB-2.
10.31 Stock Purchase and Sale Agreement dated as of March 14, 1997, by and
between Gregory J. Frazer, David N. Jenkins, and Jami Tanihana and
Sonus-USA, Inc. Incorporated by reference to Exhibit 10.35 to the
SB-2.
10.32 Stock Purchase and Sale Agreement dated as of April 6, 1997, by and
between Susan Diaz, Gregory J. Frazer, and Jami Tanihana and
Sonus-USA, Inc. Incorporated by reference to Exhibit 10.36 to the
SB-2.
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10.33 Equipment Lease Agreement dated as of April 1, 1997, between Siemens
Hearing Instruments, Inc., and Sonus-USA, Inc. Incorporated by
reference to Exhibit 10.37 to the SB-2.
10.34 Loan and Security Agreement between Phonak, Inc. and Sonus-USA, Inc.,
and related Guaranty between the Company and Phonak, Inc., each dated
July 16, 1997. Incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-QSB for the quarter ended April
30, 1997.
10.35 Stock Purchase Agreement dated August 27, 1997, by and between Carissa
D. Bennett, Gregory J. Frazer, and Evelyn L. Gong and Sonus-USA, Inc.
*10.36 Promissory Note of Brandon M. Dawson dated May 8, 1997, and related
Pledge Agreement between the Company and Brandon M. Dawson dated May
8, 1997.
*10.37 Promissory Note of Gene K. Balzer, Ph.D., dated May 19, 1997, and
related Pledge Agreement between the Company and Gene K. Balzer,
Ph.D., dated May 19, 1997.
16 Letter of Shikaze Ralston, Chartered Accountants, regarding change in
certifying accountant.
21 The subsidiaries of the Company.
24 Power of attorney of certain officers and directors.
27 Financial Data Schedule.
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*Management contract or compensatory plan or arrangement.
65
A BY-LAW RELATING GENERALLY TO THE CONDUCT OF THE BUSINESS AND AFFAIRS
OF HEALTHCARE CAPITAL CORP. (HEREINAFTER CALLED THE "CORPORATION").
(By-Law No. 1A as amended by By-Law No. 1B effective October 15, 1997)
PART I
INTERPRETATION
1.01 In this By-law and all other By-laws of the Corporation, unless the context
otherwise specifies or requires:
"ACT" means the Business Corporations Act (Alberta), as from time to time
amended, and every statute in substitution thereof;
"ARTICLES" means, as the case may require, the original or restated articles of
incorporation, articles of amendment, articles of amalgamation, articles of
continuance, articles of reorganization, articles of arrangement, articles of
dissolution and articles of revival of the Corporation, and includes an
amendment to any of them;
"BOARD" means the board of Directors, as such board may be constituted from time
to time;
"BY-LAW" means this by-law and all other by-laws of the Corporation from time to
time in force and effect;
"DIRECTORS" means the directors of the Corporation;
"MEETING OF SHAREHOLDERS" includes an annual or other general meeting of
Shareholders and a meeting of any class or classes of Shareholders;
"SHAREHOLDER" means a shareholder of the Corporation;
"CHIEF EXECUTIVE OFFICER" means the President or, if the Corporation does not
have a President or if the office of President is vacant, the officer of the
Corporation holding the paramount office.
PART 2
DIRECTORS
2.01 BORROWING POWERS OF DIRECTORS: Without limiting the powers of the Directors
as set forth in the Act, but subject to the Articles, the Directors may from
time to time on behalf of the Corporation, without authorization of the
Shareholders:
(a) borrow money upon the credit of the Corporation;
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(b) issue, reissue, sell or pledge bonds, debentures, notes or other
evidences of indebtedness or guarantee of the Corporation, whether
secured or unsecured;
(c) to the extent permitted by the Act, give a guarantee on behalf of the
Corporation to secure performance of an obligation of any person; and
(d) mortgage, hypothecate, pledge or otherwise create an interest in or
charge on all or any currently owned or subsequently acquired property
of the Corporation to secure payment of a debt or performance of any
other obligation of the Corporation.
2.02 DELEGATION: Subject to the Articles, the Directors may from time to time,
by resolution, delegate to a committee of Directors, a single Director or an
officer or officers of the Corporation, all or any of the powers conferred on
the Directors by the preceding section of this By-law or by the Act.
2.03 POWER TO ADOPT SEAL AND AUTHORIZE USE: The Directors may, by resolution,
adopt a seal for the Corporation, and authorize persons to affix the seal and to
attest by their signatures that the seal was duly affixed.
2.04 DIRECTORS' POWER TO ISSUE SHARES: Subject to the Articles, the
Directors may, by resolution, issue shares of the Corporation at such time, to
such persons and, subject to the Act, for such consideration as the Directors
may from time to time determine.
2.05 DIRECTORS' POWER TO MAKE. AMEND OR REPEAL BY-LAWS: Subject to the
Articles and the Act, the Directors may, by resolution, make, amend or repeal
any By-laws that regulate the business or affairs of the Corporation.
2.06 DIRECTORS' POWER TO APPOINT OFFICERS: Subject to the Articles:
(a) the Directors may designate the officers of the Corporation, appoint as
officers individuals of full capacity who may, but need not, be
Directors of the Corporation, specify their duties and, except where
delegation is prohibited by the Act, delegate to them powers to manage
the business and affairs of the Corporation;
(b) a Director may be appointed to any office of the Corporation; and
(c) two (2) or more offices of the Corporation may be held by the same
person.
2.07 DIRECTORS' POWER TO FIX REMUNERATION OF DIRECTORS AND OFFICERS:
Subject to the Articles, the Directors may fix the remuneration of the
Directors and of the officers of the Corporation.
2.08 FINANCIAL DISCLOSURE: Subject to the Articles, the Directors shall not be
required to place before the annual meeting of Shareholders any information
respecting the financial position of the Corporation or the results of its
operations except that information required by the Act.
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2.09 REMUNERATION AND EXPENSES: The Directors shall be paid such remuneration
for their services as the Board may from time to time determine. The Directors
shall also be entitled to be reimbursed for travelling and other expenses
properly incurred by them in attending meetings of the Board or any committee
thereof. Nothing contained herein shall preclude any Director from serving the
Corporation in any other capacity and receiving remuneration therefor.
2.10 DIRECTORS' MEETINGS:
(a) CONVENING MEETINGS: Any Director may convene a meeting of Directors.
(b) NOTICE OF MEETING OF DIRECTORS: At least forty-eight (48) hours'
notice (inclusive of the day on which the notice is communicated, or
deemed to be communicated, and the day of the meeting) shall be given
of a meeting of the Directors, and the notice shall specify the place,
the day and the hour of the meeting. Except where required by the Act,
the notice need not specify the purpose of the meeting or the business
to be transacted thereat.
(c) NOTICE OF ADJOURNED MEETING OF DIRECTORS: If a meeting of the Directors
is adjourned by one or more adjournments, it is not necessary to give
notice of the adjourned meeting, other than by announcement at the time
of the adjournment, if:
(i) all of the Directors are present at the time of the
announcement; or
(ii) those Directors who were not present at the time of
the announcement attend the adjourned meeting and
participate in the meeting;
but in all other cases, notice of the adjourned meeting shall be given as if it
were a new meeting, provided that if the adjournment is for a period of time
which makes it impossible or impracticable to give forty-eight (48) hours'
notice, the notice shall be deemed to have been properly given if transmitted on
the next business day following the adjournment.
(d) MANNER OF TRANSMITTING NOTICES: Notice of a meeting of the Directors,
or any other communication required to be made, may be given or made to
a Director either:
(i) in writing:
(1) by first class mail, postage prepaid,
addressed to the Director at the
Director's latest address as shown in
the records of the Corporation;
(2) by delivery to the Director's latest
address as shown in the records of the
Corporation and leaving the notice in the
custody of an adult person found there,
placing it in a mail receptacle at that
address
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or affixing it to a door or placing in some
other place at that address where the notice
or communication is likely to be found;
(3) by personally serving it upon the Director;
or
(4) by any electronic device capable of
transmitting a printed message directed to
the Director at a place where the Director
has access to a device capable of receiving
the message; or
(ii) verbally, whether by means of a telephone or
otherwise.
All notices or other communication given or made in writing in
accordance with the foregoing shall be deemed to have been
communicated:
(i) if given or made by mail, at the time it would be delivered in
the ordinary course of mail unless there are reasonable
grounds for believing that the Director did not receive the
notice or communication at that time, or at all;
(ii) if delivered or personally served, on the day that it was
delivered or served; and
(iii) if by electronic device, one (1) hour following transmission.
(e) WAIVER OF NOTICE: Notice of any meeting of Directors or of any
committee of Directors or the time for the giving of any such notice or
any irregularity in any meeting or in the notice thereof may be waived
by any Director in writing or by telecopy, telegram, cable or telex
addressed to the Corporation or in any other manner, and any such
waiver may be validly given either before or after the meeting to which
such waiver relates. Attendance of a Director at any meeting of
Directors or of any committee of Directors is a waiver of notice of
such meeting, except when a Director attends a meeting for the express
purpose of objecting to the transaction of any business on the grounds
that the meeting is not lawfully called.
(f) OMISSION OF NOTICE: The accidental omission to give notice of any
meeting of Directors, or of any committee of Directors, or the
non-receipt of any notice by any person shall not invalidate any
resolution passed or any proceeding taken at such meeting.
(g) PLACE OF MEETINGS OF DIRECTORS: Subject to the Articles, meetings of
the Directors may be held at any place in Alberta, or at any place
outside of Alberta if all Directors entitled to attend and vote at the
meeting either participate in the meeting or consent, verbally or
otherwise, to the meeting being held at that place.
(h) CHAIRMAN OF MEETINGS OF DIRECTORS OR COMMITTEE OF DIRECTORS: Unless and
until the Directors have elected a Chairman of the Board, the Chief
Executive Officer shall act as chairman of all meetings of the
Directors but if the Chairman of the Board or the Chief Executive
Officer, as the case may be, is absent or refuses to act as chairman,
the
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Directors in attendance shall by a vote of the majority of them elect
some other Director present at the meeting to act as chairman of the
meeting.
(i) SECRETARY OF MEETINGS OF DIRECTORS: The chairman of a meeting of
Directors may appoint a Director to act as secretary of a meeting of
Directors, and in the absence of such appointment, the chairman of the
meeting shall also act as secretary of the meeting.
(j) QUORUM OF DIRECTORS: Subject to the Articles, a majority of Directors
shall constitute a quorum at any meeting of Directors.
(k) PARTICIPATION BY TELEPHONE: A Director may participate in a meeting of
Directors by means of telephone or other communication facilities that
permit all persons participating in the meeting to hear each other.
(l) RESOLUTION BY MAJORITY: Subject to the Articles, every resolution
submitted to a meeting of Directors shall be decided by a vote of a
majority of the Directors participating in the meeting, and the
declaration of the chairman of the meeting on the result of the vote
shall be final. In case of an equality of votes, the chairman of the
meeting shall not have a casting vote.
2.11 MEETINGS OF COMMITTEES OF DIRECTORS: The provisions of Section 2.10 of this
By-law shall apply equally to meetings of committees of Directors, but when
applying those provisions to a meeting of a committee of Directors, the phrase
"meeting of Directors" shall mean "meeting of a committee of Directors" and the
word "Director" shall mean "member of a committee of Directors".
2.12 WRITTEN RESOLUTION IN LIEU OF MEETING: Subject to the Articles, a
resolution in writing signed by all the Directors entitled to vote on that
resolution at a meeting of Directors or committee of Directors is as valid as if
it had been passed at a meeting of Directors or a committee of Directors. A
resolution in writing may be signed in any number of counterparts which together
shall be construed as a single instrument. A resolution in writing shall take
effect on the date when it is expressed to be effective notwithstanding that the
effective date is before or after the date on which it was signed by the
Directors or any of them. A resolution in writing transmitted by telegraph,
telex or other device capable of transmitting a printed message and purporting
to be sent by a Director shall be valid as a counterpart of a resolution in
writing of the Directors or committee of Directors.
PART 3
SHAREHOLDERS' MEETINGS
3.01 CHAIRMAN OF MEETING OF SHAREHOLDERS: The Chairman of the Board, or failing
him the President of the Corporation, shall act as chairman at all Meetings of
Shareholders. If the Chairman of the Board and the President are both absent or
refuse to act as chairman of the meeting, the Shareholders in attendance shall
elect some other person in attendance at the meeting, who need not be a
Shareholder, to act as chairman of the meeting.
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3.02 PLACE OF SHAREHOLDERS' MEETINGS: Subject to the Articles and the
provisions of the Act permitting a Meeting of Shareholders to be held outside of
Alberta, a Meeting of Shareholders shall be held at the place in Alberta
determined by the Directors.
3.03 PARTICIPATION IN MEETING BY TELEPHONE: A Shareholder or any other person
entitled to attend a Meeting of Shareholders may participate in the meeting by
means of telephone or other communication facilities that permit all persons
participating in the meeting to hear each other, and a person participating in
such a meeting by those means is deemed for the purposes of the Act to be
present at the meeting.
3.04 NOTICE OF ADJOURNED MEETING: If a Meeting of Shareholders is adjourned by
one or more adjournments for an aggregate of less than thirty (30) days, it is
not necessary to give notice of the adjourned meeting, other than by
announcement at the time of the adjournment.
3.05 QUORUM OF SHAREHOLDERS: A quorum of Shareholders is present at a Meeting of
Shareholders if not less than 33-1/3% of the issued shares entitled to vote at
the Meeting are represented in person or by proxy.
3.06 LOSS OF QUORUM DURING MEETING: If a quorum is present at the opening of a
Meeting of Shareholders, the Shareholders present may proceed with the business
of the meeting notwithstanding that a quorum is not present throughout the
meeting.
3.07 VOTING JOINTLY HELD SHARES: If two (2) or more persons hold shares of the
Corporation jointly, one of those holders present at a Meeting of Shareholders
may, in the absence of the others, vote the shares, but if two (2) or more of
those persons who are present, in person or by proxy, vote, they shall vote as
one on the shares jointly held by them.
3.08 VOTING: Voting at a Meeting of Shareholders shall be by show of hands
except when a vote by ballot is demanded by a Shareholder or a proxyholder
entitled to vote at the meeting. If a vote by ballot is demanded at a meeting in
which a Shareholder, or other person entitled to attend and vote at the meeting,
is participating by telephone or other communication facilities, such
Shareholder or other person may verbally appoint some person present at the
meeting to cast a ballot on his behalf and a ballot so cast shall be valid as if
it were personally cast by the Shareholder or other person so participating.
3.09 WRITTEN RESOLUTION IN LIEU OF MEETING: Subject to the Articles, a
resolution in writing signed by all the Shareholders entitled to vote on that
resolution at a Meeting of Shareholders is as valid as if it had been passed at
a Meeting of Shareholders. A resolution in writing may be signed in any number
of counterparts which together shall be construed as a single instrument. A
resolution in writing shall take effect on the date when it is expressed to be
effective notwithstanding that the effective date is before or after the date on
which it was signed by the Shareholders or any of them. A resolution in writing
transmitted by telegraph, telex or other device capable of transmitting a
printed message and purporting to be sent by a Shareholder shall be valid as a
counterpart of a resolution in writing of the Shareholders.
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PART 4
LIEN ON SHARES
4.01 If the Articles provide that the Corporation has a lien on shares
registered in the name of a Shareholder or his legal representative for a debt
of that Shareholder to the Corporation, such lien may be enforced, subject to
the Act and to any other provision of the Articles, by the sale of shares
thereby affected or by any other action, suit, remedy or proceedings authorized
or permitted by law or by equity and, pending such enforcement, the Corporation
may refuse to register a transfer of the whole or any part of such shares.
PART 5
VOTING RIGHTS IN OTHER BODIES CORPORATE
5.01 The signing officers of the Corporation may execute and deliver instruments
of proxy and arrange for the issuance of voting certificates or other evidence
of the right to exercise the voting rights attaching to any securities held by
the Corporation. Such instruments, certificates or other evidence shall be in
favour of such person or persons as may be determined by the person signing or
arranging for them. In addition, the Board may direct the manner in which, and
the person or persons by whom, any particular voting rights or class of voting
rights may or shall be exercised.
PART 6
SHARES AND SHARE CERTIFICATES
6.01 ALLOTMENT: Subject to the Articles, the Board may from time to time allot,
or grant options to purchase, and issue the whole or any part of the authorized
and unissued shares of the Corporation at such times and to such persons and for
such consideration as the Board shall determine, provided that no share shall be
issued until the consideration for the share is fully paid as provided for in
the Act.
6.02 COMMISSIONS: The Board may from time to time authorize the Corporation to
pay a reasonable commission to any person in consideration of his purchasing or
agreeing to purchase shares of the Corporation from the Corporation or from any
other person, or procuring or agreeing to procure purchasers for shares of the
Corporation.
6.03 NON-RECOGNITION OF TRUSTS: Subject to the provisions of the Act, the
Corporation may treat the person in whose name a share is registered in the
securities register as the absolute owner of the share as if that person had
full legal capacity and authority to exercise all rights of ownership,
irrespective of any indication to the contrary through knowledge or notice or
description in the Corporation's records or on the share certificate.
6.04 SHARE CERTIFICATES: Every holder of one or more shares of the Corporation
shall be entitled, at his option, to a share certificate, or to a
non-transferable written acknowledgment of his right to obtain a share
certificate, stating the name of the person to whom the certificate or
acknowledgment was issued, and the number and class or series of shares held by
him as
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shown on the securities register. Share certificates and acknowledgements of a
Shareholder's right to a share certificate, shall, subject to the Act, be in
such form as the Board shall from time to time approve. Any share certificate
shall be signed by any number of signing officers as the Board may determine and
need not be under the corporate seal, provided that, unless the Board otherwise
determines, certificates representing shares in respect of which a transfer
agent and/or registrar has been appointed shall not be valid unless
countersigned by or on behalf of such transfer agent and/or registrar. The
signature of a sole signing officer or two signing officers, as the case may be,
may be printed or mechanically reproduced in facsimile upon share certificates
and every such facsimile signature shall for all purposes be deemed to be the
signature of the officer whose signature it reproduces and shall be binding upon
the Corporation. A share certificate executed as aforesaid shall be valid
notwithstanding that one or both of the officers whose facsimile signature
appears thereon no longer holds office at the date of issue of the certificate.
6.05 REPLACEMENT OF SHARE CERTIFICATE: The Board or any officer or agent
designated by the Board may in its or his discretion direct the issue of a new
share certificate in lieu of and upon cancellation of a share certificate that
has been mutilated or in substitution for a share certificate claimed to have
been lost, destroyed or wrongfully taken, on payment of such fee not exceeding
such amount as may be allowed by the Act, and on such terms as to indemnity,
reimbursement of expenses and evidence of loss and of title as the Board may
from time to time prescribe, whether generally or in any particular case.
6.06 JOINT SHAREHOLDERS: If two or more persons are registered as joint holders
of any share, the Corporation shall not be bound to issue more than one
certificate in respect thereof, and delivery of such certificate to one of such
persons shall be sufficient delivery to all of them. Any one of such persons may
give effectual receipts for the certificate issued in respect thereof or for any
dividend, bonus, return of capital or other money payable or warrant issuable in
respect of such share.
6.07 FRACTIONAL SHARE: The Corporation may issue a certificate for a fractional
share or may issue in its place, as may be determined by the Board, scrip
certificates in a form that entitles the holder to receive a certificate for a
full share by exchanging scrip certificates aggregating a full share. The
Directors may attach conditions to any scrip certificates, including that the
scrip certificates become void if they are not exchanged for a share certificate
representing a full share by a specified date, and that any shares for which
those scrip certificates are exchangeable may, notwithstanding any pre-emptive
right, be issued by the Corporation to any person and the proceeds of those
shares distributed rateably to the holders of the scrip certificates.
6.08 TRANSFER AND TRANSMISSION OF SHARES: Shares of the Corporation may be
transferred in the form of a transfer of endorsement endorsed on the
certificates issued for the shares of the Corporation or in any form of transfer
which may be approved by the Board.
6.09 REGISTRATION OF TRANSFER: Subject to the provisions of the Act, no transfer
of shares shall be registered in a securities register except upon presentation
of the certificate
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representing such shares with a transfer endorsed thereon or delivered therewith
duly executed by the registered holder or by his attorney or successor duly
appointed, together with such reasonable assurance or evidence of signature,
identification and authority to transfer as the Board may from time to time
prescribe, upon payment of all applicable taxes and any fees prescribed by the
Board.
6.10 RIGHTS OF REPRESENTATIVES: The Corporation may treat a person as a
registered Shareholder entitled to exercise all rights of the Shareholder he
represents if that person produces to the Board such evidence as may be
reasonably required that he is the executor, administrator, heir or legal
representative of the heirs of the estate of a deceased Shareholder, or a
guardian, committee or trustee representing a registered Shareholder.
6.11 NO DUTY TO THIRD PERSON: The Corporation is not required to enquire into
the existence of, or see to the performance or observance of, any duty owed to a
third person by a registered holder of any of its shares, or by anyone whom it
treats, subject to the Act, as the owner or registered holder of its shares.
6.12 TRANSFER AGENTS AND REGISTRARS: The Board may from time to time appoint one
or more trust companies registered under the Trust Companies Act (Alberta) as
its agent or agents to maintain the central securities register or registers,
and an agent or agents to maintain branch securities registers. Such a person
may be designated as transfer agent or registrar according to his functions and
one person may be appointed both registrar and transfer agent.
The Board may at any time terminate any such appointment.
PART 7
INFORMATION AVAILABLE TO SHAREHOLDERS
7.01 AVAILABLE INFORMATION: Except as provided by the Act, no Shareholder shall
be entitled to obtain information respecting any details or conduct of the
Corporation's business which in the opinion of the Directors would not be in
the interest of the Corporation to communicate to the public.
7.02 INSPECTION OF INFORMATION: The Directors may from time to time, subject to
those rights conferred by the Act, determine whether, to what extent, at what
time and place and under what conditions or regulations the documents, books,
registers and accounting records of the Corporation or any of them shall be open
to the inspection of Shareholders, and no Shareholder shall have any right to
inspect any document, book, register or accounting record of the Corporation
except as conferred by statute or authorized by the Board or by a resolution of
the Shareholders.
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PART 8
INDEMNIFICATION OF DIRECTORS AND OFFICERS OF THE CORPORATION
8.01 In all circumstances permitted by the Act, the Corporation shall indemnify
a Director or officer of the Corporation, a former Director or officer of the
Corporation, or a person who acts or acted at the Corporation's request as a
director or officer of a body corporate of which the Corporation is or was a
shareholder or a creditor, and his heirs and legal representatives, from and
against:
(a) all costs, charges and expenses, including an 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 Corporation or such body corporate; and
(b) all other costs, charges and expenses reasonably incurred in connection
with the defence 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 Corporation or such body corporate.
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HEALTHCARE CAPITAL CORP.
SECOND AMENDED AND RESTATED
STOCK AWARD PLAN
ARTICLE 1
ESTABLISHMENT AND PURPOSE
1.1 Establishment; Amendment and Restatement. HealthCare
Capital Corp. ("Corporation") established the HealthCare Capital Corp. Stock
Award Plan (the "Plan"), effective as of December 10, 1996, subject to
shareholder approval as provided in Article 16 of the Plan. The Plan was
previously amended and restated effective February 5, 1997, and is further
amended and restated as set forth herein effective October 15, 1997.
1.2 Purpose. The purpose of the Plan is to promote and advance
the interests of Corporation and its shareholders by enabling Corporation and
its subsidiaries to attract, retain, and reward key employees, directors, and
outside consultants. It is also intended to strengthen the mutuality of
interests between such employees, directors, and outside consultants and
Corporation's shareholders. The Plan is designed to meet this intent by offering
stock options and other equity-based incentive awards, thereby providing a
proprietary interest in pursuing the long-term growth, profitability, and
financial success of Corporation.
ARTICLE 2
DEFINITIONS
2.1 Defined Terms. For purposes of the Plan, the following
terms shall have the meanings set forth below:
"AWARD" means an award or grant made to a Participant of
Options, Stock Appreciation Rights, Restricted Units, Performance Awards, or
Other Stock-Based Awards pursuant to the Plan.
"AWARD AGREEMENT" means an agreement as described in Section
6.4 evidencing an Award granted under the Plan.
"BOARD" means the Board of Directors of Corporation.
"CODE" means the Internal Revenue Code of 1986, as amended and
in effect from time to time, or any successor thereto, together with rules,
regulations, and interpretations promulgated thereunder. Where the context so
requires, any reference to a particular Code section shall be construed to refer
to the successor provision to such Code section.
"CONSULTANT" means any consultant or adviser to Corporation or
a Subsidiary who is not an employee of Corporation or a Subsidiary, but does not
include any person involved in a capital-raising or investor relations activity
on behalf of the Corporation.
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"CONTINUING RESTRICTION" means a Restriction contained in
Sections 15.4, 15.6, and 15.7 of the Plan and any other Restrictions expressly
designated by the Board in an Award Agreement as a Continuing Restriction.
"CORPORATION" means HealthCare Capital Corp., an Alberta,
Canada, corporation, or any successor corporation.
"DISABILITY" means the condition of being "disabled" within
the meaning of Section 22(e)(3) of the Code. However, the Board may change the
foregoing definition of "Disability" or may adopt a different definition for
purposes of specific Awards.
"DOLLARS" OR "$" means United States dollars.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended and in effect from time to time, or any successor statute. Where the
context so requires, any reference to a particular section of the Exchange Act,
or to any rule promulgated under the Exchange Act, shall be construed to refer
to successor provisions to such section or rule.
"FAIR MARKET VALUE" of a Share on a particular day means,
without regard to any Restrictions, the mean between the reported high and low
sale prices, or, if there is no sale on such day, the mean between the reported
bid and asked prices, for that day, of Shares on that day or, if that day is not
a trading day, the last prior trading day, on the principal securities exchange
or automated securities interdealer quotation system on which such Shares shall
have been traded.
"INCENTIVE STOCK OPTION" or "ISO" means any Option granted
pursuant to the Plan that is intended to be and is specifically designated in
its Award Agreement as an "incentive stock option" within the meaning of Section
422 of the Code.
"NONEMPLOYEE DIRECTOR" means a member of the Board who is not
an employee of Corporation or a Subsidiary.
"NONQUALIFIED OPTION" or "NQO" means any Option granted
pursuant to the Plan that is not an Incentive Stock Option.
"OPTION" means an ISO or an NQO.
"OTHER STOCK-BASED AWARD" means an Award as described in
Section .
"PARTICIPANT" means an employee or Consultant of Corporation
or a Subsidiary or a Nonemployee Director who is granted an Award under the
Plan.
"PERFORMANCE AWARD" means an Award granted pursuant to the
provisions of Article of the Plan, the Vesting of which is contingent on
attaining one or more Performance Goals.
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"PERFORMANCE CYCLE" means a designated performance period
pursuant to the provisions of Section of the Plan.
"PERFORMANCE GOAL" means a designated performance objective
pursuant to the provisions of Section of the Plan.
"PLAN" means this HealthCare Capital Corp. Stock Award Plan,
as amended and restated as set forth herein and as it may be hereafter amended
from time to time.
"REPORTING PERSON" means a Participant who is subject to the
reporting requirements of Section 16(a) of the Exchange Act.
"RESTRICTED UNIT" means an Award of stock units representing
Shares described in Section 9.1 of the Plan.
"RESTRICTION" means a provision in the Plan or in an Award
Agreement which limits the exercisability or transferability, or which governs
the forfeiture, of an Award or the Shares, cash, or other property payable
pursuant to an Award.
"RETIREMENT" means:
(a) For Participants who are employees, retirement from active
employment with Corporation and its Subsidiaries at or after age 65, or
such earlier retirement date as approved by the Board for purposes of
the Plan;
(b) For Participants who are Nonemployee Directors,
termination of membership on the Board after attaining age 65, or such
earlier retirement date as approved by the Board for purposes of the
Plan; and
(c) For individual Participants who are Consultants,
termination of service as a Consultant after attaining a retirement age
specified by the Board for purposes of an Award to such Consultant.
However, the Board may change the foregoing definition of "Retirement" or may
adopt a different definition for purposes of specific Awards.
"SHARES" means the Common Shares without nominal or par value
of Corporation or any security of Corporation issued in substitution, exchange,
or in lieu of such securities.
"STOCK APPRECIATION RIGHT" or "SAR" means an Award described
in Article 8 of the Plan.
"STOCK OPTION PLAN" means the Corporation's incentive stock
option plan adopted effective November 18, 1993.
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"SUBSIDIARY" means a "subsidiary corporation" of Corporation
within the meaning of Section 425 of the Code, namely any corporation in which
Corporation directly or indirectly controls 50 percent or more of the total
combined voting power of all classes of stock having voting power.
"VEST" or "VESTED" means:
(a) In the case of an Award that requires exercise, to be or
to become immediately and fully exercisable and free of all
Restrictions (other than Continuing Restrictions);
(b) In the case of an Award that is subject to forfeiture, to
be or to become nonforfeitable, freely transferable, and free of all
Restrictions (other than Continuing Restrictions);
(c) In the case of an Award that is required to be earned by
attaining specified Performance Goals, to be or to become earned and
nonforfeitable, freely transferable, and free of all Restrictions
(other than Continuing Restrictions); or
(d) In the case of any other Award as to which payment is not
dependent solely upon the exercise of a right, election, or option, to
be or to become immediately payable and free of all Restrictions
(except Continuing Restrictions).
2.2 Gender and Number. Except where otherwise indicated by the
context, any masculine or feminine terminology used in the Plan shall also
include the opposite gender; and the definition of any term in Section in the
singular shall also include the plural, and vice versa.
ARTICLE 3
ADMINISTRATION
3.1 General. Except as provided in Section 3.2, the Plan shall
be administered by the Board.
3.2 Committee. The Board may delegate administration of the
Plan to a committee of two or more Nonemployee Directors. In the event the Board
delegates administration to such a committee, the committee will have all the
authority of the Board with respect to administration of the Plan, other than
the authority to grant Awards to Nonemployee Directors, which authority shall
reside exclusively with the Board, and subject to any additional limits on such
delegation imposed by the Board.
3.3 Authority of the Board. The Board shall have full power
and authority to administer the Plan in its sole discretion, including the
authority to:
(a) Construe and interpret the Plan and any Award Agreement;
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(b) Promulgate, amend, and rescind rules and procedures
relating to the implementation of the Plan;
(c) With respect to Participants:
(i) Select the employees, Nonemployee Directors, and
Consultants who will be granted Awards;
(ii) Determine the number and types of Awards to be
granted to each Participant;
(iii) Determine the number of Shares, or Share
equivalents, to be subject to each Award;
(iv) Determine the option price, purchase price, base
price, or similar feature for any Award; and
(v) Determine all the terms and conditions of all
Award Agreements, consistent with the requirements of the Plan
and subject to approval, to the extent required, by any
regulatory authority having jurisdiction over Awards granted
under the Plan.
Decisions of the Board, or any delegate as permitted by the Plan, will be final,
conclusive, and binding on all Participants.
3.4 Liability of Board Members. No member of the Board will be
liable for any action or determination made in good faith with respect to the
Plan, any Award, or any Participant.
3.5 Costs of Plan. The costs and expenses of administering the
Plan will be borne by Corporation.
ARTICLE 4
DURATION OF THE PLAN AND SHARES SUBJECT TO THE PLAN
4.1 Duration of the Plan. The HealthCare Capital Corp. Stock
Award Plan initially became effective December 10, 1996, subject to approval by
Corporation's shareholders as provided in Article 16 of the Plan. The Plan will
remain in effect until Awards have been granted covering all the available
Shares or the Plan is otherwise terminated by the Board.
Termination of the Plan will not affect outstanding Awards.
4.2 Shares Subject to the Plan.
4.2.1 General. The shares which may be made subject to Awards
under the Plan are Shares, which may be either authorized and unissued Shares or
reacquired Shares. No fractional Shares may be issued under the Plan.
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4.2.2 Maximum Number of Shares. The maximum number of Shares
for which Awards may be granted under the Plan is 3,000,000 Shares, subject to
adjustment pursuant to Article 13 of the Plan; provided that the maximum number
of Shares issuable under the Plan may not exceed the number permitted by the
regulations, guidelines or policies of any regulatory authority having
jurisdiction over the issuance of Shares pursuant to the Plan.
4.2.3 Availability of Shares for Future Awards. If an Award
under the Plan is canceled or expires for any reason prior to having been fully
Vested or exercised by a Participant or is settled in cash in lieu of Shares or
is exchanged for other Awards, all Shares covered by such Awards will be made
available for future Awards under the Plan. Furthermore, any Shares covered by a
Stock Appreciation Right which are not issued upon exercise will become
available for future Awards.
ARTICLE 5
ELIGIBILITY
Officers and other key employees of Corporation and its
Subsidiaries (who may also be directors of Corporation or a Subsidiary),
Consultants, and Nonemployee Directors who, in the Board's judgment, are or will
be contributors to the long-term success of Corporation shall be eligible to
receive Awards under the Plan.
ARTICLE 6
AWARDS
6.1 Types of Awards. The types of Awards that may be granted
under the Plan are:
(a) Options governed by Article of the Plan;
(b) Stock Appreciation Rights governed by Article of the
Plan;
(c) Restricted Units governed by Article of the Plan;
(d) Performance Awards governed by Article of the Plan; and
(e) Other Stock-Based Awards or combination Awards governed
by Article of the Plan.
In the discretion of the Board, any Award may be granted alone, in addition to,
or in tandem with other Awards under the Plan.
6.2 General. Subject to the limitations of the Plan, the Board
may cause Corporation to grant Awards to such Participants, at such times, of
such types, in such amounts, for such periods, with such option prices, purchase
prices, or base prices, and subject to such terms, conditions, limitations, and
restrictions as the Board, in its discretion, deems appropriate; provided that
all Awards granted under the Plan are subject to approval by any regulatory
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authority having jurisdiction over such grants. Awards may be granted as
additional compensation to a Participant or in lieu of other compensation to
such Participant. A Participant may receive more than one Award and more than
one type of Award under the Plan, subject to approval, to the extent required,
by any regulatory authority having jurisdiction over Awards granted under the
Plan.
6.3 Nonuniform Determinations. The Board's determinations
under the Plan or under one or more Award Agreements, including, without
limitation, the selection of Participants to receive Awards, the type, form,
amount, and timing of Awards, the terms of specific Award Agreements, and
elections and determinations made by the Board with respect to exercise or
payments of Awards, need not be uniform and may be made by the Board selectively
among Participants and Awards, whether or not Participants are similarly
situated.
6.4 Award Agreements. Each Award will be evidenced by a
written Award Agreement between Corporation and the Participant. Award
Agreements, or the form thereof, must be approved by the Board and may, subject
to the provisions of the Plan, contain any provision approved by the Board,
subject to approval, to the extent required, by any regulatory authority having
jurisdiction over Awards granted under the Plan.
6.5 Provisions Governing All Awards. All Awards will be
subject to the following provisions:
(a) Alternative Awards. If any Awards are designated in their
Award Agreements as alternative to each other, the exercise of all or
part of one Award automatically will cause an immediate equal (or pro
rata) corresponding termination of the other alternative Award or
Awards.
(b) Rights as Shareholders. No Participant will have any
rights of a shareholder with respect to Shares subject to an Award
until such Shares are issued in the name of the Participant.
(c) Employment Rights. Neither the adoption of the Plan nor
the granting of any Award will confer on any person the right to
continued employment with Corporation or any Subsidiary or the right to
remain as a director of or a consultant to Corporation or any
Subsidiary, as the case may be, and will not interfere in any way with
the right of Corporation or a Subsidiary to terminate such person's
employment or to remove such person as a Consultant or as a director at
any time for any reason or for no reason, with or without cause.
(d) Termination Of Employment. The terms and conditions under
which an Award may be exercised, if at all, after a Participant's
termination of employment or service as a Nonemployee Director or
Consultant will be determined by the Board and specified in the
applicable Award Agreement, subject to approval, to the extent
required, by any regulatory authority having jurisdiction over Awards
granted under the Plan.
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(e) Change in Control. The Board, in its discretion, may
provide in any Award Agreement that in the event of a change in control
of Corporation (as the Board may define such term in the Award
Agreement), as of the date of such change in control:
(i) All, or a specified portion of, Awards requiring
exercise will become fully and immediately exercisable,
notwithstanding any other limitations on exercise;
(ii) All, or a specified portion of, Awards subject
to Restrictions will become fully Vested; and
(iii) All, or a specified portion of, Awards subject
to Performance Goals will be deemed to have been fully earned.
The Board, in its discretion, may include change in control provisions
in some Award Agreements and not in others, may include different
change in control provisions in different Award Agreements, and may
include change in control provisions for some Awards or some
Participants and not for others.
(f) Reporting Persons. Notwithstanding anything in the Plan to
the contrary, the Board, in its sole discretion, may bifurcate the Plan
so as to restrict, limit, or condition the use of any provision of the
Plan to Participants who are Reporting Persons without so restricting,
limiting or conditioning the Plan with respect to other Participants.
(g) Service Periods. At the time of granting Awards, the Board
may specify, by resolution or in the Award Agreement, the period or
periods of service performed or to be performed by the Participant in
connection with the grant of the Award.
(h) Nontransferability. Each Award shall not be transferable
or assignable otherwise than by will or the laws of descent and
distribution and shall be exercisable (if exercise is required) during
the lifetime of the Participant, only by the Participant or, in the
event the Participant becomes legally incompetent, by the Participant's
guardian or legal representative.
ARTICLE 7
OPTIONS
7.1 Types of Options. Options granted under the Plan may be in
the form of Incentive Stock Options or Nonqualified Options. The grant of each
Option and the Award Agreement governing each Option will identify the Option as
an ISO or an NQO. In the event the Code is amended to provide for tax-favored
forms of stock options other than or in addition to Incentive Stock Options, the
Board may grant Options under the Plan meeting the requirements of such forms of
options.
7.2 General. Options will be subject to the terms and
conditions set forth in Article of the Plan and this Article and may contain
such additional terms and conditions,
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not inconsistent with the express provisions of the Plan, as the Board deems
desirable, subject to approval by any regulatory authority having jurisdiction
over Awards granted under the Plan.
7.3 Option Price. Each Award Agreement for Options will state
the option exercise price per Share of Common Stock purchasable under the
Option, which will not be less than:
(a) 75 percent of the Fair Market Value of a Share on the date
of grant for all Nonqualified Options; or
(b) 100 percent of the Fair Market Value of a Share on the
date of grant for all Incentive Stock Options;
provided that at no time shall the option exercise price of an Option at the
date of grant be greater or less than that permitted under the regulations,
guidelines or policies of any regulatory authority having jurisdiction over
Awards granted under the Plan.
7.4 Option Term. The Award Agreement for each Option will
specify the term during which the Option may be exercised, as determined by the
Board, subject to approval by any regulatory authority having jurisdiction over
Awards granted under the Plan.
7.5 Time of Exercise. The Award Agreement for each Option will
specify, as determined by the Board:
(a) The time or times when the Option will become exercisable
and whether the Option will become exercisable in full or in graduated
amounts over a period specified in the Award Agreement;
(b) Such other terms, conditions, and restrictions as to when
the Option may be exercised as are determined by the Board; and
(c) The extent, if any, to which the Option will remain
exercisable after the Participant ceases to be an employee, Consultant
or Nonemployee Director of Corporation or a Subsidiary;
in each case, subject to approval by any regulatory authority having
jurisdiction over Awards granted under the Plan. An Award Agreement for an
Option may, in the discretion of the Board, provide whether, and to what extent,
the Option will become immediately and fully exercisable (i) in the event of the
death, Disability, or Retirement of the Participant, or (ii) upon the occurrence
of a change in control of Corporation.
7.6 Method of Exercise. The Award Agreement for each Option
will specify the method or methods of payment acceptable upon exercise of an
Option. An Award Agreement may provide that the option price is payable in full
in cash or, at the discretion of the Board, by delivery (in a form approved by
the Board) of an irrevocable direction to a securities broker acceptable to the
Board (i) to sell Shares subject to the Option and to deliver all or a part of
the
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sales proceeds to Corporation in payment of all or a part of the option price
and withholding taxes due, or (ii) to pledge Shares subject to the Option to the
broker as security for a loan and to deliver all or a part of the loan proceeds
to Corporation in payment of all or a part of the option price and withholding
taxes due.
7.7 Special Rules for Incentive Stock Options. In the case of
an Option designated as an Incentive Stock Option, the terms of the Option and
the Award Agreement shall be in conformance with the statutory and regulatory
requirements specified in Section 422 of the Code, as in effect on the date such
ISO is granted. ISOs may not be granted under the Plan after December 9, 2006,
unless the ten-year limitation of Section 422(b)(2) of the Code is removed or
extended.
ARTICLE 8
STOCK APPRECIATION RIGHTS
8.1 General. Stock Appreciation Rights will be subject to the
terms and conditions set forth in Article of the Plan and this Article and may
contain such additional terms and conditions, not inconsistent with the express
terms of the Plan, as the Board deems desirable, subject to approval, to the
extent required, by any regulatory authority having jurisdiction over Awards
granted under the Plan.
8.2 Nature of Stock Appreciation Right. A Stock Appreciation
Right (or SAR) is an Award entitling a Participant to receive an amount equal to
the excess (or if the Board determines at the time of grant, a portion of the
excess) of the Fair Market Value of a Share on the date of exercise of the SAR
over the base price, as described below, on the date of grant of the SAR,
multiplied by the number of Shares with respect to which the SAR is exercised.
The base price will be designated by the Board in the Award Agreement for the
SAR and may be the Fair Market Value of a Share on the grant date of the SAR or
such other higher or lower price as the Board determines.
8.3 Exercise. A Stock Appreciation Right may be exercised by a
Participant in accordance with procedures established by the Board. The Board
may also provide that a SAR will be automatically exercised on one or more
specified dates or upon the satisfaction of one or more specified conditions.
8.4 Form of Payment. Payment upon exercise of a Stock
Appreciation Right may be made in cash, in installments, in Shares, or in any
other form or combination of such methods as the Board shall determine.
ARTICLE 9
RESTRICTED UNITS
9.1 Nature of Restricted Units. A Restricted Unit is an Award
of stock units (with each unit having a value equivalent to one Share) granted
to a Participant subject to such terms and conditions as the Board deems
appropriate, and may include a requirement that the Participant forfeit such
Restricted Units upon termination of Participant's employment (or service
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as a Consultant or Nonemployee Director) for specified reasons within a
specified period of time or upon other conditions, as set forth in the Award
Agreement for such Restricted Units.
9.2 General. Restricted Units will be subject to the terms and
conditions of Article of the Plan and this Article and may contain such
additional terms and conditions, not inconsistent with the express provisions of
the Plan, as the Board deems desirable, subject to approval, to the extent
required, by any regulatory authority having jurisdiction over Awards granted
under the Plan.
9.3 Restriction Period. Restricted Units will provide that
such Awards, and the Shares subject to such Awards, may not be transferred, and
may provide that, in order for a Participant to Vest in such Awards, the
Participant must remain in the employment (or remain as a Consultant or
Nonemployee Director) of Corporation or its Subsidiaries, subject to relief for
reasons specified in the Award Agreement, for a period commencing on the date of
grant of the Award and ending on such later date or dates as the Board may
designate at the time of the Award (the "Restriction Period"). During the
Restriction Period, a Participant may not sell, assign, transfer, pledge,
encumber, or otherwise dispose of Shares underlying Restricted Units. The Board,
in its sole discretion, may provide for the lapse of restrictions in
installments during the Restriction Period. Upon expiration of the applicable
Restriction Period (or lapse of Restrictions during the Restriction Period where
the Restrictions lapse in installments) the Participant will be entitled to
settlement of the Restricted Units or portion thereof, as the case may be.
Although Restricted Units usually will Vest based on continued employment (or
continued service as a Consultant or Nonemployee Director) and Performance
Awards under Article of the Plan will usually Vest based on attainment of
Performance Goals, the Board, in its discretion, may condition Vesting of
Restricted Units on attainment of Performance Goals as well as continued
employment (or continued service as a Consultant or Nonemployee Director). In
such case, the Restriction Period for such Restricted Units will include the
period prior to satisfaction of the Performance Goals.
9.4 Forfeiture. If a Participant ceases to be an employee (or
Consultant or Nonemployee Director) of Corporation or a Subsidiary during the
Restriction Period for any reason other than reasons which may be specified in
an Award Agreement (such as death, Disability, or Retirement) the Award
Agreement may require that all non-Vested Restricted Units previously granted to
the Participant be forfeited and returned to Corporation.
9.5 Settlement of Vested Restricted Units. Upon Vesting of an
Award (or portion thereof) of Restricted Units, a Participant will be entitled
to receive payment for Restricted Units in an amount equal to the aggregate Fair
Market Value of the number of Shares covered by such Restricted Units at the
expiration of the applicable Restriction Period. Payment in settlement of a
Restricted Unit will be made as soon as practicable following the conclusion of
the applicable Restriction Period in cash, in installments, in Shares equal to
the number of Restricted Units, or in any other form or combination of such
methods as the Board, in its sole discretion, determines.
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ARTICLE 10
PERFORMANCE AWARDS
10.1 General. Performance Awards will be subject to the terms
and conditions set forth in Article of the Plan and this Article and may contain
such other terms and conditions not inconsistent with the express provisions of
the Plan, as the Board deems desirable, subject to approval, to the extent
required, by any regulatory authority having jurisdiction over Awards granted
under the Plan.
10.2 Nature of Performance Awards. A Performance Award is an
Award of stock units (with each unit having a value equivalent to one Share)
granted to a Participant subject to such terms and conditions as the Board deems
appropriate, including, without limitation, the requirement that the Participant
forfeit such Performance Award or a portion of such Award in the event specified
Performance Goals are not met within a designated Performance Cycle.
10.3 Performance Cycles. For each Performance Award, the Board
will designate a performance period (the "Performance Cycle") with a duration to
be determined by the Board in its discretion within which specified Performance
Goals are to be attained. There may be several Performance Cycles in existence
at any one time and the duration of Performance Cycles for specific Awards may
differ from each other.
10.4 Performance Goals. For each Performance Award, the Board
will establish Performance Goals on the basis of such criteria and to accomplish
such objectives as the Board may from time to time select. Performance Goals may
be based on performance criteria for Corporation, a Subsidiary, or an operating
group or division, or based on a Participant's individual performance.
Performance Goals may include objective and subjective criteria. During any
Performance Cycle, the Board may adjust the Performance Goals for such
Performance Cycle as it deems equitable in recognition of unusual or
nonrecurring events affecting Corporation, changes in applicable tax laws or
accounting principles, or such other factors as the Board may determine.
10.5 Determination of Vested Awards. As soon as practicable
after the end of a Performance Cycle, the Board will determine the extent to
which Performance Awards have been earned on the basis of performance in
relation to the established Performance Goals.
10.6 Timing and Form of Payment. Settlement of earned
Performance Awards will be made to the Participant as soon as practicable after
the expiration of the Performance Cycle and the Board's determination under
Section , in the form of cash, installments, or Shares, or in any form or
combination of such methods as the Board determines.
ARTICLE 11
OTHER STOCK-BASED AND COMBINATION AWARDS
11.1 Other Stock-Based Awards. The Board may grant other
Awards under the Plan pursuant to which Shares are or may in the future be
acquired, or Awards denominated in
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or measured by Share equivalent units, including Awards valued using measures
other than the market value of Shares. Such Other Stock-Based Awards may be
granted either alone, in addition to, or in tandem with, any other type of Award
granted under the Plan.
11.2 Combination Awards. The Board may also grant Awards under
the Plan in tandem or combination with other Awards or in exchange of Awards, or
in tandem or combination with, or as alternatives to, grants or rights under any
other employee plan of Corporation, including the plan of any acquired entity.
No action authorized by this section will reduce the amount of any existing
benefits or change the terms and conditions thereof without the Participant's
consent.
ARTICLE 12
DEFERRAL ELECTIONS
The Board may permit a Participant to elect to defer receipt
of the payment of cash or the delivery of Shares that would otherwise be due to
such Participant by virtue of the exercise, earn-out, or Vesting of an Award
made under the Plan. If any such election is permitted, the Board will establish
rules and procedures for such payment deferrals, including, but not limited to,
payment or crediting of a growth factor on such deferred amounts credited in
cash.
ARTICLE 13
ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, ETC.
13.1 Plan Does Not Restrict Corporation. The existence of the
Plan and the Awards granted under the Plan will not affect or restrict in any
way the right or power of the Board or the shareholders of Corporation to make
or authorize any adjustment, recapitalization, reorganization, or other change
in Corporation's capital structure or its business, any merger or consolidation
of the Corporation, any issue of bonds, debentures, preferred or prior
preference stocks ahead of or affecting Corporation's capital stock or the
rights thereof, the dissolution or liquidation of Corporation or any sale or
transfer of all or any part of its assets or business, or any other corporate
act or proceeding.
13.2 Adjustments by the Board. In the event of any change in
capitalization affecting the Shares of Corporation, such as a stock dividend,
stock split, recapitalization, merger, consolidation, split-up, combination or
exchange of shares or other form of reorganization, or any other change
affecting the Shares, such proportionate adjustments as the Board, in its sole
discretion, deems appropriate to reflect such change, will be made with respect
to the aggregate number of Shares for which Awards in respect thereof may be
granted under the Plan, the maximum number of Shares which may be sold or
awarded to any Participant, the number of Shares covered by each outstanding
Award, and the price per Share in respect of outstanding Awards. The Board may
also make such adjustments in the number of Shares covered by, and price or
other value of any outstanding Awards in the event of a spin-off or other
distribution (other than normal cash dividends), of Corporation assets to
shareholders.
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ARTICLE 14
AMENDMENT AND TERMINATION
Without further approval of Corporation's shareholders, the
Board may at any time terminate the Plan, or may amend it from time to time in
such respects as the Board may deem advisable; provided that the Board may not,
without approval of the shareholders, make any amendment that would materially
increase the aggregate number of Shares that may be issued under the Plan
(except for adjustments pursuant to Article 13 of the Plan); and provided
further that any amendment of the Plan shall be subject to approval, to the
extent required, by any regulatory authority having jurisdiction over the Plan.
ARTICLE 15
MISCELLANEOUS
15.1 Tax Withholding.
15.1.1 General. Corporation will have the right to deduct from
any settlement of any Award under the Plan, including the delivery or vesting of
Shares, any taxes of any kind required by the laws of any Canadian or U.S.
jurisdiction to be withheld with respect to such payments or to take such other
action as may be necessary in the opinion of Corporation to satisfy all
obligations for the payment of such taxes. The recipient of any payment or
distribution under the Plan may be required to make arrangements satisfactory to
Corporation for the satisfaction of any such withholding tax obligations,
whether or not such recipient is an employee of Corporation or a Subsidiary on
the date of such settlement. Corporation will not be required to make any such
payment or distribution under the Plan until such obligations are satisfied.
15.1.2 Stock Withholding. The Board, in its sole discretion,
may permit a Participant to satisfy all or a part of the withholding tax
obligations incident to the settlement of an Award involving payment or delivery
of Shares to the Participant by having Corporation withhold a portion of the
Shares that would otherwise be issuable to the Participant. Such Shares will be
valued based on their Fair Market Value on the date the tax withholding is
required to be made.
15.2 Unfunded Plan. The Plan will be unfunded and Corporation
shall not be required to segregate any assets that may at any time be
represented by Awards under the Plan. Any liability of Corporation to any person
with respect to any Award under the Plan will be based solely upon any
contractual obligations that may be effected pursuant to the Plan. No such
obligation of Corporation shall be deemed to be secured by any pledge of, or
other encumbrance on, any property of Corporation.
15.3 Payments to Trust. The Board is authorized to cause to be
established a trust agreement or several trust agreements whereunder the Board
may make payments of amounts due or to become due to Participants in the Plan.
However, the Board has no obligation to establish such a trust or fund.
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15.4 Annulment of Awards. Any Award Agreement may provide that
the grant of an Award payable in cash is provisional until cash is paid in
settlement of such Award or that the grant of an Award payable in Shares is
provisional until the Participant becomes entitled to the stock certificate in
settlement of such Award. In the event the employment (or service as a
Consultant or Nonemployee Director) of a Participant is terminated for cause (as
defined below), any Award that is provisional will be annulled as of the date of
such termination for cause. For the purpose of this Section 15.4, the term "for
cause" will have the meaning set forth in the Participant's employment
agreement, if any, or otherwise means any discharge (or removal) for material or
flagrant violation of the policies and procedures of Corporation or for other
job performance or conduct that is materially detrimental to the best interests
of Corporation, as determined by the Board.
15.5 Engaging in Competition With Corporation. Any Award
Agreement may provide that, if a Participant terminates employment with
Corporation or a Subsidiary for any reason whatsoever, and within 18 months
after the date of such termination accepts employment with any competitor of (or
otherwise engages in competition with) Corporation, the Board, in its sole
discretion, may require such Participant to return to Corporation the economic
value of any Award that is realized or obtained (measured at the date of
exercise, Vesting, or payment) by such Participant at any time during the period
beginning on the date that is six months prior to the date of such Participant's
termination of employment with Corporation.
15.6 Other Corporation Benefit and Compensation Programs.
Payments and other benefits received by a Participant under an Award made
pursuant to the Plan will not be deemed a part of a Participant's regular,
recurring compensation for purposes of the termination indemnity or severance
pay law of any state or country and will not be included in, or have any effect
on, the determination of benefits under any other employee benefit plan or
similar arrangement provided by Corporation or a Subsidiary unless expressly so
provided by such other plan or arrangements, or except where the Board expressly
determines that an Award or portion of an Award should be included to accurately
reflect competitive compensation practices or to recognize that an Award has
been made in lieu of a portion of cash compensation. Awards under the Plan may
be made in combination with or in tandem with, or as alternatives to, grants,
awards, or payments under any other Corporation or Subsidiary plans,
arrangements, or programs. The Plan notwithstanding, Corporation or any
Subsidiary may adopt such other compensation programs and additional
compensation arrangements as it deems necessary to attract, retain, and reward
employees and directors for their service with Corporation and its Subsidiaries.
15.7 Securities Law Restrictions. No Shares will be issued
under the Plan unless counsel for Corporation is satisfied that such issuance
will be in compliance with the applicable securities laws of any Canadian or
U.S. jurisdiction. Certificates for Shares delivered under the Plan may be
subject to such stop-transfer orders and other restrictions as the Board deems
advisable under the rules, regulations, and other requirements of the Securities
and Exchange Commission, the Alberta or British Columbia Securities Commissions,
any stock exchange upon which the Shares are then listed, and any applicable
securities law. The Board may cause a legend or legends to be put on any such
certificates to make appropriate reference to such restrictions.
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<PAGE>
15.8 Governing Law. Except with respect to references to the
Code or applicable securities laws, the Plan and all actions taken thereunder
will be governed by and construed in accordance with the laws of the State of
Oregon.
ARTICLE 16
SHAREHOLDER APPROVAL
The adoption of the Plan, as amended and restated effective
October 15, 1997, and any grant of Awards under the Plan are expressly subject
to the approval of the Plan by the shareholders at the 1997 annual meeting of
Corporation's shareholders. In the event that such shareholder approval is
received, no additional stock options will be granted thereafter under the Stock
Option Plan and such plan will immediately terminate; provided that such
termination will have no effect on any options previously granted thereunder.
ARTICLE 17
OTHER APPROVALS
For so long as the Shares are listed on The Alberta Stock
Exchange, the Plan is subject to approval by such Exchange and compliance with
all conditions imposed by such Exchange from time to time with respect to the
granting and administration of Awards under the Plan.
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STOCK PURCHASE AND SALE AGREEMENT
(SANTA MONICA)
AGREEMENT dated as of August 27, 1997, by and between the individuals
named in Section 1.1 below (referred to herein individually as "Seller" and
collectively as "Sellers") and HEALTHCARE HEARING CLINICS, INC., a Washington
corporation ("Purchaser").
RECITALS
A. Hearing Care Associates-Santa Monica, Inc., a California corporation
(the "Company"), operates an audiology and hearing aid clinic in Santa Monica,
California, which performs testing and evaluation of patients' hearing,
prescribes and fits hearing aids, and provides related services and products.
B. Sellers own all shares of the issued and outstanding capital stock
of the Company (the "Shares").
C. Purchaser and Sellers desire that Purchaser acquire ownership of the
Company through a purchase of the Shares.
TERMS
In consideration of the premises and of the mutual covenants,
representations, warranties and agreements contained herein, the parties agree
as follows:
ARTICLE I
PURCHASE AND SALE OF SHARES
1.1 Ownership of Shares. The Shares are owned by Sellers as follows:
Sellers Shares Percentage
------- ------ ----------
Carissa D. Bennett 50 25
Gregory J. Frazer 50 25
Evelyn L. Gong 100 50
--- --
200 100
1.2 Purchase and Sale of Shares. At the Closing (as defined in Section
2.1), on the terms and subject to the conditions set forth in this Agreement,
Sellers shall sell and deliver to Purchaser, and Purchaser shall purchase the
Shares from Sellers.
1.3 Purchase Price. Subject to adjustment as set forth in Section 1.4
hereof, the purchase price for the Shares (the "Purchase Price") shall be a
total of $258,268 payable to Sellers as follows:
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Sellers
Carissa D. Bennett $ 64,567
Gregory J. Frazer 64,567
Evelyn L. Gong 129,134
-------
$258,268
At the Closing, Purchaser shall pay the Purchase Price to Sellers by certified
or cashier's check.
1.4 Purchase Price Adjustments. The Purchase Price shall be subject to
post- closing adjustment as set forth below:
(a) Accounts Receivable. On the 200th day following the
Closing, Sellers shall reimburse Purchaser 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 1.4(c)(i)
below) net of the allocable portion of the reserve for bad debts, which
remain uncollected as of such date provided that with respect to the
accounts receivable listed on Schedule 1.4(a) attached hereto, the
reimbursement date shall be the first anniversary of the Closing date.
Upon such reimbursement, the uncollected accounts shall be assigned to
Sellers. During such 200-day period (or the 365-day period with respect
to the accounts receivable listed on Schedule 1.4(a), Sellers may
participate in the collection process of such accounts receivable. In
the event the total amount collected with respect to accounts
receivable reflected on the Statement of Net Working Capital exceeds
the amount of such accounts receivable net of the applicable reserve
for bad debts, Purchaser shall pay the excess to Sellers pro rata on
the 200th day following Closing.
(b) Liabilities. Sellers acknowledge that the Purchase Price
was negotiated on the assumption that Company would have no long-term
liabilities, including debt. In the event that at Closing Company has
long-term liabilities, Sellers shall pay to Purchaser, on a pro rata
basis, an amount equal to the total of any such long-term liabilities.
(c) Net Working Capital Adjustment.
(i) For purposes of this Agreement, "Net Working
Capital" shall equal (i) cash, money market accounts, accounts
receivable (net of reasonable provisions for doubtful
accounts), cash surrender value of life insurance policies,
and prepaid expenses including rental payments if paid in
advance, 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 paid time off for vacation and sick leave), bonuses
(including all related payroll taxes and employee benefits),
personal and real property taxes, water, gas, electric and
other utility charges, business and other license fees and
taxes
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(excluding fees for audiology and hearing aid dispensing
licenses), merchants' association dues, rental payments under
any leases, any customer refunds 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), vendor
accounts payable and intercompany accounts. In computing Net
Working Capital, (i) all hearing aids ordered but not fitted
to the patient as of the Closing date will not be included in
accounts receivable and (ii) all payments made by Company with
respect to such hearing aid orders shall be treated as prepaid
items.
(ii) As promptly as practicable following the
Closing, but in no event later than 45 days thereafter,
Sellers and Purchaser shall cooperate in preparing a mutually
agreeable statement of the Net Working Capital which shall set
forth the computation and components thereof in reasonable
detail (the "Statement of Net Working Capital").
(iii) 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
Sellers and Purchaser in writing), (i) in the event that the
Net Working Capital exceeds $30,000, then Purchaser shall pay
to Sellers pro rata an amount equal to the excess, or (ii) in
the event that Net Working Capital is less than $30,000, then
Sellers shall pay to Purchaser, pro rata, the amount of the
deficiency.
ARTICLE II
CLOSING
2.1 Closing. The closing of the transaction provided for herein (the
"Closing") shall occur on such date on or before September 1, 1997, and at such
time and place as the parties shall mutually agree.
2.2 Closing Transactions. The following actions shall be taken at
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 Sellers. Sellers shall deliver to Purchaser:
(i) Certificates representing the Shares;
(ii) An opinion of counsel to Sellers, dated as of
the Closing date, substantially in the form of Schedule
2.2(a)(ii) attached hereto; and
(iii) The stock and minute books of the Company;
(iv) All consents required in connection with the
transactions contemplated hereunder.
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(b) Deliveries by Purchaser. Purchaser shall deliver to
Sellers:
(i) The payments provided for in Section 1.3; and
(ii) An opinion of counsel to Purchaser, dated as of
the Closing date, substantially in the form of Schedule
2.2(b)(ii) attached hereto.
(c) Joint Delivery.
(i) Purchaser and Sellers shall execute and deliver
counterparts of the Noncompetition Agreements provided for in
Section 6.5(a) hereof; and
(ii) Purchaser and Evelyn L. Gong shall execute and
deliver to each other counterparts of the Employment
Agreement provided for in Subsection 6.5(b) hereof.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SELLERS
Except as otherwise set forth in the Disclosure Statement attached
hereto as Schedule III, Sellers represent and warrant to Purchaser as set forth
below in this Article III. Subject to the limitations set forth in Section
8.1(a), the Sellers shall be jointly and severally liable for breaches of such
representations and warranties except to the extent otherwise expressly set
forth in Section 3.1(b) hereof.
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 a single class of common stock, of which 200 shares
are issued and outstanding. All issued and outstanding Shares have been
validly issued and are fully paid and nonassessable. Each Seller
separately warrants that such Seller is the owner of the number of
shares shown in Section 1.1 hereof (beneficially and of record) free
and clear of all liens, claims, and encumbrances whatsoever. The Shares
constitute all the outstanding shares of capital stock of the Company.
Except for a Buy-Out Agreement to which the Sellers are parties, no
person has any agreement, option or other right, present or future, to
purchase or otherwise acquire any of the shares of Company. Such
Buy-Out Agreement will be terminated effective as of the Closing date.
(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.
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(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 Company's
articles of incorporation (certified by the Secretary of State of
California) and bylaws (certified by Company's secretary) which have
heretofore been delivered to Purchaser are complete and correct as
amended or restated to the date hereof.
3.2 No Violation. Neither the execution and delivery of this Agreement
or the other documents and instruments to be executed and delivered by the
Sellers pursuant hereto, nor the consummation by the Sellers 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 3.8(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 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 any of the Company's
assets or properties or the shares of the Company may be bound or affected.
3.3 Financial Statements. The Sellers have heretofore delivered to
Purchaser the following financial statements of the Company including balance
sheets and statements of income (the "Financial Statements"):
(a) Financial Statements for the Company's 1993, 1994, and
1995 fiscal years; and
(b) Financial Statements for the interim period ended November
30, 1996.
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 and changes in its financial position for the periods
then ended.
3.4 Absence of Certain Changes. Since the date of the most recent
balance sheet included in the Financial Statements, there has not been:
3.4(a) Adverse Change. Any material adverse change in the
financial condition, assets, liabilities, business, prospects or
operations of the Company;
3.4(b) Damage. Any material loss, damage or destruction,
whether covered by insurance or not, affecting the Company's business
or assets;
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3.4(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;
3.4(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;
3.4(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;
3.4(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 capital stock of the Company, or any security relating
thereto; or any other payment to any Shareholder as a shareholder;
3.4(g) Disposition of Property. Except as set forth on
Schedule 3.4(g), 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 in the ordinary course of business;
3.4(h) Indebtedness. Any indebtedness for borrowed money
incurred, assumed or guaranteed by the Company other than changes in
the Company's line of credit in the ordinary course of business;
3.4(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;
3.4(j) Loans, Advances, or Credit. Any loan or advance or any
grant of credit by the Company; or
3.4(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.
3.5 Absence of Undisclosed Liabilities. Except as and to the extent
specifically disclosed in the most recent balance sheet included in the
Financial Statements or this Agreement, the Company does not have any
liabilities other than commercial liabilities and obligations incurred since the
date of such balance sheet in the ordinary course of business consistent with
past practices none of which has or will have a material adverse effect on the
business, financial condition or results of operations of the Company.
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<PAGE>
3.6 No Litigation. There is no action, suit, arbitration, proceeding,
investigation or inquiry pending or to the knowledge of the Sellers threatened
against the Company, its directors (in such capacity), its business or any of
its assets, nor do the Sellers know of any such proceeding, investigation or
inquiry threatened against the Company. The Disclosure Schedule identifies all
actions, suits, proceedings, investigations and inquiries to which the Company
has been a party since January 1, 1993. Neither the Company nor its business or
assets are 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.
3.7 Compliance With Laws.
3.7(a) Compliance. Except as set forth in Section 3.7(a) of
the Disclosure Schedule, 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, 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 is 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.
3.7(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 the Disclosure Schedule 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.
3.8 Title to and Condition of Properties.
3.8(a) Real Property. Except as set forth on the Disclosure
Schedule, the Company does not own any interest in any real property
other than the leases referred to in Section 3.10(a) hereof.
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3.8(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 the Company. No personal property
owned by Sellers is located at Company's business premises.
3.8(c) Condition. All the Company's tangible assets are, taken
as a whole, in good operating condition and repair, normal wear and
tear excepted.
3.8(d) Land Use Regulations. There are no condemnation,
environmental, zoning, land use, or other regulatory proceedings,
pending or, to the knowledge of the Sellers, planned to be instituted,
that could detrimentally affect the ownership, 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.
3.9 Insurance. The Company maintain policies of fire, liability,
product liability, 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.
3.10 Contracts and Commitments.
3.10(a) Leases. Set forth in Schedule 3.10(a) of the
Disclosure Schedule is a list of all real and personal property leases
to which the Company is a party. Complete and correct copies of each
lease listed on the schedule, and all amendments thereto, have
heretofore been made available to Purchaser.
3.10(b) Purchase Commitments. Set forth in Schedule 3.10(b) of
the Disclosure Schedule 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 $1,000 or which obligate the
Company for a period of more than 90 days from the date hereof.
Complete and correct copies of all such written agreements have
heretofore been made available to Purchaser.
3.10(c) Sales Commitments. Set forth in Schedule 3.10(c) of
the Disclosure Schedule 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 made
available to Purchaser.
3.10(d) Contracts With Sellers and Certain Others. Except for
the employment relationships which exist between the Sellers and the
Company, the
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Company has no agreement, understanding, contract or commitment
(written or oral) with any Seller, or any relative of a Seller.
3.10(e) Collective Bargaining Agreements. The Company is not a
party to any collective bargaining agreement with any union.
3.10(f) Loan Agreements. Except as set forth on the Disclosure
Schedule, the Company is not obligated under any loan agreement,
promissory note, letter of credit, or other evidence of indebtedness as
signatories, guarantors or otherwise.
3.10(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.
3.10(h) Restrictive Agreements. The Company is not a 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 it from carrying on its
business anywhere in the world.
3.10(i) Other Material Contracts. The Company is not a 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 $1,000, or
involving performance over a period of more than 90 days from the date
hereof, or which is otherwise individually material to the operations
of the Company, except as set forth in Schedule 3.10(i) of the
Disclosure Schedule.
3.10(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 on any of the assets owned, used or occupied by the Company. To
the knowledge of the Sellers, 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.
3.11 Employee Benefit Plans. Set forth in Schedule 3.11 of the
Disclosure Schedule, 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
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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 Purchaser. The Company is in compliance with and have 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.
3.12 Employment Compensation. Set forth in Schedule 3.12 of the
Disclosure Schedule is a true and correct list of:
(a) All employees to whom the Company is paying compensation;
and in the case of salaried employees such list identifies the current
annual rate of compensation for each 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;
(b) All amounts owed to employees of the Company (including
the Sellers) for accrued sick pay, vacation pay, and bonus pay.
3.13 Patents, Trademarks, etc. Set forth in Schedule 3.13 of the
Disclosure Schedule attached hereto 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 3.13 of the Disclosure Schedule
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, nor to the knowledge of the Sellers is any other
person 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 3.13 of the
Disclosure Schedule, to the knowledge of Sellers, 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 Sellers, all Trade
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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.
3.14 Product Warranty and Product Liability. Set forth in Schedule 3.14
of the Disclosure Schedule is a true, correct and complete copy of the Company's
standard warranty or warranties for sales of its products.
3.15 Tax Matters. The Company has properly completed and filed in
correct form all federal, state, and other tax returns (including Forms 1099 and
other informational returns) of every nature required to be filed by it and has
paid all taxes (whether or not requiring the filing of returns) including all
deficiencies, assessments, additions to tax, penalties and interest of which
notice has been received to the extent such amounts have become due. The Company
has obtained all required Forms W-9. Complete and correct copies of the
Company's federal and California income tax returns for 1993, 1994, and 1995
have been delivered by the Sellers to Purchaser. All tax liabilities have been
fully and properly reflected in the Financial Statements. The income tax returns
of the Company have not been examined by the Internal Revenue Service. There are
no outstanding agreements or waivers extending the statutory period of
limitation for any federal or state tax return of the Company for any period.
The Company has made all required deductions and payments and has properly
prepared and delivered all required documents in connection with the withholding
of taxes from the wages and other compensation of its employees. The Company has
filed all sales/use tax returns and have paid all such taxes for all states in
which they have responsibility to do so. The Company has obtained and maintains,
to the extent required by law, a current sales and use tax exemption certificate
for each customer to which it makes tax-exempt sales.
3.16 Key Employees; Bank; Etc. Set forth in Schedule 3.16 of the
Disclosure Schedule 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.
3.17 Records. The books of account of the Company fairly reflect the
items of income and expense and the assets, liabilities, and accruals of its
business and operations.
3.18 Disclosure. No representation or warranty by the Sellers in this
Agreement, nor any statement, certificate, schedule or exhibit hereto furnished
or to be furnished by or on behalf of the Sellers pursuant to this Agreement,
nor any document or certificate delivered to Purchaser pursuant to this
Agreement or in connection with transactions contemplated
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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 PURCHASER
Purchaser hereby represents and warrants to the Sellers as follows:
4.1 Corporate.
(a) Organization. Purchaser is a corporation duly organized
and validly existing under the laws of the state of Washington.
(b) Corporate Power. Purchaser 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 Purchaser pursuant hereto and to carry out the
transactions contemplated hereby and thereby.
(c) Authority. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been
duly authorized by the board of directors of HealthCare. This Agreement
constitutes the valid and binding agreement of Purchaser, enforceable
against Purchaser in accordance with its terms.
(d) Qualification. Purchaser 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 No Violation. Neither the execution and delivery of this Agreement
or the other documents and instruments to be executed and delivered by Purchaser
pursuant hereto, nor the consummation by Purchaser 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 upon any of the assets of Purchaser under, any
term or provision of the Articles of Incorporation or By-laws of Purchaser or of
any material contract, commitment, understanding, arrangement, agreement or
restriction of any kind or character to which Purchaser is a party or by which
Purchaser or any of its assets or properties may be bound or affected.
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4.3 Disclosure. No representation or warranty by Purchaser in this
Agreement nor any statement, certificate, schedule or exhibit hereto furnished
or to be furnished by or on behalf of Purchaser pursuant to this Agreement, nor
any document or certificate delivered to Purchaser 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 Sellers.
(a) Access to Information and Records. The Sellers agree that
during the period after the date hereof and prior to the Closing,
Purchaser, 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
Purchaser deems appropriate (and Sellers shall furnish or cause to be
furnished to Purchaser and its representatives all information with
respect to the business and affairs of the Company as Purchaser may
reasonably request); (ii) reasonable access to employees and agents of
the Company for such meetings and communications as Purchaser
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.
(b) Conduct of Business Pending the Closing. The Sellers agree
that from the date hereof until the Closing, except as otherwise
approved in writing by Purchaser:
(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 Purchaser the present officers
and employees of the Company, and to preserve for Purchaser
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 Sellers.
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(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; the Company
shall not grant any option or other right to acquire any share
of its authorized 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 and shall
procure such additional insurance as shall be reasonably
requested by Purchaser at Purchaser's expense.
(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
Purchaser with interim monthly financial statements and other
management reports as and when they are available.
(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 Sellers, except for the repayment
of loans made by the Sellers to the Company.
(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) Repayment of Sellers' Loans. As of the date hereof, the
Company is indebted to the Sellers as set forth on Schedule 5.1(c). For
purposes of Section 1.4(b) hereof, such debts shall not be deemed to be
long-term liabilities. Notwithstanding any other provision of this
Agreement, on or prior to the Closing date, Sellers shall have the
right to cause the Company to repay such indebtedness to the extent the
Company has funds available for such purposes. To the extent any such
debts are not paid prior to Closing, (i) such debts shall be taken into
account in computing the Net Working Capital adjustment provided for in
Section 1.4(c), and (ii) Purchaser shall cause the Company to pay all
such debts at the time the Net Working Capital adjustment is made
pursuant to Section 1.4(c)(iii). To the extent necessary, Purchaser
shall advance funds to the Company for such debt repayment.
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(d) Reimbursement of Sick and Vacation Pay. In preparing the
Statement of Net Working Capital it has been agreed that no accrual
shall be made for sick and vacation pay entitlements for employees of
Company. In consideration of this exclusion, Sellers agree to reimburse
Purchaser for any sick or vacation pay payments Purchaser is required
to make to former employees of Company who become employees of
Purchaser and whose employment terminates for any reason within the
first six months following the Closing date to the extent such payments
relate to accruals of sick or vacation pay prior to the Closing date.
5.2 Release of Sellers' Personal Guarantees. Certain Sellers 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. Following the Closing,
Purchaser will use its best efforts to obtain the release of the Sellers from
all such personal liabilities. To the extent that any such release cannot be
obtained, Purchaser will indemnify and hold the Sellers harmless with respect to
any loss, cost, or expense the Sellers may incur as a result of not being
released.
ARTICLE VI
CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATIONS
Each and every obligation of Purchaser to be performed at Closing shall
be subject to the satisfaction prior to or at the Closing (or the waiver by
Purchaser) of each of the following conditions:
6.1 Representations and Warranties True at Closing. Each of the
representations and warranties made by the Sellers in this Agreement, or in any
instrument, schedule, list, certificate or writing delivered by Sellers 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.
6.2 Compliance With Agreement. The Sellers 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.
6.3 Absence of Suit. No action, suit, investigation or proceeding
before any court or any governmental authority shall have been commenced or
threatened, against Purchaser, 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 Purchaser
shall not be affected unless there is a reasonable likelihood that as a result
of such action, suit, investigation, or proceeding Purchaser will be unable to
retain substantially all the practical benefits of the transaction to which it
is entitled under this Agreement.
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6.4 Approvals; Consents. All consents, permits, approvals, licenses or
orders from any governmental or regulatory body or other third party required to
be obtained by Sellers for the 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.
6.5 Agreements.
(a) Noncompetition Agreements. Each Seller shall have executed
and delivered to Purchaser a Noncompetition Agreement substantially in
the form attached hereto as Schedule 6.5(a).
(b) Employment Agreement. Evelyn L. Gong shall have executed
and delivered to Purchaser an Employment Agreement substantially in the
form of Schedule 6.5(b) hereto.
ARTICLE VII
CONDITIONS PRECEDENT TO THE SELLERS' OBLIGATIONS
Each and every obligation of the Sellers to be performed at Closing
shall be subject to the satisfaction prior to or at the Closing (or the waiver
by the Sellers) of the following conditions:
7.1 Representations and Warranties True at Closing. Each of the
representations and warranties made by Purchaser in this Agreement, or in any
instrument, list, certificate or writing delivered by Purchaser pursuant to this
Agreement, shall be true and correct 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.
7.2 Compliance With Agreement. Purchaser shall have in all material
respects performed and complied with all of Purchaser's agreements and
obligations under this Agreement which are to be performed or complied with by
Purchaser prior to or on the Closing, including the delivery of the closing
documents specified in Section 2.2(b) 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 Purchaser, 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
Sellers shall not be affected unless there is a reasonable likelihood that as a
result of such action, suit, proceeding or investigation, the Sellers will be
unable to retain substantially all the consideration to which they are entitled
under this Agreement.
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7.4 Agreements.
(a) Noncompetition Agreements. Purchaser shall have executed
and delivered to each Seller a Noncompetition Agreement substantially
in the form attached hereto as Schedule 6.5(a).
(b) Employment Agreement. Purchaser shall have executed and
delivered to Evelyn L. Gong an Employment Agreement substantially in
the form attached hereto as Schedule 6.5(b).
ARTICLE VIII
INDEMNIFICATION; SURVIVAL OF REPRESENTATIONS
8.1 Indemnification by the Sellers.
(a) The Sellers hereby agree to indemnify, defend, and hold
Purchaser (and its directors, officers, shareholders, employees,
affiliates, agents and assigns) harmless from and against all Claims
(as defined below) asserted against, resulting to, imposed upon, or
incurred by Purchaser directly or indirectly by reason of, arising out
of, or resulting from (a) the inaccuracy or breach of any
representation or warranty of the Sellers contained in or made pursuant
to this Agreement or (b) the non-performance or breach of any covenant,
term or provision to be performed by the Sellers contained in this
Agreement. The indemnification obligation of Sellers hereunder is with
respect to the full amount of the Claims (as defined below). As used in
this Article VIII, the term "Claim" shall include any and all losses,
liabilities, damages, deficiencies, assessments, judgments, awards,
settlements, costs, and expenses including without limitation
penalties, court costs, and attorney fees and expenses at trial and on
appeal. Notwithstanding the foregoing, Sellers' indemnity obligations
shall be subject to the following limitations:
(i) Sellers shall be responsible for indemnifying
Purchaser only to the extent Claims in the aggregate exceed
the sum of $5,000.
(ii) Each Seller shall be solely responsible for
indemnification with respect to such Seller's warranty of
title regarding Seller's Shares and such Seller's warranty
regarding the absence of liens and encumbrances applicable to
such Shares;
(iii) Each Seller's liability with respect to a Claim
shall be limited to a percentage of such Claim equal to such
Seller's percentage ownership of the Shares as set forth in
Section 1.1; and
(iv) Each Seller's maximum liability to Purchaser for
indemnification shall not exceed an amount equal the portion
of the Purchase Price being paid to such Seller as set forth
in Section 1.3 hereof.
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(v) Any Claims shall be asserted by Purchaser jointly
against Sellers on a uniform basis and any waiver, compromise
or settlement of a Claim offered by Purchaser shall be offered
on the same terms to all Sellers.
(b) Purchaser's right to indemnification as provided in this
Section 8.1 shall not be eliminated, reduced or modified in any way as
a result of the fact that (i) Purchaser had notice of a breach or
inaccuracy of any representation, warranty or covenant contained herein
(except as set forth in the Disclosure Schedule), (ii) Purchaser had
been provided with access, as requested by Purchaser, to officers and
employees of the Company and such of Company's books, documents,
contracts and records as has been provided to Purchaser in response to
Purchaser's requests.
8.2 Indemnification by Purchaser. Purchaser hereby agrees to indemnify,
defend, and hold harmless the Sellers from and against all Claims asserted
against, resulting to, imposed upon, or incurred by the Sellers directly or
indirectly by reason of, arising out of, or resulting from (a) the inaccuracy or
breach of any representation or warranty of Purchaser contained in or made
pursuant to this Agreement or in any of the documents delivered pursuant hereto,
or (b) the non-performance or breach of any covenant, term or provision to be
performed by Purchaser contained in this Agreement or in any of the documents
delivered pursuant hereto. The indemnification obligation of Purchaser hereunder
is with respect to the full amount of the Claims.
8.3 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
so elects, to take control of the defense and investigation of such lawsuit or
action and to employ and engage attorneys of its own choice to handle and defend
the same, at the indemnifying party's cost, risk and expense provided that the
indemnifying party and its 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 own
cost, participate in the investigation, trial and defense of such lawsuit or
action and any appeal arising therefrom.
8.4 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 until October 31, 1998
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(except for the representations and warranties of the Sellers set forth in
Section 3.10 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 IX
MISCELLANEOUS
9.1 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 Purchaser or the Sellers 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.
(b) Termination for Breach.
(i) Termination by Purchaser. If there has been a
material breach by the Sellers of any of their agreements,
representations or warranties contained in this Agreement which
has not been waived in writing by Purchaser, then Purchaser
may, by written notice to Sellers at any time prior to the
Closing that such breach is continuing, terminate this
Agreement with the effect set forth in Section 9.1(b)(iii)
hereof.
(ii) Termination by Sellers. If there has been a
material breach by Purchaser of any of its agreements,
representations or warranties contained in this Agreement which
has not been waived in writing by the Sellers, then the Sellers
may, by written notice to Purchaser at any time prior to the
Closing that such breach is continuing, terminate this
Agreement with the effect set forth in Section 9.1(b)(iii).
(iii) Effect of Termination. Termination of this
Agreement pursuant to this Section 9.1 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.
9.2 Waiver. Sellers or Purchaser 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
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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 9.2 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.
9.3 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.
9.4 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.
9.5 Brokers and Finders. Sellers on the one hand and Purchaser 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.
9.6 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 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.
9.7 Schedules. The Schedules are a part of this Agreement as if fully
set forth herein.
9.8 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 Sellers or Purchaser shall
be subject to the approval of the other in all essential respects, except that
the Sellers' approval shall not be required as to any announcements or filings
Purchaser may be required to make under applicable laws or regulations.
9.9 Expenses. Sellers agree that all fees and expenses incurred by them
in connection with this Agreement shall be borne by Sellers including, without
limitation, all fees of counsel and accountants; and Purchaser agrees that all
fees and expenses incurred by it in connection with this Agreement shall be
borne by it, including, without limitation, all fees of counsel and accountants.
9.10 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)
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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 Purchaser: HealthCare Hearing Clinics, Inc.
111 S.W. Fifth Avenue, Suite 2390
Portland, Oregon 97204
Attn: President
Personal & Confidential
Facsimile: (503) 225-9309
with a copy to: Miller, Nash, Wiener, Hager & Carlsen
111 S.W. Fifth Avenue, Suite 3500
Portland, Oregon 97204
Attn: G. Todd Norvell
Facsimile: (503) 224-0155
If to Sellers: Evelyn L. Gong
7746 McLaren Avenue
West Hills, California 91304
Facsimile: ( )
with a copy to: Richard P. Manson
Graham & James
801 S. Figueroa St., 14 Fl.
Los Angeles, California 90017
Facsimile: (213) 623-4581
and to: Gregory J. Frazer
1477 Dwight Drive
Glendale, California 91207
Facsimile (818) 244-8889
with a copy to: Ms. Nancy Borders
Gardner, Carton & Douglas
321 N. Clark Street, Ste. 3400
Chicago, Illinois 60610
Facsimile: (312) 644-3381
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.
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9.11 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 Los Angeles,
California, in accordance with the Commercial Arbitration Rules of the
American Arbitration Association then in effect, except as specifically
otherwise provided in this Section 9.11. 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 covenants of the Shareholders under Section 5.1(b) of
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 $50,000, then the panel to be appointed
shall consist of three neutral arbitrators; otherwise, one neutral
arbitrator.
(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 9.11,
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 13 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
- 22 -
<PAGE>
in good faith, subject to any rights to terminate this Agreement that
may be available to any party.
9.12 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.
9.13 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 may consist of a number of copies hereof each
signed by less than all, but together signed by all, of the parties hereto.
9.14 Entire Agreement. This instrument embodies the entire agreement
between the parties hereto with respect to the transactions contemplated herein,
and there have been and are no agreements, representations or warranties between
the parties other than those set forth or provided for herein.
9.15 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.
9.16 Sellers Action. Whenever in this Agreement the Sellers are given
the discretion to take or not to take any action, the decision of the Sellers
shall be made pursuant to the vote of the Sellers holding a majority of the
Shares.
9.17 Termination of Restrictions. Upon the consummation of the
transactions provided for herein, any restrictions on the transfer of the Shares
shall be waived by Sellers and shall become void and of no further effect.
- 23 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement effective as of the date first above written.
SELLERS: PURCHASER:
HEALTHCARE HEARING CLINICS, INC., a
Washington corporation
/s/ Evelyn L. Gong By: /s/ Edwin J. Kawasaki
Evelyn L. Gong Edwin J. Kawasaki
Vice President
/s/ Gregory J. Frazer
Gregory J. Frazer
/s/ Carissa Bennett
Carissa Bennett
The undersigned, being the spouses of the Sellers named in the foregoing Stock
Purchase and Sale Agreement, hereby relinquish all right, title, and interest,
including, without limitation, any community property rights under California
law to the Shares (as defined in such Agreement) and hereby consent and agree to
the transfer of such Shares pursuant to such Agreement.
/s/ Carissa Bennett /s/ Robert Lindgren
Carissa Bennett Robert Lindgren
/s/ Gregory J. Frazer
Gregory J. Frazer
- 24 -
<PAGE>
SCHEDULES
(Omitted)
Schedule 1.4(a) 365-Day Accounts Receivable
Schedule 2.2(a)(ii) Opinion of Sellers' Counsel
Schedule 2.2(b)(ii) Opinion of Purchaser's Counsel
Schedule III Disclosure Schedule
Schedule 3.4 Disposition of Property
Schedule 3.7(a) Compliance with laws
Schedule 3.10(a) Leases
Schedule 3.10(b) Purchase Commitments
Schedule 3.10(c) Sales Commitments
Schedule 3.10(i) Other Material Contracts
Schedule 3.11 Employee Benefit Plans
Schedule 3.12 Employee Compensation
Schedule 3.13 Patents, Trademarks
Schedule 3.14 Product Warranty
Schedule 3.16 Key Employees; Banks
Schedule 5.1(c) Sellers' Loans
Schedule 5.2 Sellers' Personal Guarantees
Schedule 6.5(a) Noncompetition Agreement
Schedule 6.5(b) Employment Agreement
- 25 -
$67,500.00 May 8, 1997
PROMISSORY NOTE
FOR VALUE RECEIVED, the undersigned (the "Maker") promises to pay to the order
of HealthCare Capital Corp., an Alberta, Canada corporation (hereinafter
referred to as "Holder"), the principal sum of Sixty-Seven Thousand Five Hundred
and no/100 Dollars ($67,500.00) with interest thereon at ten percent (10%) per
annum. Principal and interest shall be payable in lawful money of the United
States of America at 111 SW Fifth Avenue, Suite 2390, Portland, Oregon 97204 or
at such other place as Holder may designate in writing. Principal and interest
shall become due and payable on May 8, 1998 (one year from the above date).
Maker agrees to pay all costs of collection of any amounts due hereunder when
incurred, including, without limitation, attorney's fees and expenses, including
on any appeal. Such costs shall be added to the balance of principal and
interest then due.
Maker, for himself and his successors and assigns, hereby waives presentment,
demand, notice and protest and any defense by reason of extension of time for
payment or other indulgences. Failure of the Holder to assert any right herein
shall not be deemed to be waiver hereof.
This Note is secured. The Maker has executed a Pledge Agreement of even date
herewith which describes the collateral and the process for realization on the
security in the event of a default hereunder.
This Promissory Note shall be governed by and construed and enforced in
accordance with the laws of the State of Oregon.
Maker:
/s/ Brandon M. Dawson
Brandon M. Dawson, an individual
<PAGE>
PLEDGE AGREEMENT
DATE: May 8, 1997
PARTIES: HEALTHCARE CAPITAL CORP., an Alberta, ("Lender")
Canada corporation
AND: BRANDON M. DAWSON, an individual ("Borrower")
RECITAL:
Contemporaneous with this Agreement, Borrower has exercised stock options from
Lender for Two Hundred Fifty Thousand (250,000) Shares of Common Stock of
HEALTHCARE CAPITAL CORP., an Alberta, Canada corporation and issued Lender a
promissory note of even date herewith in the amount of $67,500.00 (the "Note").
To secure all amounts due now or later from Borrower to Lender under the Note,
Borrower hereby pledges to Lender a security interest in the following described
property:
One Hundred Thousand (100,000) shares of the common stock of Lender as
evidenced by stock certificate no. , endorsed in the blank by Borrower
(the "Shares").
AGREEMENT:
SECTION 1. POSSESSION
Lender shall retain possession of the Shares until all amounts due from Borrower
to Lender are paid in full.
SECTION 2. DEFAULT
Borrower shall be in default under this Agreement if Borrower fails to make any
payment to Lender when due, or if borrower violates any terms of this Agreement
or the Note. Upon default, Lender shall have all the rights of a secured party
under the Oregon Uniform Commercial Code, including, subject to Section 3, the
right to sell the Shares at either a private or public sale.
SECTION 3. SECURITIES LAWS
Borrower acknowledges that the sale of the Shares by Lender may be subject to
certain securities laws, and Borrower agrees that Lender may take any action
necessary in order to comply with such laws, including any and all necessary
restrictions with respect to the time, place, manner and conditions of sale.
IN WITNESS WHEREOF, Borrower has executed this Pledge Agreement on the day and
year first written above.
Borrower:
/s/ Brandon M. Dawson
Brandon M. Dawson
an individual
$56,000.00 May 19, 1997
PROMISSORY NOTE
FOR VALUE RECEIVED, the undersigned (the "Maker") promises to pay to the order
of HealthCare Capital Corp., an Alberta, Canada corporation (hereinafter
referred to as "Holder"), the principal sum of Fifty-Six Thousand and no/100
Dollars ($56,000.00) with interest thereon at ten percent (10%) per annum.
Principal and interest shall be payable in lawful money of the United States of
America at 111 SW Fifth Avenue, Suite 2390, Portland, Oregon 97204 or at such
other place as Holder may designate in writing. Principal and interest shall
become due and payable on May 19, 1998 (one year from the above date).
Maker agrees to pay all costs of collection of any amounts due hereunder when
incurred, including, without limitation, attorney's fees and expenses, including
on any appeal. Such costs shall be added to the balance of principal and
interest then due.
Maker, for himself and his successors and assigns, hereby waives presentment,
demand, notice and protest and any defense by reason of extension of time for
payment or other indulgences. Failure of the Holder to assert any right herein
shall not be deemed to be waiver hereof.
This Note is secured. The Maker has executed a Pledge Agreement of even date
herewith which describes the collateral and the process for realization on the
security in the event of a default hereunder.
This Promissory Note shall be governed by and construed and enforced in
accordance with the laws of the State of Oregon.
Maker:
/s/ Gene K. Balzer
Gene K. Balzer, Ph.D., an individual
<PAGE>
PLEDGE AGREEMENT
DATE: May 19, 1997
PARTIES: HEALTHCARE CAPITAL CORP., an Alberta, ("Lender")
Canada corporation
AND: GENE K. BALZER, Ph.D., an individual ("Borrower")
RECITAL:
Contemporaneous with this Agreement, Borrower has exercised stock options from
Lender for Two Hundred Thousand (200,000) Shares of Common Stock of HEALTHCARE
CAPITAL CORP., an Alberta, Canada corporation and issued Lender a promissory
note of even date herewith in the amount of $56,000.00 (the "Note"). To secure
all amounts due now or later from Borrower to Lender under the Note, Borrower
hereby pledges to Lender a security interest in the following described
property:
One Hundred Thousand (100,000) shares of the common stock of Lender
as evidenced by stock certificate no. ------------ , endorsed in the
blank by Borrower (the "Shares").
AGREEMENT:
SECTION 1. POSSESSION
Lender shall retain possession of the Shares until all amounts due from Borrower
to Lender are paid in full.
SECTION 2. DEFAULT
Borrower shall be in default under this Agreement if Borrower fails to make any
payment to Lender when due, or if borrower violates any terms of this Agreement
or the Note. Upon default, Lender shall have all the rights of a secured party
under the Oregon Uniform Commercial Code, including, subject to Section 3, the
right to sell the Shares at either a private or public sale.
SECTION 3. SECURITIES LAWS
Borrower acknowledges that the sale of the Shares by Lender may be subject to
certain securities laws, and Borrower agrees that Lender may take any action
necessary in order to comply with such laws, including any and all necessary
restrictions with respect to the time, place, manner and conditions of sale.
IN WITNESS WHEREOF, Borrower has executed this Pledge Agreement on the day and
year first written above.
Borrower:
/s/ Gene K. Balzer
Gene K. Balzer, Ph.D.
an individual
SHIKAZE RALSTON
CHARTERED ACCOUNTANTS
October 27, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C.
20549-1004
Ladies and Gentlemen:
We were previously principal accountants for HealthCare Capital Corp., and,
pursuant to our Auditors' Report dated October 24, 1997, reported on the
consolidated financial statements of HealthCare Capital Corp. (and subsidiaries)
as of and for the year ended July 31, 1996. Effective December 20, 1996, our
appointment as principal accountants was terminated. We have read the statements
regarding such termination included under Item 8-Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure, contained in HealthCare
Capital Corp.'s Annual Report on Form 10-KSB for the fiscal year ended July 31,
1997, and we agree with such statements.
Yours very truly,
SHIKAZE RALSTON
/s/ Ron D. Miller
Ron D. Miller, C.A., C.B.V.
Partner
LIST OF SUBSIDIARIES
NAMES UNDER
JURISDICTION OF WHICH DOES
NAME INCORPORATION BUSINESS
Sonus-USA, Inc. Washington Hearing Care Associates
Hearing Dynamics
Family Hearing Center
Dakota Hearing Aid Service
Santa Maria Hearing Associates
Sonus
Allied Hearing
Auditory-Vestibular Center
Hearing Improvement Center
Sonus-Canada Ltd. Alberta, Canada Fraserview Hearing Clinic
Fraserview-Pacific Hearing Clinic
Kamloops Hearing Clinic
Langley Hearing Clinic
Pacific Hearing Clinic
Rockyview Hearing and Balance Clinic
T. H. Moore Hearing Clinic
POWER OF ATTORNEY
Each person whose signature appears below designates and
appoints Brandon M. Dawson and Edwin J. Kawasaki, and either of them, such
person's true and lawful attorneys-in-fact and agents, to sign the annual report
on Form 10-KSB of HealthCare Capital Corp., an Alberta, Canada, corporation, for
the fiscal year ended July 31, 1997, and to file said report, with all exhibits
thereto, with the Securities and Exchange Commission under the Securities
Exchange Act of 1934. Each person whose signature appears below also grants full
power and authority to these attorneys-in-fact and agents to perform every act
and execute any instruments that they deem necessary or desirable in connection
with said report, as fully as he or she could do in person, hereby ratifying and
confirming all that the attorneys-in-fact and agent or their substitutes may
lawfully do or cause to be done.
IN WITNESS WHEREOF, this power of attorney has been executed
by each of the undersigned as of the 15th day of October, 1997.
Signature Title
--------- -----
/s/ Brandon M. Dawson President and Chief Executive Officer and
Brandon M. Dawson Director (Principal Executive Officer)
/s/ Edwin J. Kawasaki Vice President-Finance
Edwin J. Kawasaki (Principal Financial and Accounting
Officer)
/s/ Gregory J. Frazer, Ph.D. Vice President-Business Development and
Gregory J. Frazer, Ph.D. Director
/s/ Douglas F. Good Chairman of the Board and Director
Douglas F. Good
/s/ William DeJong Secretary and Director
William DeJong
/s/ Gene K. Balzer, Ph.D. Director
Gene K. Balzer, Ph.D.
/s/ Hugh T. Hornibrook Director
Hugh T. Hornibrook
<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> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUL-31-1997
<CASH> 1,099
<SECURITIES> 0
<RECEIVABLES> 2,875
<ALLOWANCES> (361)
<INVENTORY> 425
<CURRENT-ASSETS> 4,612
<PP&E> 2,976
<DEPRECIATION> 699
<TOTAL-ASSETS> 16,544
<CURRENT-LIABILITIES> 6,512
<BONDS> 1,197
0
0
<COMMON> 11,131
<OTHER-SE> (2,296)
<TOTAL-LIABILITY-AND-EQUITY> 16,544
<SALES> 11,627
<TOTAL-REVENUES> 13,462
<CGS> 5,010
<TOTAL-COSTS> 10,995
<OTHER-EXPENSES> 4,200
<LOSS-PROVISION> 47
<INTEREST-EXPENSE> 47
<INCOME-PRETAX> (1,701)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,701)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,701)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
