SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended April 30, 1997
Commission File Number 0-22367
HealthCare Capital Corp.
(Exact name of small business issuer as specified in its charter)
Alberta, Canada Not Applicable
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
111 S.W. Fifth Avenue, Suite 2390, Portland, Oregon 97204-3699
(Address of principal executive offices)
Issuer's telephone number, including area code: 503-225-9152
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 past 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 . No X .
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 27,144,888 shares
of Common Stock, without par or nominal value, outstanding as of July
21, 1997.
Transitional Small Business Disclosure Format. Yes . No X .
<PAGE>
FORWARD-LOOKING STATEMENTS
Statements in this report, to the extent they are not based on
historical events, constitute 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 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, changes in the application or
interpretation of applicable government 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. 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.
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
HEALTHCARE CAPITAL CORP.
CONSOLIDATED BALANCE SHEET
April 30, 1997
(Unaudited)
ASSETS
Current Assets:
Cash $ 2,164,171
Accounts receivable, net of allowance
for doubtful accounts and contractual
write downs of $394,137
1,843,412
Inventory 469,489
Prepaid expenses 247,387
4,724,459
Capital Assets 1,906,024
Names, Files, Reputations and
Covenants Not to Compete 8,794,293
Trademarks 6,639
Deferred Acquisition Costs 155,804
---------------
$15,587,219
===============
LIABILITIES
Current Liabilities:
Bank loans $ 206,868
Accounts payable and accrued 2,338,768
liabilities
Current portion of long term debt 229,053
---------------
2,774,689
Long Term Debt 886,734
Convertible Notes Payable 2,725,268
---------------
6,386,691
---------------
SHAREHOLDERS' EQUITY
Share Capital 10,900,869
Treasury Stock (22,044)
Deficit (1,653,830)
Cumulative Translation Adjustment (24,467)
---------------
9,200,528
---------------
$ 15,587,219
===============
See accompanying notes to the financial statements.
- 1 -
<PAGE>
HEALTHCARE CAPITAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended April 30, Ended April 30,
---------------------------------------------------------------
1997 1996 1997 1996
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Product revenue $3,725,560 $555,906 $ 7,437,346 $1,572,980
Product cost of sales 1,613,679 230,069 3,160,305 704,639
---------------------------------------------------------------
Product gross profit 2,111,881 325,837 4,277,041 868,341
Service revenue 629,004 6,386 1,118,590 23,715
---------------------------------------------------------------
2,740,885 332,223 5,395,631 892,056
---------------------------------------------------------------
Expenses:
Clinic expenses 1,740,926 390,151 3,985,097 881,721
General and administrative expenses 1,109,207 100,763 2,221,338 249,914
Depreciation and amortization 192,726 39,765 462,130 80,166
---------------------------------------------------------------
Total expenses 3,042,859 530,679 6,668,565 1,211,801
---------------------------------------------------------------
Loss from operations (301,974) (198,456) (1,272,934) (319,745)
Other income (expense):
Interest income 4,599 54,291 4,599
Interest expense (2,383) (22,132)
Foreign exchange loss 14,395 3,442
---------------------------------------------------------------
Net loss $ (289,962) $(193,857) $ (1,237,333) $ (315,146)
===============================================================
Weighted average outstanding shares 25,933,112 16,885,028 22,654,350 13,908,692
===============================================================
Net loss per share ($0.01) ($0.01) ($0.05) ($0.02)
===============================================================
See accompanying notes to the financial statements.
</TABLE>
- 2 -
<PAGE>
HEALTHCARE CAPITAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended April 30, Ended April 30,
----------------------------------------------------
1997 1996 1997 1996
----------------------------------------------------
Cash (Bank Indebtedness) Provided By (Used For)
Operating Activities:
<S> <C> <C> <C> <C>
Net loss for the period $ (289,962) $ (193,857) $(1,237,333) $ (315,146)
Item not involving cash:
Depreciation and amortization 192,726 39,765 462,130 80,166
----------------------------------------------------
(97,236) (154,092) (775,203) (234,980)
----------------------------------------------------
Changes in non-cash working capital
Accounts receivable (24,081) (50,716) (1,440,576) (40,367)
Inventory (152,458) (41,617) (325,892) (29,546)
Prepaid expenses (85,106) (7,833) (206,391) (19,312)
Income taxes recoverable (payable) 8,790 (154) 8,724 14,033
Accounts payable and accrued liabilities 570,765 117,195 1,876,207 85,327
----------------------------------------------------
317,910 16,875 (87,928) 10,135
----------------------------------------------------
220,674 (137,217) (863,131) (224,845)
----------------------------------------------------
Investing Activities:
Purchase of capital assets (489,758) (204,356) (1,543,897) (264,764)
Purchase of names, patient files, reputations
and covenants not to compete, net (1,426,231) 5,394 (7,951,109) (111,195)
Trademarks 13,913 -- (1,255) --
----------------------------------------------------
(1,902,076) (198,962) (9,496,261) (375,959)
----------------------------------------------------
Financing Activities:
Net proceeds (repayments) of long term debt 258,491 (5,368) 930,367 12,286
Advances from (repayments to) shareholders (56,445) 34,633 (196,623)
Issuance (redemption) of convertible notes (4,705) (190,533 2,596,275 (151,158)
Shares issued for acquisitions and for cash,
net of costs 310,737 1,224,624 8,839,643 1,647,422
Cumulative translation adjustment (99,968) (2,670) (27,616) 1,671
----------------------------------------------------
408,110 1,060,686 12,338,669 1,313,598
----------------------------------------------------
Increase (Decrease) In Cash (1,273,292) 724,507 1,979,277 712,794
Cash (Bank Indebtedness), beginning of period 3,230,595 (101,574) (21,974) (89,861)
----------------------------------------------------
Cash, end of period $1,957,303 $ 622,933 1,957,303 $ 622,933
====================================================
Cash (Bank Indebtedness) consists of
Cash $2,164,171 $ 725,768 $ 2,164,171 $ 725,768
Bank loan (206,868) (102,835) (206,868) (102,835)
----------------------------------------------------
$1,957,303 622,933 1,957,303 622,933
====================================================
See accompanying notes to the financial statements.
</TABLE>
- 3 -
<PAGE>
HealthCare Capital Corp.
Notes to Consolidated Financial Statements
(Unaudited)
1. Significant Accounting Policies
a) Inventory
Inventory is recorded at the lower of cost or net realizable value.
b) Capital Assets
Capital assets are recorded at cost and are amortized in the following
manner:
Audiology equipment 20% Declining balance
Office equipment 20% Declining balance
Computer equipment 30% Declining balance
Leasehold improvements Straight line over five years
Computer software 30% Declining balance
In the year of acquisition, amortization is calculated at one-half of the
above-noted rates.
c) Names, Patient Files, Reputations and Covenants Not To Compete
The amounts paid for the names, patient files and reputations acquired
are equivalent to the purchase price including capitalized acquisition
costs, less the fair value of identifiable net assets acquired, as
determined by management. These costs are amortized over 20 years using
the straight line method.
Covenants not to compete represent amounts paid under non-competition
agreements with the sellers. Where the sellers enter into employment
contracts with the Company as key management personnel, the covenants not
to compete are effective when employment of the key management personnel
ceases. At the time employment ceases these costs are amortized using the
straight line method over the non-compete period. In all other
circumstances the costs are amortized over the term of the non-compete
agreement.
- 4 -
<PAGE>
d) Trademarks
Trademarks are amortized over 40 years using the straight line method.
e) Deferred Acquisition Costs
Costs related to the acquisition of clinics are deferred and, upon
successful completion of acquisitions, are allocated to the assets
acquired and are subject to the accounting policies outlined above.
f) Deferred Financing Costs
Costs related to issuing shares are deferred. Upon the issuance of the
related shares, the deferred costs are applied to reduce the net proceeds
of the issue.
g) Interim Financial Statements
The interim financial statements reflect all adjustments, consisting of
only normal recurring adjustments, which are, in the opinion of
management, necessary to a fair statement of the results for the interim
periods presented. The results of operations for an interim period are
not necessarily indicative of the results of operations for a full year.
h) Income Taxes
Income taxes are accounted for by the asset/liability approach in
accordance with Statement of Financial Accounting Standards No. 109
(Accounting for Income Taxes). Deferred tax assets and liabilities are
established for the temporary differences between the financial reporting
amounts and the tax amounts of the Company's assets and liabilities and
changes to tax rates when those tax rates are enacted.
i) Earnings Per Share
Earnings per share is based on the weighted average number of common
shares outstanding in each period. Common shares issued upon exercise of
special warrants are included in the weighted average number of shares
outstanding during the period of computation. Common share equivalents
represented by convertible debt, options, and contingent shares held in
escrow have not been included in the calculation of earnings per share as
the effect would be anti-dilutive.
j) Fair Value of Financial Instruments
The carrying value of financial instruments such as cash, accounts
receivable, notes payable and accounts payable, approximate their fair
value.
2. Business Acquisitions
The Company has accounted for acquisitions using the purchase method. Certain
acquisitions have been structured using the Company's common stock or debt
convertible into the Company's common stock as a portion of the consideration in
the transaction. The valuation of the Company's common stock given in
consideration is based on the market price for a reasonable period before and
after the date the terms of an acquisition are agreed to, announced and approved
by The Alberta Stock Exchange.
- 5 -
<PAGE>
a) Santa Maria Hearing Associates
On August 1, 1996, HealthCare Hearing Clinics, Inc. acquired for cash
certain assets of Santa Maria Hearing Associates at a cost of $75,000
plus acquisition costs of $11,576. The seller entered into a three year
covenant not to compete with HealthCare Hearing Clinics, Inc. for
consideration of $25,000 which was paid on January 5, 1997.
Net assets acquired consist of:
Non cash working capital $ 5,000
Capital assets 3,000
------------
8,000
Names, patient files and reputations 52,412
Covenant not to compete 25,000
------------
$ 85,412
============
b) Hearing Care Associates Group
On October 1, 1996, HealthCare Hearing Clinics, Inc. completed the merger
of Hearing Care Associates Group ("HCA") through a merger of three HCA
corporations at a cost of $2,704,260 plus acquisition costs of $129,756.
As consideration for this merger, the Company paid cash of $314,724 and
issued 2,389,536 common shares of the Company at a price of $1.00 per
share. 597,384 of the shares have been retained by the Company and will
be released at the rate of one share for each dollar that the net assets
of HCA exceed certain target amounts. Any shares not released under this
formula may be purchased by the sellers for $1.00 per share or will be
canceled. The sellers entered into employment agreements with HealthCare
Hearing Clinics, Inc., one for five years and two for three years. In
consideration for $314,724 paid in cash at closing plus $36,137 paid on
November 1, 1996, the sellers also entered into covenants not to compete
for a period of three years after their employment terminates for any
reason.
Net assets acquired consist of:
Non cash working capital $ 369,600
Capital assets 148,928
------------
518,528
Names, patient files and reputations 2,247,827
Less: Contingent consideration (597,384)
Covenants not to compete 350,861
------------
$ 2,519,832
============
c) Hearing Health Services, Inc. doing business as "SONUS"
- 6 -
<PAGE>
On October 31, 1996, HealthCare Hearing Clinics, Inc. purchased
substantially all the assets of Hearing Health Services, Inc. doing
business as "SONUS" at a cost of $2,960,000 plus acquisition costs of
$10,716. SONUS operates 14 audiology based clinics in the Chicago,
Illinois and Lansing, Michigan greater metropolitan areas. Consideration
for this acquisition was in the form of a secured $2,600,000 convertible
note payable due October 31, 1997 and a $360,000 note payable. The former
note is convertible into 2,000,000 common shares of the Company at the
rate of $1.30 per share.
Net assets acquired consist of:
Non cash working capital $ 99,349
Capital assets 389,090
------------
488,439
Names, patient files and reputations 2,482,277
------------
$ 2,970,716
============
d) Hearing Dynamics ("HD")
On December 6, 1996, HealthCare Hearing Clinics, Inc. merged with HD, a
California corporation that operates 4 hearing clinics in the San Diego,
California area. The merger of HD into HealthCare Hearing Clinics, Inc.
was consummated as a tax-free merger whereby common shares of the Company
were exchanged for all the issued and outstanding shares of HD at a cost
of $804,360 plus acquisition costs of $23,527. Consideration for this
acquisition was $102,600 paid in cash on closing and 408,000 common
shares of the Company issued at a price of $1.72 per share. The purchase
price is subject to adjustment if the actual amount of net current assets
acquired as of the closing date is determined to vary from the agreed
amount. The seller entered into an employment agreement for three years
with HealthCare Hearing Clinics, Inc. In consideration for $25,000 paid
in cash at closing, the seller also entered into a covenant not to
compete for a period of one year after employment terminates for any
reason.
Net assets acquired consist of:
Non cash working capital $ (48,492)
Capital assets 46,356
------------
(2,136)
Names, patient files and reputations 830,023
Covenant not to compete 25,000
------------
$ 852,887
============
e) FHC, Inc. doing business as "Family Hearing Centers"
On December 17, 1996, HealthCare Hearing Clinics, Inc. acquired all the
outstanding shares of FHC, Inc., a New Mexico corporation, at a cost of
$400,000 plus acquisition costs of $19,108. FHC, Inc. operates one clinic
in Albuquerque, New Mexico. Consideration for this acquisition was
$250,000 cash paid on closing and three year promissory notes for a total
of
- 7 -
<PAGE>
$150,000 bearing interest at 6 1/2% per annum. The purchase price is
subject to adjustment if the actual amount of net current assets acquired
as of the closing date is determined to vary from the agreed amount. The
sellers entered into employment agreements with HealthCare Hearing
Clinics, Inc., one for three years and one for two years. In
consideration for a $112,233 note payable, the sellers also entered into
covenants not to compete for a period of three years from the date of
closing.
Net assets acquired consist of:
Non cash working capital $ (62,957)
Capital assets 68,144
------------
5,187
Names, patient files and reputations 376,510
Covenants not to compete 112,233
------------
$ 493,930
============
f) Hearing Care Associates - Los Angeles, Inc.
On January 9, 1997, HealthCare Hearing Clinics, Inc. purchased all the
outstanding shares of Hearing Care Associates - Los Angeles, Inc. at a
cost of $301,000 paid in cash at closing. In consideration for $112,500
paid in cash, the sellers entered into covenants not to compete for a
period of three years after employment terminates for any reason.
Net assets acquired consist of:
Non cash working capital $ (11,754)
Capital assets 5,526
------------
(6,228)
Names, patient files and reputations 307,228
Covenants not to compete 112,500
------------
$ 413,500
============
g) Hearing Care Associates - Arcadia, Inc.
On February 28, 1997, HealthCare Hearing Clinics, Inc. acquired all the
outstanding shares of Hearing Care Associates - Arcadia, Inc. at a cost
of $410,338 paid in cash at closing. The selling shareholders signed a
three-year covenant not to compete, on ceasing employment with HealthCare
Hearing Clinics, Inc., in exchange for $130,170 paid in cash at closing.
h) Hearing Care Associates - Sherman Oaks, Inc.
On March 6, 1997, HealthCare Hearing Clinics, Inc. acquired all the
outstanding shares of Hearing Care Associates - Sherman Oaks, Inc. at a
cost of $26,568 paid in cash at closing. The selling shareholders signed
a three-year covenant not to compete, on ceasing employment with
HealthCare Hearing Clinics, Inc., in exchange for $33,783 paid in cash at
closing.
- 8 -
<PAGE>
i) Auditory Vestibular Center, Inc.
On March 14, 1997, HealthCare Hearing Clinics, Inc. acquired all the
outstanding shares of Auditory Vestibular Center, Inc. at a cost of
$56,204 paid in cash at closing. The selling shareholders signed a
three-year covenant not to compete, on ceasing employment with HealthCare
Hearing Clinics, Inc., in exchange for $28,580 paid in cash at closing.
j) Hearing Care Associates - Lancaster, Inc.
On April 8, 1997, HealthCare Hearing Clinics, Inc. acquired all the
outstanding shares of Hearing Care Associates - Lancaster, Inc. at a cost
of $136,751 paid in cash at closing. The selling shareholders signed a
three-year covenant not to compete, on ceasing employment with HealthCare
Hearing Clinics, Inc., in exchange for $61,877 paid in cash.
3. Convertible Notes Payable
April 30, 1997
--------------
A non-interest bearing note due on demand. The note
is convertible into common shares of the Company at
a rate of $1.00 per share until May 31, 1998. $ 125,268
A non-interest bearing note due October 31, 1997.
The note is convertible into common shares of the
Company at a rate of $1.30 per share. 2,600,000
---------
$2,725,268
==========
4. Share Capital
a) Authorized
Unlimited common shares without par value
b) Issued
<TABLE>
<CAPTION>
Number Issue Net
Of Shares Price Proceeds
--------- ----- --------
<S> <C> <C> <C>
Balance, July 31, 1996 17,827,750 $1,925,318
R&D Tax Credits 112,800 $0.19 21,763
Exercise of options 325,000 $0.28 to $0.74 195,001
Acquisition of HCA (Note 2b) 2,389,536 $1.00 2,389,536
Less: Contingent consideration withheld (597,384) (597,384)
Shares redeemed to treasury (13,200) (13,200)
Acquisition of HD (Note 2d) 408,000 $1.72 701,760
September Special Warrants (Note 4c) 5,467,410 5,778,015
Exercise of February Warrants 35,750 44,688
---------- ----------
Balance, April 30, 1997 25,955,662 $10,445,497
========== ===========
</TABLE>
- 9 -
<PAGE>
c) September Special Warrants
A private placement in Canada of 810,000 special warrants was consummated
by the Company in September 1996 and a private placement in the United
States of 4,149,000 special warrants was consummated by the Company in
December 1996. Such special warrants are collectively referred to as the
"September Special Warrants." The aggregate offering price for the
September Special Warrants was $1,012,500 for those sold in Canada and
$5,186,250 for those sold in the United States. Each of the September
Special Warrants placed in Canada entitled the holder to receive one and
one-tenth shares of common stock and one and one-tenth share purchase
warrants, with each such warrant exercisable for one share of common
stock at a price of $2.00 per share. Each of the September Special
Warrants placed in the United States entitled the holder thereof to
receive one share of common stock and one share purchase warrant to
purchase an additional share of common stock for $2.00 per share.
In connection with the offering of the September Special Warrants in
Canada, the Company's placement agent (the "Canadian Agent") received a
selling commission consisting of $48,625 in cash and 34,000 September
Special Warrants exercisable for one share of common stock and one share
purchase warrant to purchase an additional share of common stock for
$2.00 per share and was granted an option to acquire 81,000 share
purchase warrants, each exercisable for one share of common stock at a
price of $1.25 per share. The purchase warrants are subject to certain
rights of the Company to force exercise or cancellation. The Canadian
Agent also received a $61,987 syndication fee and a $37,097 corporate
finance fee.
In connection with the placement of the September Special Warrants in the
United States, the Company's two placement agents (the "U.S. Agents")
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, each exercisable for one share of common stock and a
share purchase warrant to purchase one additional share of common stock
for $2.00 per share. 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 In addition, the U.S. Agents received an
option to acquire 214,900 and 200,000 share purchase warrants,
respectively, with each warrant exercisable for one share of common stock
at a price of $1.25 per share. The purchase warrants are subject to
certain rights of the Company to force exercise or cancellation.
d) Options
Stock options exercisable at prices representing fair market value at the
time the options were granted are as follows:
<TABLE>
<CAPTION>
Number Exercise Expiration
Of Shares Price Date
--------- -------- ----------
<S> <C> <C> <C>
Balance, July 31, 1996 1,700,000
Granted in the period 325,000 $1.54 August 22, 2001
600,000 $1.30 October 7, 2001
407,000 $1.45 February 5, 2002
60,000 $1.41 March 31, 2002
Exercised in the period (325,000) $0.28 and $0.74
Canceled in the period (325,000)
--------------
Balance, April 30, 1997 2,442,000
==============
</TABLE>
- 10 -
<PAGE>
e) Escrowed Shares
A total of 5,250,000 outstanding shares were held in escrow at April 30,
1997. All such shares are registered in the shareholders' respective
names with all voting rights attached and exercisable by the respective
registered shareholder. The escrowed shares are restricted as to
transferability. The release of 1,000,000 shares is subject to lapse of
time provisions and will be released on October 21, 1997. The release of
the remaining 4,250,000 shares is subject to the following provisions:
i) one share will be released for each $0.08 of cash flow generated by
the Company;
ii) release shall only be made pursuant to a written application to The
Alberta Stock Exchange; and
iii)the maximum number of shares to be released in any year to a
shareholder shall be one-third of the original number of shares held
in escrow on behalf of such shareholder.
5. Foreign Currency Translation
These financial statements have been translated to U.S. dollars from the
Company's functional currency, the Canadian dollar, using the current rate
method.
- 11 -
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Three Months Ended April 30, 1997 Compared to Three Months Ended April 30, 1996
Revenues. Total revenues for the three months ended April 30, 1997,
were $4,354,564, representing a 674% increase over revenues of $562,292 for the
comparable period in fiscal 1996. Of this increase, approximately $25,000 was
attributable to the eight clinics in Canada that operated for the full
three-month period ended April 30 in both fiscal 1997 and 1996, representing an
internal growth rate of 4.5% for clinics operated by the Company during both
periods, and approximately $3,767,000 was attributable to 36 clinics acquired by
the Company during the nine-month period ended April 30, 1997.
Product sales revenue was $3,725,560 for the three months ended April
30, 1997, up 570% from $555,908 for the same period in 1996. Audiological
service revenues of $629,004 represented 14% of total revenues for the three
months ended April 30, 1997, as compared to $6,386 or 1% for the comparable
period in 1996. Substantially all of the clinics acquired in the United States
separately charge for the performance of audiological services when a hearing
aid is purchased. The Company's policy in the past was to waive the fee if a
hearing aid was purchased.
Gross Profit on Product Sales. Product gross profit for the three
months ended April 30, 1997, was $2,111,881 or 57% of revenue, compared to
$325,837 or 59% of revenue for the comparable period in fiscal 1996. The decline
in gross profit percentage was primarily due to the fact that the three months
ended April 30, 1996, included revenue derived solely from Canadian clinics
where higher margin, lower priced hearing aids are sold, whereas the three
months ended April 30, 1997, included revenue primarily from acquired United
States clinics where the product mix consists of higher priced upper-end
products that yield greater gross profits in terms of dollars despite lower
margins.
Operating Expenses. Operating expenses for the three months ended April
30, 1997, were $3,042,859 representing an increase of 473% over operating
expenses of $530,679 for the comparable period in fiscal 1996. This increase was
attributable to the 36 clinics acquired by the Company during the nine-month
period ended April 30, 1997, and to planned increases in corporate staff,
increases in amortization of intangibles, and other corporate expenses related
to the operation of a significantly larger organization. As a percentage of
total revenues, operating expenses decreased to 70% for the three months ended
April 30, 1997, from 94% for the comparable period in 1996.
Nine Months Ended April 30, 1997 Compared to Nine Months Ended April 30, 1996
Revenues. Total revenues for the nine months ended April 30, 1997, were
$8,555,936 representing a 436% increase over revenues of $1,596,695 for the
comparable period in fiscal 1996. Of this increase, approximately $110,000 was
attributable to eight clinics in Canada that operated for the full nine-month
period ended April 30 in both fiscal 1997 and 1996, representing an internal
growth rate of 6.8% for clinics operated by the Company during both periods, and
approximately $6,849,000 was attributable to the 36 clinics acquired by the
Company during the nine-month period ended April 30, 1997.
Product sales revenue was $7,437,346 for the nine months ended April
30, 1997, up 373% from $1,572,980 for the same period in 1996. Audiological
service revenues of $1,118,590 represented 13.1% of total revenues for the nine
months ended April 30, 1997, as compared to
- 12 -
<PAGE>
$23,715 or 1.5% for the comparable period in 1996.
Gross Profit on Product Sales. Product gross profit for the nine months
ended April 30, 1997, was $4,277,041 or 58% of revenue, compared to $868,341 or
55% of revenue for the comparable period in fiscal 1996. The improvement in
gross profit percentage was primarily due to the Company's access to greater
volume discounts from manufacturers as a result of increased hearing aid
purchases.
Operating Expenses. Operating expenses for the nine months ended April
30, 1997, were $6,668,565, representing an increase of 450% over operating
expenses of $1,211,801 for the comparable period in fiscal 1996. This increase
was attributable to the 36 clinics acquired by the Company during the nine-month
period ended April 30, 1997, and planned increases in corporate staff, increases
in amortization of intangibles, and other corporate expenses related to the
operation of a significantly larger organization. As a percentage of total
revenues, operating expenses increased to 78% for the nine months ended April
30, 1997, from 76% for the comparable period in 1996.
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 of the Company ("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 Alberta Stock Exchange or another more senior
North American stock exchange), the Company has the option upon 45 days' prior
written notice to the holders to force the exercise or cancellation of the share
purchase warrants. The actual and anticipated uses of the proceeds of the
September and December 1996 private placements are as follows:
Working capital $1,898,750
Capital expenditures 600,000
Registration costs 250,000
Acquisitions 3,200,000
Offering costs 250,000
----------
$6,198,750
==========
During the nine months ended April 30, 1997, the Company acquired 36 hearing
care clinics located in California, Illinois, Michigan, and New Mexico. The
acquisitions were funded primarily through the issuance of Common Stock valued
at $3.1 million, the issuance of convertible subordinated notes in an aggregate
principal amount of $2.6 million, the issuance of $150,000 in promissory notes,
cash payments totaling $2.3 million, and the assumption of debt totaling
$460,000.
The Company has a revolving demand loan with the Royal Bank of Canada,
providing for borrowings up to $178,942. As of April 30, 1997, $139,575 was
outstanding against this line, compared to $33,200 as of July 31, 1996. Advances
under the line of credit bear interest at 1% above the Royal Bank of Canada
prime rate, which was 4.75 % at April 30, 1997. Advances under
- 13 -
<PAGE>
the revolving line of credit are secured by all the assets of HC HealthCare
Hearing Clinics, Ltd., the Company's Canadian operating subsidiary, and
personally guaranteed by Marilyn Marshall, a shareholder.
On July 16, 1997, the Company's operating subsidiary in the United
States, HealthCare Hearing Clinics, Inc.("HHC"), obtained a $500,000 line of
credit from Phonak, Inc., a hearing aid manufacturer. The line of credit is
secured by a portion of HHC'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. The Company expects to use the line of
credit for working capital and for acquisitions.
The Company expects to spend approximately $600,000 in fiscal 1997 to
develop a management information system that will link each clinic with the
Company's headquarters. Development costs will include system design, new
hardware, patient management and accounting software, and staff training. The
Company is seeking to finance a substantial portion of this cost. The Company
also plans to outsource the majority of its advertising and public relations
functions at a cost of approximately $350,000 over the next 12 months, exclusive
of direct marketing costs such as printing, mailing, and media purchases.
The Company believes that its existing cash balances, amounts available
under the revolving lines of credit, and cash from operations will be sufficient
to fund its operations and planned acquisitions over the next three months.
However, to execute its long-term business strategy, the Company will require
additional funding in order to acquire new clinics and to expand into other
geographic markets. The Company plans to fund its long-term liquidity needs by a
combination of the following methods: (i) obtaining lease financing for
significant capital expenditures; (ii) issuing debt instruments; (iii) raising
additional privately placed equity; and (iv) the exercise of outstanding share
purchase warrants. In the event the Company is unable to consummate any of the
above strategies, the Company will be unable to continue to pursue its
acquisition strategy, necessitating significant reductions in administrative
personnel in order to reduce expenses. There can be no assurance that any such
financing alternatives will be available to the Company or will be available on
terms acceptable to the Company.
- 14 -
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) The exhibits filed as part of this report or incorporated by reference
herein are listed in the accompanying exhibit index.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter
ended April 30, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTHCARE CAPITAL CORP.
By: /s/ Edwin J. Kawasaki
Edwin J. Kawasaki
Vice President-Finance
(Principal Financial Officer)
DATED: July 28, 1997
- 15 -
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Number Description of Exhibit
- -------------- ----------------------
10.1 Loan and Security Agreement between Phonak,
Inc. and HealthCare Hearing Clinics, Inc.,
dated July 16, 1997, and related Guaranty
between HealthCare Capital Corp. and Phonak,
Inc., dated July 16, 1997.
27 Financial Data Schedule.
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT is entered into this 16th day
of July, 1997, between HEALTHCARE HEARING CLINICS, INC. (hereinafter called
"Borrower"), whose principal place of business is 111 SW Fifth Avenue, Suite
2390, Portland, Oregon 97204, and PHONAK, INC. (hereinafter called "Phonak").
1. DEFINITIONS. When used herein, the following terms shall have
the following meanings:
1.1. ACCOUNT OR ACCOUNTS RECEIVABLE - includes contract rights
and means all amounts due Borrower in the form of payments due and receivables
from whatever source, and all proceeds and products thereof, including all
causes of action thereon, and all of Borrower's rights and interests under the
terms of any and all agreements, whether written or oral, legally enforceable,
or conditionally provided for, including, but not limited to, all of Borrower's
rights and interests in any and all accounts, notes, policies of insurance,
drafts, leases, bills of lading, chattel papers and general intangibles
consisting of rights to payment and the proceeds or products thereof.
1.2. ACCOUNT BORROWER - shall mean any party who is obligated
to Borrower on any Account Receivable.
1.3. ADVANCE - means an amount of money requested and received
by Borrower from Phonak in any single transaction and which is charged against
the Line of Credit. All advances and repayments of advances shall be in United
States Dollars.
1.4. COLLATERAL - means the property in which the Borrower has
granted Phonak a continuing Security Interest which has been, is being or will
be delivered, pledged, assigned or otherwise tendered to Phonak as security for
payment of the Obligations. "Collateral" also includes any guaranty which has
been, is being or will be given to Phonak and all property in which any
guarantor has granted Phonak a security interest as security for the payment of
the Obligations.
1.5. CONTRACT RIGHTS - shall mean any right to payment under a
contract not yet earned by performance and not evidenced by an Instrument or
Chattel Paper.
1.6. GENERAL INTANGIBLES OR INTANGIBLES - shall have the
meaning assigned to such terms under the Illinois Commercial Code and shall mean
and include, but not be limited to, customer lists, books and records
(including, without limitation, correspondence, credit files, tapes, cards,
computer runs, computer programs and other papers and documents) whether in the
<PAGE>
possession or control of the Borrower or any computer service bureau; rights in
franchises and sales contracts, patents, copyrights, trademarks, service marks,
goodwill, logos, trade names, label designs, royalties, brand names, plans,
blueprints, patterns, trade secrets, licenses, jigs, dies, molds and formulas;
credits, tax refunds, returned and unearned insurance premiums; and choses in
action.
1.7. CHATTEL PAPER, DOCUMENTS, GOODS AND INSTRUMENTS - shall
have the respective meanings assigned to such terms in the Illinois Commercial
Code as of the date of this Agreement.
1.8. INVOICE - shall mean a bill or claim form submitted to an
Account Borrower for goods sold or services rendered on or before the date it
bears. Each invoice shall indicate the time when, and the location where, such
goods where shipped or delivered, or the services performed, and the amounts due
therefore and shall (except with respect to claim forms submitted to insurance
companies or other third parties for reimbursement) on its face be due and
payable no more than 30 days after the date it bears.
1.9. LINE OF CREDIT - means an amount of principal not to
exceed $500,000 which Phonak shall make available to Borrower pursuant to the
terms of this Loan and Security Agreement.
1.10. OBLIGATIONS - means any and all indebtedness,
obligations, liabilities and contractual duties of every kind and nature of
Borrower to Phonak, whether nor existing or hereafter arising, due or to become
due, direct or indirect, absolute or contingent, joint or several, and however
created or arising and howsoever acquired by Phonak, and any and all renewals or
extensions thereof, and all expenses and charges, legal or otherwise, including
attorneys' fees, paid or incurred by Phonak in realizing upon or protecting the
Collateral, or collecting or enforcing the payment of any and all such
indebtedness, obligations, liabilities, expenses and charges.
1.11. PRIME RATE - means the interest rate described in the
"Money Rates" section of the Wall Street Journal as the "prime rate", in effect
from time to time. If the Wall Street Journal shall cease publication, then
Phonak shall notify Borrower of the business publication or financial
institution which shall define the prime rate for purposes of this Agreement.
1.12. REVOLVING CREDIT LOAN - means the outstanding balance
owed by Borrower to Phonak under the terms of this Loan and Security Agreement.
1.13. REVOLVING CREDIT NOTE - means the promissory note in the
form attached hereto as Exhibit A executed by Borrower evidencing Borrower's
obligation to repay the Revolving Credit Loan.
1.14. SECURITY INTEREST - means the interest set forth and
allowed in Article 9 of the Uniform Commercial Code. Although this Agreement is
entered into in the State of Illinois and the parties have agreed that the
substantive law of Illinois shall apply to this Agreement,
<PAGE>
where the location of Borrower's Collateral requires the application of the
procedural law of any other state, territory or foreign country, the Security
Interest granted Phonak by Borrower shall include all rights and interests
allowed or required of Phonak in those locations.
1.15. DATES FOR DELIVERY OF FINANCIAL STATEMENTS - shall mean
(i) with respect to its annual reports on Form 10-K and its annual financial
statements a date within 90 days after the end of the fiscal year of Borrower
and (ii) with respect to its quarterly financial statements for each fiscal
quarter other than the last quarter of Borrower's fiscal year a date within 45
days after the close of each fiscal quarter.
2. LINE OF CREDIT. Phonak agrees to make available to Borrower a
line of credit as described herein.
2.1. Subject to the terms and conditions of this Agreement,
Phonak will make a line of credit available to Borrower ("line of credit"),
pursuant to which Phonak shall from time to time make revolving credit loan
Advances to Borrower. The aggregate amount of advances outstanding under the
line of credit shall at no time exceed Five Hundred Thousand ($500,000.00)
Dollars. The line of credit shall terminate, and all Advances and other sums due
hereunder shall become due and payable on July 1, 1998.
2.2. The proceeds of the line of credit shall be disbursed to
Borrower in accordance with written instructions of Borrower as and when same
are received by Phonak. Proceeds of the line of credit shall be used by Borrower
solely for business purposes.
2.3. All outstanding loan amounts, together with any accrued
but unpaid interest thereon, or other sums due thereunder, shall be repaid in
full no later than July 1, 1998. In addition, outstanding loans shall be repaid
upon demand if and to the extent they exceed Five Hundred Thousand ($500,000.00)
Dollars.
2.4. The Revolving Credit Loan shall be evidenced by the
Revolving Credit Note.
2.5. The Line of Credit shall bear interest at a floating
daily rate equal to the Prime Rate, in effect from time to time, with each
change in such prime rate to take effect on the same day as each published
change.
3. CONDITIONS PRECEDENT. The obligation of Phonak to make the
Loan is subject to Borrower's delivering or causing to be delivered to Phonak on
the date of, but prior to the disbursement of any portion of the loan the
following:
3.1 The Revolving Credit Note, duly executed by Borrower.
3.2 The Corporate Guaranty in the form attached hereto as
Exhibit B duly executed by Healthcare Capital Corp.
<PAGE>
3.3 Resolutions of the Board of Directors of Borrower
approving the execution of the loan documents.
3.4 A certificate, dated as of the most recent date
practicable, of the Secretary of State of Washington as to the good standing of
the Borrower.
3.5 UCC Financing Statements regarding all Collateral, duly
executed by the Borrowers, as debtor, in a form acceptable to Phonak and filed
in such offices as Phonak shall require.
3.6 A certificate dated of the most recent date practicable,
of the appropriate governmental authority in a form acceptable to Phonak, as to
the good standing of Healthcare Capital Corporation.
3.7 An opinion of borrower's counsel substantially in the form
attached hereto as Exhibit C.
3.8 An opinion of Guarantor's counsel substantially in the
form attached hereto as Exhibit D.
3.9 Resolutions of the Board of Directors of Healthcare
Capital Corp. approving the execution of the Corporate Guaranty.
3.10 Payment for Lender's counsel fees and costs incurred in
connection with this transaction.
3.11 Such other documents, certificates or evidence as Phonak
may reasonably request to consummate the transactions contemplated hereby.
4. GRANT OF SECURITY INTEREST. To secure the payment of all the
Obligations, Borrower hereby grants to Phonak a continuing security interest in
the following property of Borrower, now existing or hereafter arising or
acquired, wherever now or hereafter located, except that no security interest is
granted by Borrower with respect to any such property held, owned, used or
acquired for use in association with Borrower's and HealthCare Capital Corp.'s
business in the States of Michigan and Illinois: all Accounts and Accounts
Receivable and all Goods whose sale, lease or other disposition by Borrower has
given rise to Accounts and have been returned to or repossessed or stopped in
transit by Borrower. The security interest in the Collateral granted to Phonak
hereunder is granted to secure Borrower's Obligations, and the parties agree
that Phonak shall have no obligation to perform any of Borrower's obligations
under any contract rights assigned hereunder.
5. GENERAL REPRESENTATIONS AND WARRANTIES OF BORROWER. To induce
Phonak to enter into this Agreement, Borrower represents and warrants as
follows:
<PAGE>
5.1. Borrower has full power to enter into this Agreement, and
none of the terms hereof is in contravention of law, or violates any provision
of Borrower's charter or by-laws or any indenture, agreement or undertaking to
which Borrower is a party or by which Borrower is bound.
5.2. Borrower is, and as to all Collateral hereafter acquired
shall be, for so long as any Obligation to Phonak is outstanding, the owner of
all Collateral free of any liens, Security Interests or claims of any kind,
other than the Security Interest granted by this Agreement, and Borrower shall
at all times defend the Collateral against any claim or demand of any person
which is adverse to Phonak.
5.3. Borrower will not hereafter grant a Security Interest in
the Collateral to any other party, or otherwise permit the encumbrances or
disposition of Collateral without Phonak's prior written consent for so long as
Borrower is indebted to Phonak on any Obligation, or until this Agreement is
terminated according to its provisions.
5.4. The Collateral or records pertaining to the Collateral
(except any part thereof which prior to the execution of this Agreement,
Borrower shall have advised Phonak, in writing, consists of Collateral normally
used in more than one state) will be kept at Borrower's clinic locations as
identified on Exhibit E attached hereto, or at its main office: 111 SW Fifth
Avenue, Suite 2390, Portland, Oregon 97204. Notwithstanding removal of the
Collateral or records pertaining thereto to any other location, Phonak's
security interest in the Collateral shall continue.
5.5. Borrower will comply with the terms and conditions of any
orders, ordinances, regulations, laws or statutes of the Federal government or
of any city, state or other governmental department having jurisdiction with
respect to the conduct of business thereon. Borrower will, within five days
after being notified, either orally or in writing, of any claim of violation of
any such order, ordinance, regulation, law or statute, notify Phonak in writing
of the assertion of such claim. When requested by Phonak, Borrower will execute
any written instruments and do any other acts necessary to effectuate more fully
the purpose and provisions of this Agreement.
5.6. Borrower will indemnify and save Phonak harmless from all
loss, costs, damages, liability or expenses, including attorney fees, that
Phonak may sustain or incur by reason of defending or protecting the Security
Interest herein granted or the priority thereof, or enforcing the Obligations or
the prosecution or defense of any action or proceeding concerning any matter
growing out of, or connected with this Agreement, the Obligations or the
Collateral.
6. COVENANTS AS TO ACCOUNTS RECEIVABLE. Borrower hereby promises
and agrees that so long as any Obligation of the Borrower to Phonak is
outstanding, the following covenants will be binding upon the Borrower:
6.1. As of the time any Account Receivable becomes subject to
the Security Interest provided for herein, Borrower shall be deemed to have
warranted as to each and all of
<PAGE>
such Accounts Receivable, that each is, and all papers and documents relating
thereto are, genuine, and in all respects, what they purport to be; that each
Account Receivable for products or services sold or leased is valid and
subsisting and arises out of a bona fide sale or lease of goods, or out of and
for services theretofore actually rendered by Borrower to the Account Borrower
named in the Account; that the amount of the Account represented as owing is the
correct amount actually and unconditionally owing except for normal cash
discounts and to Borrower's knowledge is not disputed, and except for such
normal cash discounts and return rights is not subject to any set-offs, credits,
deductions or counter-charges; that Borrower is the owner thereof free and clear
of all liens, encumbrances and security interests of any nature whatsoever,
other than those granted to Phonak or otherwise noted hereunder; and that no
surety bond was required or given in connection with said Account or the
contract or purchase orders out of which the same arose.
6.2. At any time, after an Event of Default has occurred and
is continuing, Phonak may, after five days written notice to Borrower, notify
and any all Account Borrowers to make payment directly to Phonak. To the extent
that Phonak does not so elect, Borrower shall continue to collect the Accounts
Receivable.
6.3. Proceeds of Accounts Receivable when received by Phonak
shall, after payment of any of Phonak's expenses incurred, including attorneys
fees, be applied by Phonak in payment of the Obligations secured hereby, whether
or not such Obligations shall have by their terms matured, such application to
be made at such intervals and upon such of said Obligations as Phonak may
determine. Phonak need not apply or give credit for any such proceeds until
Phonak has received final payment thereof at its offices in cash or solvent
credits accepted by Phonak as such.
6.4. In making collection of any Account Receivable, Phonak
shall have the right in its own name or in the name of Borrower to demand,
collect, receive, receipt for, sue for, compound or abandon any and all amounts
due or to become due on any of the Accounts Receivable and to endorse payment
thereof in its own name or that of Borrower, and in its discretion to file any
claim or take any other action or proceeding which Phonak may deem necessary or
appropriate to protect, preserve and realize upon the Security Interest of
Phonak in said Accounts Receivable and the proceeds thereof. Borrower expressly
waives notice from Phonak that any Account has been defended by the Account
Borrower or compromised by Phonak; it is expressly agreed that Phonak need not
provide Borrower with an itemized accounting unless Borrower has given Phonak
written notice requesting that accounting, within five business days after
Phonak exercises any of its rights hereunder.
6.5. Upon receipt by Borrower of instructions from Phonak,
Borrower at Borrower's expense, shall take all necessary action promptly to
collect the Accounts Receivable and shall pay or deliver all proceeds thereof
immediately upon receipt in the form received without mingling the same with
other property and during the time Borrower has that cash in its possession, it
shall be deemed to be held in Trust by Borrower for the benefit of Phonak. When
and to the extent required by Phonak upon the occurrence and continuation of an
Event of Default, Borrower shall (a) deposit all proceeds in a Collateral
Collection Account with Phonak
<PAGE>
immediately upon receipt, or (b) notify Account Borrowers that their Accounts
and contract obligations have been assigned to Phonak and shall be paid directly
to Phonak.
6.6. Borrower shall furnish to Phonak at Borrower's expense,
at least monthly, a certificate signed by an officer of Borrower setting forth
balance of accounts receivable and a summary aging by clinic location of
Accounts.
7. GENERAL COVENANTS OF BORROWER.
7.1. Borrower agrees that, at Borrower's expense, Phonak or
its agent shall have the privilege at any time, upon request, to inspect during
regular business hours any of the business properties or premises of the
Borrower and the books and records of the Borrower relating not only to Accounts
Receivable and Inventory or the purchasing or collecting thereof, but also
relating to Borrower's general business affairs and financial condition.
7.2. At Phonak's request, Borrower agrees to furnish Phonak on
the Dates For Delivery Financial Statements specified in Paragraph 1.15 above,
(i) a copy of its annual report on Form 10-K and annual financial statements
(balance sheet and profit and loss statement at a minimum) of Borrower prepared
in conformity with generally accepted accounting principles; and (ii) a copy
similarly prepared of its financial statements for each fiscal quarter (except
the fourth quarter) signed by the proper accounting officer of Borrower.
Borrower further agrees to, from time to time, furnish such other reports, data
and financial statements, including audit reports by independent certified
public accountants, in respect to its business and financial condition, as
Phonak may reasonably require.
7.3. Borrower agrees to execute and deliver such financing
statement or statements, amendments thereof or supplements thereto, as Phonak
may require from time to time in order to comply with the appropriate provisions
of the relevant Uniform Commercial Code, and to preserve and protect the
Security Interest hereby granted. Borrower further agrees to execute such
further instruments and perform such further acts and things that Phonak may
reasonably require in order to maintain a perfected Security Interest in Phonak
with respect to the Collateral free of all other liens or claims whatsoever. In
addition, Borrower agrees to mark its books, records and contracts to reflect
the Security Interest of Phonak in and to all Collateral. Borrower hereby
irrevocably appoints Phonak its agent and attorney-in-fact to execute such
financing statements and other instruments and to do such other acts and things
as may be necessary to preserve and perfect Phonak's security interest in the
Collateral.
7.4. Borrower agrees to pay promptly when due all taxes,
assessments and governmental charges upon or against Borrower or the property or
obligations of Borrower in each case before the same become delinquent and
before penalties accrue thereon, unless and to the extent the same are being
contested in good faith by appropriate proceedings.
<PAGE>
7.5. Borrower agrees that Phonak may, at its option, at any
time and without notice to Borrower, apply to the payment of any Obligations
secured hereby, either due or not, the balance of any deposits, checking,
savings, collateral reserve or other account of the Borrower at Phonak. As
additional security for payment of the Obligations, Phonak is hereby granted a
Security Interest in any other funds or property of the Borrower now or
hereafter in the possession of Phonak and, with respect thereto, Phonak will
have all rights and remedies specified herein.
7.6. Borrower agrees to pay Phonak, from time to time, upon
demand all reasonable costs incurred by Phonak to Phonak for supervising and
servicing the outstanding Obligations of Borrower and the Collateral securing
said Obligations, including employment of an outside servicing company, and the
making and maintaining by Phonak or its designated agent of records in
connection therewith. Each such item of cost shall become an Obligation of
Borrower and shall be secured by the Security Interest herein granted.
7.7. Borrower agrees that whenever the Uniform Commercial Code
and the local law of the jurisdiction where the affected Collateral is located
requires Borrower to sign a financing statement for filing purposes, Borrower
hereby appoints Phonak or any of Phonak's representatives as Borrower's attorney
and agent, with full power of substitution, to sign or endorse Borrower's name
on any such financing statement or other document and authorizes Phonak to file
such a financing statement in all places where necessary to perfect Phonak's
security interest in the Collateral; and Borrower hereby ratifies all acts of
said attorney and said substitute and agrees to hold Phonak and said attorney
harmless form any acts of commission or omission or any error judgement or
mistake of fact or law pertaining thereto. A photographic or other reproduction
of this Agreement, or any financing statement signed by Borrower, is sufficient
as a financing statement.
7.8. Additional Documents. Each of the parties hereto agrees
to execute and deliver to the other party any and all documents and/or
instruments, in addition to those otherwise provided for herein, that may be
necessary and/or appropriate to effectuate the provisions of this Agreement
(including but not limited to the execution of any and all Uniform Commercial
Code financing statements) whether before, on or after the date of execution of
this Agreement.
7.9. This Agreement and all its terms and provisions shall
inure to the benefit of Phonak and its successors and assigns and shall be
binding upon Borrower and the successors and assigns of Borrower. Each and every
of the terms hereof shall govern and apply to each and every Obligation of
Borrower to Phonak previously incurred, and to any Collateral therefor, to the
same extent as though such Obligations had been incurred, and the Collateral
therefor assigned, transferred and delivered, subsequent to the date of this
Agreement.
8. EVENTS OF DEFAULT. Borrower agrees that any one or more of the
following events, conditions or acts shall constitute an Event of Default under
this Agreement:
8.1. Failure of Borrower to make any timely payment of any
amount due under the Revolving Credit Note or any notice, instrument or
agreement which shall cause or permit the holder thereof to cause the
Obligations of Borrower to become due prior to maturity.
<PAGE>
8.2. Failure of Borrower to make any timely payment of any
other Obligation when due.
8.3. Falsification in any material respect at any time of any
statement, application or agreement furnished to Phonak by Borrower or any
guarantor.
8.4. Failure of the Borrower or any guarantor, after request,
to furnish Phonak with annual, periodic or additional financial statements in
form satisfactory to Phonak or other financial information as required by
Phonak, from time to time.
8.5. Insolvency of the Borrower or any guarantor or the
inability of the Borrower or any guarantor to pay debts as they mature.
8.6. The execution of an Assignment for the Benefit of
Creditors by Borrower, or any guarantor, or the filing or commencement of any
proceedings for relief under Bankruptcy Code or insolvency laws or any laws
relating from debts by Borrower hereunder or any guarantor, whether voluntary or
involuntary.
8.7. The entry of any judgment, attachment, lien, execution or
levy against Borrower or any guarantor or against the property of Borrower or
guarantor in any amount which is not paid, discharged, released, bonded, stayed
on appeal or otherwise fully satisfied within 30 days thereafter.
8.8. Failure of Borrower or any guarantor to perform any of
the terms, conditions and provisions under this Agreement or any agreements
between Borrower or any guarantor and Phonak.
8.9. Failure of Borrower or any guarantor to pledge or grant
to cause to be pledged or granted to Phonak a continuing Security Interest in
the Collateral, or to furnish additional Collateral immediately upon request
from Phonak and Phonak, in its sole discretion, shall deem itself insecure for
any reason whatsoever.
8.10. Dissolution of Borrower or any guarantor whether by
voluntary or involuntary action.
8.11. Any admission, either orally or in writing, by Borrower
or any guarantor, of the inability to pay debts as they mature.
8.12. Any and all other events or circumstances that cause
Phonak in its sole discretion to deem itself insecure for any reason whatsoever,
including, but not limited to, fear of removal or waste of the Collateral, or
any part thereof.
9. REMEDIES OF PHONAK ON DEFAULT.
<PAGE>
9.1. In the event that an Event of Default described in
Sections 8.1 through 8.13 of this Agreement has occurred and is continuing,
Phonak may, without notice or demand of any kind, declare the principal of, and
any interest accrued on, all outstanding Obligations of Borrower to Phonak
immediately due and payable, and thereupon all such Obligations shall become and
be immediately due and payable, notwithstanding the maturity date or dates
expressed in any evidence of those Obligations.
9.2. When any Obligation of Borrower is due and payable,
either by acceleration or otherwise, and is unpaid in whole or in part, Phonak,
in addition to all other rights and remedies, shall have all the rights and
remedies of a secured party under the Illinois Uniform Commercial Code. Without
limiting the foregoing, Phonak may require Borrower to assemble Collateral and
make it available to Phonak at a place designated by Phonak which is reasonably
convenient. Phonak may enter, with or without process of law and without breach
of the peace, any premises where the Collateral or the books and records of
Borrower related thereto is or may be located, and without charge or liability
to Phonak therefor seize and remove the Collateral (and copies of Borrower's
books and records in any way relating to the Collateral) from said premises
and/or remain upon said premises and use the same (together with said books and
records) for the purpose of collecting, preparing and disposing of the
Collateral, and Borrower hereby grants Phonak a security interest in said books
and records for the purpose above stated. Phonak may also, with or without
notice to Borrower, unless required by law, sell the Collateral at public or
private sale and Phonak or its nominee may purchase any Collateral at any sale.
Any requirement of the Code for reasonable notice to the Borrower shall be met
if such notice is mailed postage prepared to the Borrower at the address shown
at the commencement of this Agreement, at least five days before the sale or
other disposition or other event giving rise to the required notice.
10. NOTICE. Unless otherwise provided in this Agreement or by law,
any notice of any sale, disposition or other intended action by Phonak shall be
deemed reasonable if it is in writing and deposited in the United States mails
five business days in advance of the intended disposition or other intended
action, first class, postage prepaid, and addressed to the Borrower at the
address first hereinabove described or any other address designated in writing
by Borrower previously received by Phonak.
11. WAIVER. Waiver by Phonak of any Event of Default hereunder, or
of any breach of the provisions of this Agreement by Borrower, shall not
constitute a Waiver of any other Event of Default or breach, or of the same
Event of Default or breach occurring on a future occasion.
12. INVALIDITY OF ANY PROVISION. Whenever possible, each provision
of this Agreement shall be interpreted in such manner as to be effective and
valid under the applicable law. If any provision of this Agreement is prohibited
or determined to be invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision of the remaining provisions of this
Agreement.
<PAGE>
13. GOVERNING LAW. This Agreement, its terms and provisions,
including matters of construction validity and performance, shall be governed by
the laws of the State of Illinois.
Dated at Naperville, Illinois, this 16th day of July, 1997.
HEALTHCARE HEARING CLINICS, INC.
By: /s/ Edwin J. Kawasaki
Print Name: Edwin J. Kawasaki
Title: Vice President of Finance
Attest: /s/ Brian S. Thompson
Title: Secretary
ACCEPTED this 16th day of July, 1997.
PHONAK, INC.
By: /s/ James G. Sherry
Print Name: James G. Sherry
Title: Director of Finance
<PAGE>
GUARANTY
Loan Agreement made and entered into this 16th day of July, 1997, by
and between HEALTHCARE CAPITAL CORP., having its principal offices at 1120-595
Howe St. Vancouver, British Columbia ("Guarantor") and PHONAK, INC., having its
principal offices at 850 E. Deihl Road, Naperville, Illinois ("Phonak").
WHEREAS, Healthcare Hearing Clinics, Inc. ("Borrower") is a subsidiary
of Guarantor and is a party with Phonak to a Loan and Security Loan Agreement
and a Revolving Credit Note of even date herewith (which are referred to
collectively as the "Loan Agreement"); and
WHEREAS, Phonak has required, as a condition precedent to its
consummation of the transactions under the Loan Agreement, that Guarantor
execute and deliver this Guaranty; and
WHEREAS, all financial accommodations made by Phonak under the Loan
Agreement will inure to the direct and material benefit of Guarantor;
NOW THEREFORE, in consideration of the premises, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and to induce Phonak to consummate the transactions under the Loan
Agreement, Guarantor hereby represents, warrants, and agrees to and with Phonak
as follows:
1. In order to induce Phonak to enter into the Loan Agreement, and in
consideration thereof, Guarantor hereby guarantees the full, prompt and faithful
performance and discharge by Borrower of all the terms, warranties, conditions
and provisions of the Loan Agreement, including any modifications, amendments or
supplements thereto.
2. Guarantor further guarantees the payment of all obligations and
indebtedness of Borrower to Phonak arising under the Loan Agreement or the
assignment of accounts referred to therein at the time and in accordance with
the terms and provisions of said Loan Agreement, including any modifications,
amendments, or supplements thereto.
3. Guarantor hereby authorizes extensions of time or other indulgences
to Borrower, and agrees that Phonak may take, give up, modify, vary, exchange,
renew, or abstain from perfecting or taking advantage of any security, accept or
make compositions or other arrangements, discharge or release any party or
parties, release on any security, and otherwise deal with Borrower and other
parties and security as Phonak may deem expedient.
4. All demands, presentments, notices of protest and of dishonor, and
other notices of any kind or nature, including those of any action or nonaction
of Borrower, Phonak, any co-guarantor, creditor, or other person, are expressly
waived by Guarantor. Guarantor hereby waives the right to require Phonak to
proceed against Borrower or any other party or to proceed against or apply any
security it may hold, and waives the right to require Phonak to pursue any other
remedy for the benefit of Guarantor on this Guaranty without taking any action
against Borrower or any other party and without proceeding against or applying
any security it may hold.
1
<PAGE>
5. Guarantor hereby guarantees that Borrower, as well as directors,
officers, partners, associates, or other agents acting or purporting to act on
its behalf, are empowered to enter into the Loan Agreement, and that each of
them is acting within the scope of such power. Phonak shall not be required to
inquire into the existence, scope or exercise of such power.
6. Guarantor agrees to pay reasonable attorney's fees and all other
costs and expenses that may be incurred by Phonak in the enforcement of this
Guaranty or in the collection of any of said liabilities from Borrower or
Guarantor.
7. As one of the material inducements to Phonak to enter into the Loan
Agreement, Guarantor hereby covenants, warrants and represents that Guarantor is
now and at all times hereafter shall be solvent, and generally able to pay its
debts as such debts become due and Guarantor now owns and shall at all times
hereafter own property which at a fair valuation exceeds the sum of Guarantor's
debts.
8. Guarantor further agrees that in any action between Guarantor and
Phonak arising out of this Guaranty, the items of charge and debit in Phonak's
books and records relating to Borrower, and the books, records, documents, and
admissions of Borrower, shall be admissible against Guarantor to the same extent
as they would be admissible against Borrower.
This Guaranty is assignable by Phonak with respect to any one or
several or all of the indebtedness and obligations which it guarantees, and if
it is so assigned, guarantor shall be bound as above to the assignees without
affecting guarantor's liability to Phonak hereunder as to any such indebtedness
or obligation retained by Phonak.
This Guaranty shall inure to the benefit of and bind the successors and
assigns of Phonak and of Guarantor, and shall be construed as the joint and
several obligation of each of the Guarantor's signatories hereto when there are
more than one.
This Guaranty shall be governed, construed and interpreted by the law
of the State of Illinois and cannot be amended or modified orally.
Executed at Naperville, Illinois, on the day and year first above
written.
GUARANTOR:
HEALTHCARE CAPITAL CORP.
By:/s/ Edwin J. Kawasaki
Printed Name: Edwin J. Kawasaki
Title: Vice President-Finance
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE COMPANY'S CONSOLIDATED BALANCE SHEETS AND RELATED CONSOLIDATED
STATEMENTS OF EARNINGS FOR THE PERIOD ENDED APRIL 30,1997, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-END> APR-30-1997
<CASH> 2,164,171
<SECURITIES> 0
<RECEIVABLES> 2,237,549
<ALLOWANCES> 394,137
<INVENTORY> 469,489
<CURRENT-ASSETS> 4,724,459
<PP&E> 1,906,024
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,587,219
<CURRENT-LIABILITIES> 2,774,689
<BONDS> 3,612,002
0
0
<COMMON> 10,878,825
<OTHER-SE> (1,678,297)
<TOTAL-LIABILITY-AND-EQUITY> 15,587,219
<SALES> 7,437,346
<TOTAL-REVENUES> 8,555,936
<CGS> 3,160,305
<TOTAL-COSTS> 7,145,402
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (22,132)
<INCOME-PRETAX> (1,237,333)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,237,333)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,237,333)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> 0
</TABLE>
