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 October 31, 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 X . No ---.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 27,284,517 shares
of Common Stock, without par or nominal value, outstanding as of
December 1, 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 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 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.
2
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
HEALTHCARE CAPITAL CORP.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
October 31, July 31,
1997 1997
----------- ---------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ --- $ 1,099
Accounts receivable, net of allowance
for doubtful accounts and contractual
write downs of $393 and $361,
respectively 2,714 2,514
Other receivables 410 314
Inventory 626 425
Prepaid expenses 491 260
-------- --------
Total current assets 4,241 4,612
Property and equipment, net 2,490 2,277
Other assets 189 136
Goodwill and covenants not to compete, net 9,726 9,519
-------- --------
$ 16,646 $ 16,544
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 275 $ ---
Bank loans and short-term notes payable 510 59
Accounts payable and accrued liabilities 2,998 3,395
Convertible notes payable 2,600 2,600
Capital lease obligation, current portion 101 101
Long term debt, current portion 357 357
-------- --------
Total current liabilities 6,841 6,512
Capital lease obligation, non-current portion 280 305
Long term debt, noncurrent portion 722 765
Convertible notes payable --- 127
-------- --------
Total liabilities 7,843 7,709
Shareholders' equity:
Common stock, no par value per share,
unlimited number of shares authorized,
27,259,517 and 27,138,288 shares,
respectively, issued and outstanding 11,259 11,131
Notes receivable from shareholders (124) (124)
Accumulated deficit (2,213) (2,117)
Treasury stock, 28,200 and 19,800 shares,
respectively, at cost (47) (33)
Cummulative translation adjustment (72) (22)
-------- --------
Total shareholders' equity 8,803 8,835
-------- --------
$ 16,646 $ 16,544
======== ========
See accompanying notes to financial statements
3
<PAGE>
HEALTHCARE CAPITAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
Three months ended October 31,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Net revenues $ 5,307 $ 1,268
------------ ------------
Costs and expenses:
Cost of products sold 1,753 492
Clinical expenses 2,244 646
General and administrative expenses 1,112 377
Depreciation and amortization 277 52
------------ ------------
Total costs and expenses 5,386 1,567
------------ ------------
Loss from operations (79) (299)
Other income (expense):
Interest income 9 1
Interest expense (26) ---
------------ ------------
Net loss $ (96) $ (298)
============ ============
Weighted average outstanding shares 22,916 15,152
============ ============
Net loss per share $ -- $ ($0.02)
============ ============
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
HEALTHCARE CAPITAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
Three months
ended October 31,
--------------------------------
1997 1996
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (96) $ (298)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Provision for bad debt expense 28 ---
Depreciation and amortization 277 52
Changes in non-cash working capital:
Accounts receivable (228) (17)
Other receivables (96) ---
Inventory (201) (72)
Prepaid expenses (231) 1
Bank overdraft 275 ---
Accounts payable and accrued liabilities (396) 199
----------- ------------
Net cash used in operating activities (668) (135)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Incorporation and trademark costs --- 3
Purchase of property and equipment (324) (111)
Deferred acquisition costs, net (53) 19
Net cash paid on business acquisitions (372) (616)
----------- ------------
Net cash used in investing activities (749) (705)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayments) of long term debt
and capital lease obligations (69) 59
Deferred financing costs, net --- (22)
Advances of bank loans and
short-term notes payable 451 99
Issuance of common stock for cash, net of costs --- 1,151
Acquisition of treasury stock (14) ---
----------- ------------
Net cash provided by financing activities 368 1,287
----------- ------------
Net increase (decrease) in cash and cash equivalents (1,049) 447
Effect on cash and cash equivalents of changes
in foreign translation rate (50) 14
Cash and cash equivalents at the beginning of the period 1,099 11
----------- ------------
Cash and cash equivalents at the end of the period $ --- $ 472
=========== ============
Required supplemental disclosures:
Interest paid during the period $ 26 $ ---
Non-cash financing activities:
Issuance and assumption of long-term debt $ --- $ 360
Issuance of convertible notes on acquisitions $ --- $ 2,602
Issuance of common stock on acquisitions $ --- $ 2,390
Conversion of convertible note to common stock $ (127) $ ---
Issuance of common stock upon conversion of convertible note $ 127 $ ---
</TABLE>
See accompanying notes to financial statements
5
<PAGE>
HealthCare Capital Corp.
Notes to Consolidated Financial Statements
(Unaudited)
1. Interim Financial Statements
The interim financial statements reflect all adjustments, consisting of
only normal recurring adjustments, which are, in the opinion of management,
necessary for 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.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Three Months Ended October 31, 1997 Compared to Three Months Ended October 31,
1996
Revenues. Total revenues for the three months ended October 31, 1997,
were $5,307,000, representing a 319% increase over revenues of $1,268,000 for
the comparable period in fiscal 1996. The increase was primarily attributable to
the 39 clinics acquired by the Company since October 1, 1996.
Product revenues were $4,601,000 for the three months ended October 31,
1997, up 295% from $1,165,000 for the same period in 1996. Audiological service
revenues of $706,000 represented 13% of total revenues for the three months
ended October 31, 1997, as compared to $103,000 or 8% of total revenues for the
comparable period in 1996. This increase is due to the fact that 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 Canadian clinic policy was to waive the fee if a hearing aid was
purchased.
Gross Profit. Gross profit for the three months ended October 31, 1997,
was $3,554,000 or 67% of revenues, compared to $776,000 or 61% of revenues for
the comparable period in fiscal 1996. The increase in gross profit percentage
was primarily due to higher volume discounts and improved product sales
management.
Operating Expenses. Operating expenses for the three months ended
October 31, 1997, were $3,633,000 representing an increase of 238% over
operating expenses of $1,075,000 for the comparable period in fiscal 1996. This
increase was attributable to the clinics acquired by the Company since October
1, 1996, 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 69% for the three months ended October 31, 1997, from 85%
for the comparable period in 1996. The Company expects that operating expenses
as a percentage of revenues will continue to decrease during the current fiscal
year as the Company acquires new clinics, increasing the revenue base over which
to allocate its fixed general and administrative expenses.
Liquidity and Cash Reserves
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 $177,000 at October 31, 1997. As of October 31, 1997, $7,000 was outstanding
against this line, compared to no advances outstanding as of July 31, 1997.
Advances under the line of credit bear interest at 1% above the Royal Bank of
Canada prime rate. Advances under the revolving line of credit are secured by
all the assets of Sonus-Canada Ltd., the Company's Canadian operating
subsidiary, and personally guaranteed by a shareholder.
7
<PAGE>
The Company's operating subsidiary in the United States, Sonus-USA,
Inc.(`Sonus-USA"), has a $500,000 line of credit from a hearing instrument
manufacturer, all of which was outstanding at October 31, 1997, compared to no
amounts outstanding at July 31, 1997. 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.
On November 21, 1997, the Company executed a definitive Securities
Purchase Agreement with Warburg Pincus Ventures, L.P., a Delaware limited
partnership, for the sale by the Company of 13,333,333 Series A Convertible
Preferred Shares, along with warrants to purchase 10,000,000 common shares at
$2.40 per share, in exchange for $18,000,000 in cash (the "Warburg
Transaction"). Consummation of the Warburg Transaction, which is subject to
various conditions including approval by the holders of the common shares in
accordance with the policies of The Alberta Stock Exchange, is expected to be
completed in late December 1997. The Company believes the Warburg Transaction
will provide it with sufficient capital to fund its operations and planned
acquisitions over the next 12 months.
PART II
OTHER INFORMATION
Item 2. Changes in Securities.
During the fiscal quarter ended October 31, 1997, the Company
issued 100,000 options to purchase common shares of the Company at an option
price of $1.07 to a financial consultant in payment for services rendered. In
addition, the Company granted 100,000 options to purchase common shares at
$1.50 to its investor relations advisor in consideration of services to be
performed. The Company relied on the exemption from registration provided by
Section 4(2) under the Securities Act of 1933 (the "1933 Act") with respect to
the grants of such options.
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 October 31, 1997.
8
<PAGE>
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: December 12, 1997
9
<PAGE>
EXHIBIT INDEX
Exhibit Number Description of Exhibit
- -------------- ----------------------
27 Financial Data Schedule.
10
<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
OPERATIONS FOR THE PERIOD ENDED OCTOBER 31, 1997, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 3-MOS
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<PERIOD-START> AUG-01-1997
<PERIOD-END> OCT-31-1997
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<RECEIVABLES> 3,107
<ALLOWANCES> 393
<INVENTORY> 626
<CURRENT-ASSETS> 4,241
<PP&E> 2,490
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<TOTAL-ASSETS> 16,646
<CURRENT-LIABILITIES> 6,841
<BONDS> 1,002
0
0
<COMMON> 11,259
<OTHER-SE> (2,456)
<TOTAL-LIABILITY-AND-EQUITY> 16,646
<SALES> 5,307
<TOTAL-REVENUES> 5,307
<CGS> 1,753
<TOTAL-COSTS> 3,997
<OTHER-EXPENSES> 1,389
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<NET-INCOME> (96)
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</TABLE>
