SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
Amendment No. 1
FORM 10-KSB/A
(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.
<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
1
<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
2
<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.
3
<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.
4
<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.
5
<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.
6
<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
7
<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.
8
<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.
9
<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.
10
<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.
11
<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.
12
<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
13
<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
===========
14
<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
15
<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
16
<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.
17
<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 $ 839 $ 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>
18
<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
19
<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.
20
<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.
21
<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>
22
<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)
===== ===== ======
23
<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
24
<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.
25
<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.
26
<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.
27
<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.
28
<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.
29
<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.
30
<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.
31
<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.
32
<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
33
<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.
34
<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.
35
<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.
36
<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
37
<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.
38
<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
============= ============
39
<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
============
40
<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.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Amendment No. 1 to its report on Form 10-KSB
for the fiscal year ended July 31, 1997, to be signed on its behalf by the
undersigned, therunto duly authorized on October 30, 1997.
HEALTHCARE CAPITAL CORP.
By /s/ Edwin J. Kawasaki
Edwin J. Kasawaki
Vice President-Finance
42
<PAGE>
