AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 28, 1997
REGISTRATION NO. 333-35449
================================================================================
SECURITIES AND EXCHANGE COMMISSION
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
TRIAD MEDICAL INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 5047
(STATE OR OTHER (PRIMARY STANDARD
JURISDICTION OF INDUSTRIAL 84-1408330
INCORPORATION OR CLASSIFICATION CODE (I.R.S. EMPLOYER
ORGANIZATION) NUMBER) IDENTIFICATION NUMBER)
23161 MILL CREEK DRIVE, SUITE 300
LAGUNA HILLS, CA 92653
PHONE: (714) 770-0292
FAX: (714) 770-0727
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
WILLIAM C. KLINTWORTH, JR.
CHIEF EXECUTIVE OFFICER
TRIAD MEDICAL, INC.
2078 PROSPECTOR AVENUE
PARK CITY, UTAH 84060
PHONE: (801) 645-7200
FAX: (801) 645-9893
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
WITH COPIES TO:
ROBERT G. REEDY JAMES L. LEADER
PORTER & HEDGES, L.L.P. BAKER & BOTTS, L.L.P.
700 LOUISIANA, 35TH FLOOR 3000 ONE SHELL PLAZA
HOUSTON, TEXAS 77002-2764 HOUSTON, TEXAS 77002-4995
PHONE: (713) 226-0600 PHONE: (713) 229-1234
FAX: (713) 226-0274 FAX: (713) 229-1522
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED NOVEMBER 28, 1997
4,000,000 SHARES
TRIAD MEDICAL INC.
COMMON STOCK
ALL THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING OFFERED BY TRIAD
MEDICAL INC. ("TRIAD"). PRIOR TO THIS OFFERING (THIS "OFFERING"), THERE HAS
BEEN NO PUBLIC MARKET FOR THE COMMON STOCK. TRIAD AND THE REPRESENTATIVES OF THE
UNDERWRITERS CURRENTLY ESTIMATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE
BETWEEN $10.00 AND $12.00 PER SHARE. SEE "UNDERWRITING" FOR A DISCUSSION OF
THE FACTORS THEY WILL CONSIDER IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE.
THE COMMON STOCK HAS BEEN APPROVED FOR QUOTATION ON THE NASDAQ NATIONAL MARKET
UNDER THE SYMBOL "TRMD."
SEE "RISK FACTORS" COMMENCING ON PAGE 8 OF THIS PROSPECTUS FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE............................ $ $ $
TOTAL(3)............................. $ $ $
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) SEE "UNDERWRITING" FOR INFORMATION CONCERNING INDEMNIFICATION OF THE
UNDERWRITERS AND OTHER MATTERS.
(2) BEFORE DEDUCTING OFFERING EXPENSES PAYABLE BY TRIAD, ESTIMATED AT
$4,400,000.
(3) TRIAD HAS GRANTED THE UNDERWRITERS A 30-DAY OPTION TO PURCHASE UP TO 600,000
ADDITIONAL SHARES OF COMMON STOCK SOLELY TO COVER OVER-ALLOTMENTS, IF ANY.
IF THE UNDERWRITERS EXERCISE THIS OPTION IN FULL, THE TOTAL PRICE TO PUBLIC,
UNDERWRITING DISCOUNT AND PROCEEDS TO COMPANY WILL BE $ ,
$ AND $ , RESPECTIVELY. SEE "UNDERWRITING."
THE SHARES OF COMMON STOCK ARE OFFERED BY THE SEVERAL UNDERWRITERS NAMED
HEREIN, SUBJECT TO RECEIPT AND ACCEPTANCE BY THEM AND SUBJECT TO THEIR RIGHT TO
REJECT ANY ORDER IN WHOLE OR IN PART. IT IS EXPECTED THAT DELIVERY OF THE
CERTIFICATES REPRESENTING SUCH SHARES WILL BE MADE AGAINST PAYMENT THEREFOR AT
THE OFFICES OF NATIONSBANC MONTGOMERY SECURITIES, INC. ON OR ABOUT
, 1997.
------------------------
NATIONSBANC MONTGOMERY SECURITIES, INC.
SMITH BARNEY INC.
WEDBUSH MORGAN SECURITIES
, 1997
<PAGE>
[GRAPHICS AND RELATED TEXT OMITTED, SEE APPENDIX]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF COMMON STOCK TO COVER
SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
CONCURRENTLY WITH THE CLOSING OF THE OFFERING MADE HEREBY (THIS
"OFFERING"), TRIAD PLANS TO ACQUIRE, IN SEPARATE TRANSACTIONS (COLLECTIVELY,
THE "ACQUISITIONS"), IN EXCHANGE FOR CONSIDERATION INCLUDING SHARES OF ITS
COMMON STOCK, 11 CONTRACT SALES AND DISTRIBUTION COMPANIES (COLLECTIVELY, THE
"FOUNDING COMPANIES"). SEE "THE COMPANY." UNLESS OTHERWISE INDICATED BY THE
CONTEXT, REFERENCES HEREIN TO (I) "TRIAD" MEAN TRIAD MEDICAL INC., (II) THE
"COMPANY" MEAN TRIAD AND THE FOUNDING COMPANIES, AFTER GIVING EFFECT TO THE
ACQUISITIONS, AND (III) "FISCAL 1994," "FISCAL 1995" AND "FISCAL 1996"
MEAN, RESPECTIVELY, THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 WITH
RESPECT TO TRIAD AND SIX FOUNDING COMPANIES, THE FISCAL YEARS ENDED JUNE 30,
1994, 1995 AND 1996 WITH RESPECT TO TWO FOUNDING COMPANIES, THE FISCAL YEARS
ENDED MARCH 31, 1994, 1995 AND 1996, MAY 31, 1994, 1995 AND 1996 AND OCTOBER 31,
1994, 1995 AND 1996 WITH RESPECT TO THREE FOUNDING COMPANIES, RESPECTIVELY.
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN
THIS PROSPECTUS (I) GIVES EFFECT TO THE ACQUISITIONS, (II) ASSUMES THE
UNDERWRITERS DO NOT EXERCISE THEIR OVER-ALLOTMENT OPTION AND (III) GIVES EFFECT
TO A SPLIT OF THE COMMON STOCK IN CONNECTION WITH THIS OFFERING.
BUSINESS
The Company was formed to create a national leader in the contract sales
and distribution of specialty medical products designed for the hospital and
alternate-site health care markets (including sub-acute care facilities, home
care companies and specialty physician groups). The Company contracts with
specialty medical product manufacturers to provide outsourcing of the sales,
marketing, distribution and customer service functions for all or certain of
their product lines, thereby eliminating the manufacturers' need to develop and
maintain their own sales force or rely on a number of independent local and
regional distributors to achieve national coverage. The Company provides a broad
range of specialty medical products across the full continuum of patient care,
including products used in the surgical, anesthesiology / pain management,
critical care, cardiovascular / vascular and infusion therapy markets. It
represents over 180 manufacturers and sells products in all 50 states.
According to the Health Industry Distributor Association, the medical
instrument and supply industry (excluding pharmaceuticals) in the United States
represented an estimated annual market in excess of $30 billion in 1996, of
which the hospital and the alternate-site markets represented approximately $16
billion and $14 billion, respectively. The Company estimates that there are over
1,200 companies engaged in the contract sales and distribution of specialty
medical products in the United States, most of which are small businesses
serving local or regional markets and providing representation for a limited
number of manufacturers and product lines. The Company believes that contract
sales and distribution companies provide manufacturers with the ability to
outsource certain sales and distribution functions and afford them access to an
experienced sales force with established sales channels. Despite the advantages
provided by contract sales and distribution companies, the fragmented network of
such companies is generally not capable of serving multiple manufacturers on a
national basis or satisfying the centralized buying needs of national group
purchasing organizations ("GPOs") and regional integrated delivery networks
("IDNs"). The Company believes that the emergence of a contract sales and
distribution company capable of selling, distributing and servicing a broad
array of specialty medical products nationwide would meet the evolving needs of
both manufacturers and health care providers.
The sale and distribution of specialty medical products require a focused
selling effort by representatives capable of marketing the products' clinical
features and benefits to physicians and other health care professionals and
demonstrating the economic benefits associated with these products to purchasing
departments and operating management of health care providers. To satisfy the
sales and related needs of its represented manufacturers, the Company has over
140 sales representatives, who average in excess of 15 years' medical product
sales experience. Through this sales staff and other support staff the Company
employs at its 21 sales and distribution facilities located throughout the
United States, the Company provides its represented manufacturers and customers
with a variety of value-added services designed to facilitate access to the
marketplace and product procurement on a time-efficient and cost-effective
basis.
3
<PAGE>
These services include product introduction and support, education and training,
equipment maintenance and repair, manufacturer warranty support and product
usage reporting.
The Company's objective is to become the leading national contract sales
and distribution organization focused on specialty medical products. To achieve
this objective, the Company intends to implement an aggressive acquisition
program targeting leading local and regional contract sales and distribution
businesses in order to expand its product representation. The Company also will
seek to achieve certain operating efficiencies and cost savings by reducing
facilities, centralizing certain administrative functions and implementing a
"best practices" operating strategy throughout the Company. Centralizing these
functions will enable the local and regional offices to concentrate their
efforts on sales, customer service, inventory management and distribution. A key
component of the Company's business strategy is to accelerate internal growth in
its existing businesses and subsequently acquired businesses by (i) leveraging
its established manufacturer and customer bases, (ii) cross-selling products
between the alternate-site and the hospital markets, (iii) implementing a "best
practices" sales and marketing strategy, (iv) adding qualified sales
representatives and (v) generating ancillary service revenues. For a discussion
regarding certain risks associated with the implementation of the Company's
acquisition and business strategies, see "Risk Factors" including
" -- Dependence on Acquisitions for Growth," " -- Need for Additional
Financing" and " -- Risks Related to Internal Growth and Profitability
Strategy."
THIS OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered by TRIAD......................... 4,000,000 shares
Common Stock to be outstanding after this
Offering(1)......................................... 9,094,973 shares
Use of Proceeds....................................... To pay the cash portion of the purchase
price for the Founding Companies and to X
repay indebtedness of the Founding
Companies. See "Use of Proceeds."
Nasdaq National Market symbol......................... TRMD
</TABLE>
- ------------
(1) The number of shares estimated to be outstanding on completion of this
Offering consists of (i) 997,758 shares issued to the organizers and
management of TRIAD, (ii) 100,000 shares issued in a private placement that
closed on September 8, 1997 (the "Private Placement"), (iii) 3,997,215
shares to be issued as consideration in the Acquisitions and (iv) the
4,000,000 shares being offered hereby. Such share number does not include
(i) an aggregate of 972,987 shares subject to options granted (or to be
granted prior to the closing of this Offering) under TRIAD's 1997 Incentive
Plan (the "Incentive Plan"), 831,200 of which have an exercise price equal
to the initial public offering price per share and 141,787 of which will
have a weighted average exercise price per share of $5.85, (ii) a warrant to
purchase up to 100,000 shares (the "Equus Warrant") issued by TRIAD to
Equus II Incorporated ("Equus II") in connection with TRIAD's start-up
funding and (iii) a warrant to purchase up to 25,000 shares (the "PENMAN
Warrant") issued by TRIAD to PENMAN Private Equity and Mezzanine Fund, L.P.
("PENMAN") in connection with assisting TRIAD in the acquisition of one of
the Founding Companies. Each of the Equus Warrant and the PENMAN Warrant has
a purchase price per share equal to the initial public offering price. See
"Management -- Option Grants" and "Certain Transactions -- Organization
of TRIAD."
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors."
4
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
TRIAD will acquire the Founding Companies concurrently with and as a
condition to the consummation of this Offering. For financial statement
presentation purposes, Triad Holdings, Inc. ("THI"), one of the Founding
Companies, has been identified as the accounting acquirer. The following summary
of unaudited pro forma financial data presents certain data for the Company, as
adjusted for (i) the effects of the Acquisitions on an historical basis, (ii)
the effects of certain pro forma adjustments to the historical financial
statements and (iii) the consummation of this Offering and the application of
the estimated net proceeds therefrom. See "Selected Historical and Pro Forma
Combined Financial Data" and the Unaudited Pro Forma Combined Financial
Statements and the notes thereto included elsewhere in this Prospectus.
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ---------------------
1996 1996 1997
------------ --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
STATEMENT OF OPERATIONS DATA (1):
Revenues................................ $128,495 $ 96,659 $ 101,113
------------ --------- ----------
Gross profit............................ 40,282 29,814 30,340
Selling expenses(2)..................... 15,986 11,210 11,903
General and administrative
expenses(2)(3)........................ 13,718 10,176 11,209
Depreciation and amortization(4)........ 1,989 1,452 1,965
------------ --------- ----------
Income from operations.................. 8,589 6,976 5,263
Interest income (expense), net(5)....... 106 54 118
Other income (expense), net............. 157 (9) 37
------------ --------- ----------
Income before provision for income
taxes................................. 8,852 7,021 5,418
Provision for income taxes.............. 3,861 3,096 2,361
------------ --------- ----------
Net income.............................. $ 4,991 $ 3,925 $ 3,057
------------ --------- ----------
Net income per share.................... $ 0.54 $ 0.43 $ 0.33
============ ========= ==========
Shares used in computing net income per
share(5).............................. 9,161 9,161 9,161
============ ========= ==========
SEPTEMBER 30, 1997
---------------------------
PRO FORMA
COMBINED AS ADJUSTED(6)
--------- --------------
(IN THOUSANDS)
BALANCE SHEET DATA (1):
Working capital (deficit)............... $ (15,557) $ 19,257
Total assets............................ 82,194 78,647
Total debt, including current portion... 15,539 1,040
Stockholders' equity.................... 17,685 53,792
- ------------
(1) The pro forma combined statement of operations data assume that the
following transactions and events -- (i) the organization of TRIAD and its
issuance of shares of Common Stock and preferred stock; (ii) a split of the
outstanding Common Stock; (iii) the conversion of outstanding TRIAD
preferred stock into Common Stock; (iv) the Acquisitions; and (v) the
closing of this Offering and the application of the estimated net proceeds
therefrom -- were closed on January 1, 1996, and are not necessarily
indicative of the results the Company would have attained had these events
and transactions actually occurred then or of the Company's future results.
The pro forma combined balance sheet data assume the Acquisitions and the
net incurrence of indebtedness by the Company since September 30, 1997
occurred on that date. The pro forma combined financial data (i) are based
on preliminary estimates, available information and certain assumptions that
management deems appropriate and
(FOOTNOTES CONTINUED ON NEXT PAGE)
5
<PAGE>
(ii) should be read in conjunction with the other financial statements and
notes thereto included elsewhere in this Prospectus.
(2) Selling expenses and general and administrative expenses for the nine months
ended September 30, 1997 include costs incurred by THI to (i) increase its
sales force to expand certain marketing efforts and (ii) enhance its
administrative infrastructure to support its expansion efforts.
(3) The pro forma combined statement of operations data include the effect of:
(i) the following reductions in compensation and benefits prospectively
agreed to as part of the purchase agreements by the owners and certain key
employees of the Founding Companies: year ended December 31, 1996, $3.5
million; and the nine months ended September 30, 1996 and 1997, $2.5 million
and $1.5 million, respectively; (ii) the elimination of the $3.7 million
non-cash, non-recurring compensation charge by TRIAD for the nine months
ended September 30, 1997 (net of a $0.2 million charge for recurring salary
charges of management); (iii) distributions by certain Founding Companies of
cash and other assets prior to the closing of the Acquisitions; (iv) the
elimination of nonrecurring tax and other exposure relating to the Sun ESOP:
year ended December 31, 1996, $0.3 million; and the nine months ended
September 30, 1996 and 1997, $0.3 million and $0.3 million, respectively;
and (v) the elimination of a one-time settlement received from vendors for
early extinguishment of supply contract obligations; year ended December 31,
1996, $0.2 million; and nine months ended September 30, 1996 and 1997, $0.2
million and $0.6 million, respectively.
(4) Reflects amortization of the goodwill to be recorded as a result of the
Acquisitions over a 40-year period and computed on the basis described in
Note 5 of Notes to the Unaudited Pro Forma Combined Financial Statements.
(5) Computed on a basis described in Note 5 of Notes to the Unaudited Pro Forma
Combined Financial Statements.
(6) Reflects the closing of this Offering and TRIAD's application of its net
proceeds therefrom. See "Use of Proceeds."
6
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA FOR ACCOUNTING ACQUIRER
TRIAD will acquire the Founding Companies concurrently with and as a
condition to the consummation of this Offering. For financial statement
presentation purposes, THI has been identified as the accounting acquirer. The
following summary historical financial data of THI for the years ended December
31, 1994, 1995 and 1996, and as of December 31, 1995 and 1996, have been derived
from the audited consolidated financial statements of THI included elsewhere in
this Prospectus. The following summary historical financial data of THI as of
December 31, 1994, and as of and for the nine months ended September 30, 1996
and 1997, have been derived from consolidated unaudited financial statements of
THI, which have been prepared on the same basis as the audited financial
statements and, in the opinion of the management of THI, reflect all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of such data.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------------- --------------------
1994 1995 1996 1996 1997
----------- --------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS)
THI STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenues................................ $22,667 $ 29,674 $ 36,258 $ 26,168 $ 36,387
----------- --------- --------- --------- ---------
Gross profit............................ 5,916 7,188 8,766 5,993 9,245
Selling expenses(1)..................... 2,391 2,940 3,396 2,398 3,477
General and administrative
expenses(1)........................... 1,813 2,146 3,017 1,898 3,543
Depreciation and amortization........... 531 561 763 502 1,054
----------- --------- --------- --------- ---------
Income from operations.................. 1,181 1,541 1,590 1,195 1,171
Interest income (expense), net.......... (468) (509) (305) (200) (398)
Other income (expense), net............. (22) 15 (114) (83) (51)
----------- --------- --------- --------- ---------
Income before provision for income
taxes................................. 691 1,047 1,171 912 722
Provision for income taxes.............. 103 420 465 358 276
----------- --------- --------- --------- ---------
Net income (loss)....................... $ 588 $ 627 $ 706 $ 554 $ 446
=========== ========= ========= ========= =========
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
---------------------------------- --------------------
1994 1995 1996 1996 1997
----------- --------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
THI BALANCE SHEET DATA:
Working capital......................... $(1,557) $ (527) $ 5,904 $ 5,340 $ 4,272
Total assets............................ 9,432 10,753 18,062 13,417 23,786
Total debt, including current portion... 3,329 3,185 5,442 939 6,252
Stockholders' equity (deficit).......... (687) (69) 6,547 6,027 7,472
</TABLE>
(1) Selling expenses and general and administrative expenses for the nine months
ended September 30, 1997 include costs incurred by THI to (i) increase its
sales force to expand certain marketing efforts and (ii) enhance its
administrative infrastructure to support its expansion efforts.
7
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, AS
WELL AS THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS
CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF
ANY NUMBER OF FACTORS, INCLUDING THE RISK FACTORS SET FORTH BELOW.
ABSENCE OF COMBINED OPERATING HISTORY; RISKS OF INTEGRATING FOUNDING COMPANIES
AND ACQUIRED BUSINESSES
TRIAD, incorporated in Delaware in April 1997, has conducted no operations
to date other than in connection with this Offering and its pending acquisitions
in separate transactions (the "Acquisitions") of the Founding Companies. See
"The Company." The Founding Companies have operated, and will continue to
operate prior to the closing of the Acquisitions, as separate, independent
businesses, and the Company will use the purchase method of accounting to record
the Acquisitions, except for the acquisition of THI, which will be treated as
the acquirer for accounting purposes. Consequently, the pro forma financial
information herein may not be indicative of the Company's future operating
results and financial condition. The Company will initially rely on the separate
systems of each of the Founding Companies, but the success of the Company will
depend, in part, on the extent to which the Company is able to centralize and
integrate necessary systems and functions, including accounting and financial
reporting systems, among the Founding Companies and such additional businesses
as the Company may acquire. The inability of the Company to successfully
centralize and integrate such systems and functions could have a material
adverse effect on the Company's business, financial condition and results of
operations and adversely affect the Company's implementation of its acquisition
and operating strategies. See "Business -- Operations."
DEPENDENCE ON ACQUISITIONS FOR GROWTH
The Company intends to grow primarily by acquiring contract sales and
distribution businesses that complement its existing operations. Its acquisition
strategy presents risks that, singly or in any combination, could materially
adversely affect the Company's business and financial performance. These risks
include those inherent in assessing the value, strengths, weaknesses, contingent
or other liabilities and potential profitability of the acquisition candidate,
the possibility of the adverse effect on existing operations of the Company from
the diversion of management attention and resources to acquisitions and the
possible loss of acquired customer and supplier bases and key personnel,
including sales representatives. The success of the Company's acquisition
strategy will depend on the extent to which acquisition candidates continue to
be available and whether the Company will be able to acquire, successfully
integrate and profitably manage additional businesses. The Company believes the
contract sales and distribution business for specialty medical products is
subject to rapid consolidation on both a national and regional scale, and
competition for acquisition candidates could materially increase the cost of
acquiring businesses. The Company has identified certain possible acquisition
candidates, but has no binding agreement or letter of intent in effect with
respect to any acquisition (other than the Acquisitions), and the timing, size
and success of the Company's acquisition efforts and the associated capital
commitments cannot be readily predicted. Accordingly, no assurance can be given
the Company's strategy will succeed. For at least the two-year period commencing
on the closing of this Offering, the Company will be required to account for any
acquisition it makes under the purchase method of accounting. Acquisitions
accounted for as purchases may result in substantial annual noncash amortization
charges for goodwill and other intangible assets in the Company's statements of
operations. See "Business -- Business Strategy."
HISTORY OF LOSS OF PRODUCT LINES
The Founding Companies have, from time to time, lost significant product
lines due to, among other factors, manufacturers' decisions to sell the product
lines directly to health care providers, acquisitions of the manufacturers or
their product lines by other entities with existing sales forces or failure of
the Founding Companies to satisfy sales volume or other performance
requirements. For information regarding lost product lines for certain of the
Founding Companies, see the notes to the financial statements of those
8
<PAGE>
companies on pages F-72, F-93 and F-103. The Company's sales and distribution
agreements and agency arrangements are generally for terms of one to three
years, and are terminable if the Company fails to meet negotiated sales volume
or other performance requirements or on prior notice ranging from 30 to 90 days.
The loss of any significant product line, for any reason, could have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance the Company will not lose significant
product lines in the future.
NEED FOR ADDITIONAL FINANCING
Substantially all the net proceeds of this Offering will be used in
connection with the Acquisitions. See "Use of Proceeds." The Company's
acquisition strategy will require substantial additional capital. The Company
currently intends to use cash and shares of Common Stock in making future
acquisitions. Using internally generated cash or debt to complete acquisitions
could substantially limit the Company's operational and financial flexibility.
The extent to which the Company will be able or willing to use Common Stock for
this purpose will depend on its market value from time to time and the
willingness of potential sellers to accept it as full or partial payment. Using
Common Stock for this purpose may result in a significant dilution to then
existing stockholders. To the extent the Company is unable to use Common Stock
to make future acquisitions, its ability to grow may be limited by the extent to
which it is able to raise capital for this purpose, as well as to expand
existing operations, through debt or additional equity financings. No assurance
can be given the Company will be able to obtain the necessary capital to finance
a successful acquisition program and its other cash needs. If the Company is
unable to obtain additional capital on acceptable terms, it may be required to
reduce the scope of its presently anticipated expansion. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Pro
Forma Combined -- Liquidity and Capital Resources."
The Company has recently received a commitment letter from First National
Bank of Chicago ("First Chicago") to provide the Company with a $40.0 million
credit facility which may be used for acquisitions, working capital and other
general corporate purposes. The Company expects that such facility will require
compliance with various affirmative and negative covenants (including
maintenance of certain financial ratios) which could limit the Company's
operational and financial flexibility. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Pro Forma
Combined -- Liquidity and Capital Resources."
RISKS RELATED TO INTERNAL GROWTH AND PROFITABILITY STRATEGY
Key elements of the Company's business strategy are to improve the
profitability and increase the revenues of the Founding Companies and
subsequently acquired businesses. The Company's ability to increase the revenues
of the Founding Companies and any subsequently acquired businesses will be
affected by various factors, including the demand for the Company's products and
the Company's ability to (i) add product lines and retain existing product
lines, (ii) increase its customer base and (iii) attract and retain qualified
management, sales representatives and service personnel. Many of these factors
are beyond the control of the Company, and there can be no assurance the
Company's internal growth and profitability strategy will be successful.
On a pro forma combined basis, the Company's inventories were recorded at
approximately $16.0 million at September 30, 1997. Because these inventories
include many high-value products, the Company's profitability depends in part on
the extent to which it is able to minimize the risks of product obsolescence and
price reductions through controlling its inventory levels, and no assurance can
be given the Company's inventory control efforts will be successful. See
"Business -- Operations."
COMPETITION
The Company competes with manufacturers that sell their medical products
directly to health care providers and, to a lesser extent, with national medical
products distributors. Some of these manufacturers and national distributors are
substantially larger and have substantially greater financial and other
resources than the Company to finance their marketing strategies and other
internal growth opportunities. The
9
<PAGE>
Company also faces competition from many regional and local distributors in its
niche markets, which are generally relatively small local or regional
owner-operated businesses. Barriers to entry for distribution in the specialty
medical products market are relatively low, and the risk of new competitors
entering the market, particularly in local and regional areas, is high. In
response to competitive pressures from any of its current or future competitors,
the Company may be required to lower selling prices in order to maintain or
increase market share, and such measures could adversely affect the Company's
operating results. See "Business -- Competition."
DEPENDENCE ON INDUSTRY SPENDING
The prospects of the Company depend on the level of expenditures for
specialty medical products by health care providers, particularly hospitals,
alternate-site facilities and other institutions. In recent years,
cost-containment and competitive pressures existing in the health care industry,
together with government-imposed limits on reimbursement of hospitals and other
health care providers, have significantly impacted spending budgets in certain
markets in the specialty medical products industry. Health care providers and
private third-party reimbursement plans are also exploring more cost-effective
methods of delivering health care and developing increasingly sophisticated
methods of controlling health care costs through redesign of benefits. Decreases
in industry spending for specialty medical products could adversely affect the
Company's future sales and operating results.
HEALTH CARE REFORM; MARKET CONDITIONS
Political, economic and regulatory influences are causing fundamental
changes in the health care industry in the United States. Changes in the law,
new interpretations of existing laws or changes in payment methodologies or
amounts may have a dramatic effect on the relative costs associated with
providing health care and the amount of reimbursement provided by government and
other third-party payors. Both the President and members of Congress have
expressed significant interest in controlling the escalation of health care
expenditures and using health care reimbursement policies to help control the
federal deficit. In recent years, there have been numerous federal and state
legislative initiatives for comprehensive reforms affecting the payment for and
availability of health care services. Due to the substantial uncertainties
regarding the ultimate features of reform initiatives and their adoption and
implementation, the Company cannot predict which, if any, reform proposals will
be adopted, when they may be adopted or what impact they may have on the Company
or its suppliers or customers. There can be no assurance the adoption of reform
proposals will not have a material adverse effect on the Company's business,
financial condition or operating results. In addition, the announcement of
reform proposals and the investment community's reaction to those proposals, as
well as announcements by competitors and third-party payors of their strategies
to respond to any such proposal, could produce volatility in the trading and
market price of the Common Stock.
The primary trend in the United States health care industry is toward cost
containment. In recent years, payors have been able to exercise greater
influence through managed treatment and hospitalization patterns, including a
shift from reimbursement on a cost basis to per capita limits for patient
treatment. Hospitals have been severely impacted by the resulting cost
restraints. The increasing use of managed care, centralized purchasing
decisions, consolidations among hospitals and hospital groups and integration of
health care providers are continuing to affect purchasing patterns in the health
care system. The purchasing functions of hospitals and other health care
providers are increasingly being consolidated into group purchasing
organizations, regional integrated delivery systems and similar organizations
and purchasing decisions are becoming more economically focused, with decision
makers taking into account whether a product reduces the cost of treatment
and/or attracts additional patients to a hospital. All these factors have
contributed to reductions in prices for specialty medical products, an overall
reduction in the volume of purchasing by health care providers and, in the near
term, greater emphasis on reducing costs associated with more advanced medical
products and procedures. There can be no assurance the Company will not be
adversely affected by cost containment measures.
10
<PAGE>
DEPENDENCE ON KEY PERSONNEL
The Company's operations depend on the continuing efforts of its executive
officers and the senior management and sales representatives of the Founding
Companies, and the Company likely will depend on the senior management and sales
representatives of any significant businesses it acquires in the future. The
business or prospects of the Company could be affected adversely if any of these
persons does not continue his or her employment with the Company and the Company
is unable to attract and retain qualified replacements. The success of the
Company's growth strategy, as well as the Company's current operations, will
depend on the extent to which the Company is able to retain, recruit and train
qualified sales and service representatives who meet the Company's standards of
professionalism and service to its customers. See "Business -- Sales and
Marketing" and "-- Operations."
RELIANCE ON EFFICIENCY OF DISTRIBUTION AND THIRD PARTIES
The Company believes its financial performance depends in part on the
extent to which it is able to provide prompt, accurate and complete service to
its customers on a timely and competitive basis. Any failure of either its
computer operating system or its telephone system could adversely affect its
ability to receive and process customer orders and ship products on a timely
basis. Strikes or other service interruptions affecting Federal Express
Corporation, United Parcel Service of America, Inc. or other common carriers the
Company uses to ship its products also could impair the Company's ability to
deliver products on a timely and cost-effective basis. Any such disruption in
its day-to-day operations or material increases in its costs of procuring and
delivering products could materially adversely affect the Company's results of
operations from time to time. See "Business -- Operations."
CUSTOMER CREDIT RISKS
Under its sales and distribution agreements, the Company generally pays
manufacturers directly for the products it sells. The Company normally carries
its customers' accounts receivable and assumes the related risk of non-payment
associated with its sales. No assurance can be given that the controls the
Company has in place to avoid extensions of additional credit to delinquent
customers will be sufficient to prevent significant losses in the future as a
result of its customers' non-payment.
PROCEEDS OF OFFERING PAYABLE TO AFFILIATES AND ASSOCIATES
TRIAD will use its net proceeds from this Offering: (i) to pay the cash
portions of the purchase prices it will pay for the Founding Companies
(approximately $22.2 million); (ii) to repay outstanding indebtedness of the
Founding Companies (approximately $13.5 million); and (iii) for general
corporate purposes after this Offering closes (approximately $0.8 million). See
"Use of Proceeds." The cash payable to stockholders of the Founding Companies
will include approximately $14.6 million payable to persons who or which will
become directors or executive officers of TRIAD or beneficial owners of 5% or
more of the outstanding Common Stock. This Offering will enable TRIAD to repay
Equus II $2.2 million Equus II has advanced to pay the expenses of this Offering
and will benefit the existing stockholders of TRIAD and the Founding Companies
by creating a public market for the Common Stock. For a more detailed discussion
of the use of proceeds of this Offering and the benefits to be received by
persons who or which are or will become directors or executive officers of the
Company or beneficial holders of 5% or more of the Common Stock on consummation
of this Offering and the Acquisitions, see "Use of Proceeds" and "Certain
Transactions -- Acquisitions Involving Certain Officers, Directors and
Stockholders."
GOVERNMENT REGULATION
The Company and its customers and suppliers are subject to extensive
federal and state regulation in the United States, and the Company cannot
predict the extent to which future legislative and regulatory developments
concerning their practices and products or the health care industry may affect
the Company. Federal and state laws and regulations govern or influence the
testing, manufacture, safety, labeling, storage, recordkeeping, marketing and
distributing of specialty medical products. In connection with its limited
manufacturing operations, the Company is required to obtain the approval of
federal and state
11
<PAGE>
governmental agencies, including the Food and Drug Administration, prior to
manufacturing, marketing and distributing certain products. Further, the
Company's facilities and operations are subject to reporting to, and review and
inspection by, federal, state and local governmental entities. See
"Business -- Government Regulation."
POTENTIAL FOR PRODUCT LIABILITY CLAIMS AND INSURANCE
The manufacture, distribution, sale and repair of medical products involves
the risk of product liability claims and adverse publicity. The Company is
primarily a seller and distributor of products manufactured by third parties
from which it has certain rights to indemnification from product liability
claims, but does manufacture a limited number of product lines and provide
repair and maintenance services with respect to certain product lines and
intends to pursue ownership in additional product lines for which rights to
indemnification will be limited or not available. The Company will maintain
product liability insurance coverage in amounts it considers adequate. However,
there can be no assurance that claims outside of or exceeding its insurance
coverage will not be made, that the Company will be able to continue to obtain
insurance coverage at rates it considers reasonable or that the Company will be
successful in obtaining indemnification from its suppliers. See
"Business -- Litigation and Insurance."
SALES TAX CONSIDERATIONS
Various states are increasingly seeking to impose sales or use taxes on
interstate sales made into their state by out-of-state companies. Complex legal
issues arise in these areas, relating to, among other things, the required nexus
of a business with a particular state which may permit the state to require a
business to collect such taxes. There can be no assurance that the Company's
financial condition or results of its operations will not be adversely effected
by actions taken by state tax authorities.
EXTENT OF PROTECTION OF PROPRIETARY RIGHTS
The Company relies in part on trademark, service mark, trade secret, unfair
competition and copyright laws to protect its intellectual property rights.
There can be no assurance that the actions that have been taken by the Company
will be adequate to protect its intellectual property rights from
misappropriation by others, that the Company's proprietary information will not
become known to competitors, that others will not independently develop
substantially equivalent or better intellectual properties that do not infringe
on the Company's intellectual property rights or that others will not assert
rights in, and ownership of, proprietary rights claimed by the Company.
Furthermore, the Company's rights to its "TRIAD" common law service mark may
be limited in market areas where a similar trademark or service mark may already
be in use.
SIGNIFICANT INTANGIBLE ASSETS
As a result of the Acquisitions, goodwill accounts for a material portion
of the Company's total assets. On a pro forma combined basis, goodwill was
recorded at approximately $28.2 million at September 30, 1997, representing
approximately 35.9% of the Company's total assets. The Company's goodwill will
be amortized over a 40-year period resulting in annual noncash amortization
charges against net income of approximately $0.7 million. The Company may record
additional goodwill and related amortization charges associated with the
implementation of its acquisition strategy. See "-- Dependence on Acquisitions
for Growth."
CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS
On closing of the Acquisitions and this Offering, the former owners of the
Founding Companies, TRIAD's principal venture capital financing source (Equus
II) and the executive officers of TRIAD will beneficially own in the aggregate
approximately 56.3% of the outstanding Common Stock. If these persons were to
act in concert, they would be able to exercise control over the Company's
affairs, including the election of the entire Board of Directors and (subject to
Section 203 of the Delaware General Corporation Law (the "DGCL")) any matter
submitted to a vote of stockholders. See "Principal Stockholders."
12
<PAGE>
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
On closing of the Acquisitions and this Offering, 9,094,973 shares of
Common Stock will be outstanding. The 4,000,000 shares sold in this Offering
(other than shares purchased by affiliates of the Company) will be freely
tradable. The remaining shares outstanding may be resold publicly only following
their effective registration under the Securities Act of 1933, as amended (the
"Securities Act"), or pursuant to an available exemption from the registration
requirements of that Act, such as provided by Securities Act Rule 144
promulgated by the Securities and Exchange Commission (the "SEC"). Under Rule
144, all those shares will be eligible for Rule 144 sales, subject to certain
volume limitations and other requirements, on the day following the first
anniversary of the date this Offering closes. The holders of a substantial
number of those remaining shares have certain registration rights granted by
TRIAD in connection with the Acquisitions, subject to the lockup period
described below.
On closing of this Offering, TRIAD will have options and warrants
outstanding to purchase up to a total of 1,097,987 shares of Common Stock, of
which options to purchase 41,639 shares and warrants to purchase 125,000 shares
will be exercisable immediately after the closing. TRIAD intends to register all
the shares subject to options granted under the Company's 1997 Incentive Plan
(the "Incentive Plan") under the Securities Act for public resale.
TRIAD and its directors, executive officers and current stockholders
(including Equus II) and all persons who acquire shares of Common Stock in
connection with the Acquisitions have agreed not to offer, sell or otherwise
dispose of any shares for a period of two years following the date of this
Prospectus without the prior written consent of NationsBanc Montgomery
Securities, Inc., except that TRIAD may issue, subject to certain conditions,
Common Stock in connection with acquisitions, pursuant to awards under the
Incentive Plan (see "Management -- Incentive Plan") and pursuant to the
exercise of warrants outstanding as of the closing of this Offering.
TRIAD may register additional shares of Common Stock under the Securities
Act in the future for its use in connection with future acquisitions. Pursuant
to Securities Act Rule 145, the volume limitations and certain other
requirements of Rule 144 would apply to resales of these shares by affiliates of
the businesses the Company acquires for a period of one year from the date of
their acquisition, but otherwise these shares would be freely tradable by
persons not affiliated with TRIAD unless TRIAD contractually restricts their
resale.
Availability for sale, or sale, of the shares of Common Stock eligible for
future sale could adversely affect the market price of the Common Stock
prevailing from time to time. See "Shares Eligible for Future Sale."
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering, no public market for the Common Stock has existed,
and the initial public offering price, which TRIAD and the representatives of
the Underwriters will negotiate, may not be indicative of the price at which the
Common Stock will trade after this Offering. See "Underwriting" for the
factors they will consider in determining the initial public offering price. The
Common Stock has been approved for quotation on the Nasdaq National Market, but
no assurance can be given an active trading market for the Common Stock will
develop or, if developed, will continue after this Offering. The market price of
the Common Stock after this Offering may be subject to significant fluctuations
from time to time in response to numerous factors, including variations in the
reported financial results of the Company and changing conditions in the economy
in general or in the Company's industry in particular. In addition, the stock
markets experience significant price and volume volatility from time to time
which may affect the market price of the Common Stock for reasons unrelated to
the Company's performance.
IMMEDIATE, SUBSTANTIAL DILUTION
Purchasers of Common Stock in this Offering (i) will experience immediate,
substantial dilution in the net tangible book value of their stock of $8.19 per
share and (ii) may experience further dilution in that value from issuances of
shares of Common Stock in the future. See "Dilution."
13
<PAGE>
PREFERRED STOCK; POTENTIAL ANTI-TAKEOVER EFFECTS
TRIAD's Certificate of Incorporation, as amended (the "Charter"),
authorizes the issuance, without stockholder approval, of one or more series of
preferred stock having such preferences, powers and relative, participating,
optional and other rights (including preferences over the Common Stock
respecting dividends and distributions and voting rights) as the board of
directors of TRIAD (the "Board of Directors") may determine. See "Description
of Capital Stock -- Preferred Stock."
Certain provisions of the Charter, TRIAD's Bylaws and the DGCL may delay,
discourage, inhibit, prevent or render more difficult an attempt to obtain
control of the Company, whether by means of a tender offer, business
combination, proxy contest or otherwise. These provisions include the charter
authorization of "blank check" preferred stock, classification of the board of
directors, a limitation on the removal of directors only for cause, and then
only on approval of holders of two-thirds of the outstanding voting stock, a
restriction on the ability of stockholders to take actions by written consent
and a DGCL restriction on business combinations with certain interested parties.
See "Description of Capital Stock."
14
<PAGE>
THE COMPANY
TRIAD: TRIAD was founded in April 1997 to create a leading national
contract sales and distribution company providing specialty medical products to
the hospital and alternate-site health care markets (including sub-acute care
facilities, home care companies and specialty physician groups). Concurrently
with and as a condition to the closing of this Offering, TRIAD will acquire the
11 Founding Companies. For a description of the transactions pursuant to which
these businesses will be acquired and the consideration to be paid by TRIAD for
each of them, see "-- Summary of Terms of the Acquisitions" and "Certain
Transactions -- Organization of TRIAD."
FOUNDING COMPANIES: Each of the Founding Companies is engaged in the
contract sales and distribution of specialty medical products. The Founding
Companies are more fully described below.
THI: Triad Holdings, Inc. (together with its subsidiaries, "THI"), the
successor to a business founded in 1981, maintains its headquarters in Laguna
Hills, California. It represents over 100 manufacturers with product coverage
principally in the infusion therapy market. THI sells its products principally
to alternate-site health care providers throughout the United States from its
nine distribution centers located in Arizona, California, Florida, Georgia,
Illinois, Minnesota, New York and Texas. THI, through its predecessor, has sold
products to the alternate-site market since 1981. During fiscal 1996, THI had
consolidated revenues of approximately $36.3 million. On October 4, 1996, THI
acquired the assets and assumed certain liabilities of PCI Medical, Inc.
("PCI"). Combined pro forma revenues for THI and PCI for fiscal 1996 were
approximately $42.3 million.
HTD: Healthcare Technology Delivery, Inc. (together with its subsidiaries,
"HTD") is the successor to a business founded in 1977 and is headquartered in
Bessemer, Alabama. It represents over 10 manufacturers with product coverage in
the surgical, anesthesiology, critical care and cardiovascular/vascular markets.
HTD sells its products primarily to hospitals in the 10-state territory of
Alabama, Florida, Georgia, Louisiana, Mississippi, Oklahoma, North Carolina,
South Carolina, Tennessee and Texas. HTD, through its predecessor, has sold
products to the hospital market since 1977. Following its March 1, 1997
acquisition of Medical Companies Alliance, Inc. ("Medical Alliance"), HTD also
sells a proprietary product line used in connection with the anastomosis of
blood vessels. For information concerning the formation of HTD, see "Certain
Transactions -- HTD." During fiscal 1996, HTD had consolidated revenues of
approximately $16.5 million.
SUN: Sun Medical, Inc. ("Sun") was founded in 1978 and maintains its
headquarters in Arlington, Texas. It represents over 17 manufacturers with
product coverage in the surgical, pain management, maternal child care, plastic
surgery, dermatology and hospital software information systems markets. Sun
sells its products primarily to hospitals in the five-state territory of
Arizona, Arkansas, New Mexico, Oklahoma and Texas. Sun also has a proprietary
product line of smoke evacuation systems used in minimally invasive surgical
procedures. During fiscal 1996, Sun had revenues of approximately $13.0 million.
CMS: Custom Medical Specialties, Inc. ("CMS") was founded in 1989 and
maintains its headquarters in Indianapolis, Indiana. It represents over 10
manufacturers with product coverage in the surgical, anesthesiology, critical
care, laboratory, long-term care and infection control markets. CMS sells its
products principally to hospitals in the two-state territory of Indiana and
Kentucky. During fiscal 1996, CMS had revenues of approximately $9.6 million.
KENTEC: Kentec Medical, Inc. ("Kentec") was founded in 1970 and
maintains its headquarters in Irvine, California. It represents over 16
manufacturers with product coverage in the surgical, critical care, vascular and
respiratory markets. Kentec sells its products principally to hospitals in the
four-state territory of Arizona, California, Nevada and New Mexico. It also
distributes private label disposable perinatal products manufactured under the
Kentec name. During the fiscal year ended June 30, 1997, Kentec had revenues of
approximately $13.6 million.
PRODUCTS FOR SURGERY: Products for Surgery, Inc. (together with its
subsidiaries, "Products for Surgery") was founded in 1979 and maintains its
headquarters in Forest Hills, Texas. It represents over 10
15
<PAGE>
manufacturers with product coverage in the general surgical, peripheral
endoscopy and cardiovascular markets. Products for Surgery sells its products
primarily to hospitals in the five-state territory of Arizona, Nevada, New
Mexico, Oklahoma and Texas. During the fiscal year ended June 30, 1997, Products
for Surgery had consolidated revenues of approximately $7.8 million.
MEGATECH: MegaTech Medical, Inc. ("MegaTech") was founded in 1976 and
maintains its headquarters in Baltimore, Maryland. It represents over 20
manufacturers with product coverage in the surgical and critical care markets.
MegaTech sells its products principally to hospitals in the 12-state territory
of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New
Jersey, New York (other than New York City), Pennsylvania, Rhode Island, Vermont
and Virginia and in Washington D.C. During fiscal 1996, MegaTech had revenues of
approximately $6.8 million.
OMNI MEDICAL: Omni Medical, Inc. ("Omni Medical") was founded in 1986
and maintains its headquarters in Redmond, Washington. It represents over eight
manufacturers with product coverage in the surgical, anesthesiology and critical
care markets. Omni Medical sells its products primarily to hospitals in the
eight-state territory of Alaska, California, Hawaii, Idaho, Montana, Nevada,
Oregon and Washington. During fiscal 1996, Omni Medical had revenues of
approximately $6.1 million.
NEW ENGLAND SPECIALTIES: New England Medical Specialties, Inc. ("New
England Specialties") was founded in 1983 and maintains its headquarters in
Guildford, Connecticut. It represents over nine manufacturers with product
coverage in the surgical, critical care and home care markets. New England
Specialties sells its products primarily to hospitals in the six-state territory
of Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont.
During fiscal 1996, it had revenues of approximately $4.9 million.
PROFESSIONAL EQUIPMENT: Professional Equipment Co., Inc. ("Professional
Equipment") was founded in 1979 and shares its headquarters with New England
Specialties in Guildford, Connecticut. It represents over 10 manufacturers with
product coverage in the medical imaging equipment and radiological supplies and
accessories markets. Professional Equipment sells its products principally to
hospitals in the three-state territory of Connecticut, Massachusetts and New
York. During fiscal 1996, Professional Equipment had revenues of approximately
$3.1 million.
WILSON: Wilson Medical Specialties, Inc. ("Wilson") was founded in 1986
and maintains its headquarters in Bellevue, Washington. It represents over 10
manufacturers with product coverage in the surgical and critical care markets.
Wilson sells its products principally to hospitals in the four-state territory
of Idaho, Montana, Oregon and Washington. During the fiscal year ended May 31,
1997, Wilson had revenues of approximately $3.1 million.
SUMMARY OF TERMS OF THE ACQUISITIONS: Subject to certain adjustments
described below, the aggregate consideration TRIAD will pay to acquire the
Founding Companies consists of (i) approximately $22.2 million in cash, (ii)
3,997,215 shares of Common Stock and (iii) options to purchase 141,787 shares of
Common Stock (to be issued in connection with the THI acquisition), which
options will be in the money at the closing of this Offering in the aggregate
amount of approximately $0.7 million.
The Company will also assume all the indebtedness of the Founding Companies
(estimated to be approximately $13.5 million as of the closing of this Offering)
and then repay substantially all such indebtedness. TRIAD will also repay to
Equus II funds advanced to TRIAD to pay expenses of this Offering (estimated to
be approximately $2.2 million as of the closing of this Offering). Prior to the
closing of the Acquisitions, CMS and MegaTech, each of which is an S
corporation, are expected to distribute cash to their respective stockholders in
amounts equal to the balance of their respective accumulated adjustment accounts
("AAA accounts") prior to the closing of the Acquisitions (approximately $3.1
million as of September 30, 1997). An AAA account generally represents
undistributed earnings of an S corporation on which taxes have been or will be
paid by its stockholders, and the Company expects that CMS and MegaTech will
borrow approximately $1.8 million to fund their AAA account distributions. The
estimated $13.5 million of indebtedness of the Founding Companies which will be
repaid on the closing of this Offering will include these borrowings and
borrowings made by Omni Medical prior to September 30, 1997
16
<PAGE>
to fund its AAA account distributions. Prior to the closing of the Acquisitions,
certain Founding Companies will make other distributions to their stockholders
of certain assets and related liabilities with an aggregate net book value of
approximately $0.3 million.
The options to be issued in the THI acquisition will replace options to
purchase shares of THI common stock currently held by THI employees. The
aggregate purchase price for THI which would have otherwise been payable has
been reduced by $1.2 million as a result of the grant of these replacement
options.
Sun has identified potential violations of the Internal Revenue Code of
1986 and the Employee Retirement Income Security Act of 1974 ("ERISA") with
respect to Sun's Employee Stock Ownership Plan (the "Sun ESOP"), Sun's sole
stockholder. Sun has voluntarily notified the Internal Revenue Service ("IRS")
regarding these potential violations and will seek appropriate remedial action
under the oversight of the IRS and, if appropriate, other governmental entities.
TRIAD will deposit a portion of the purchase price payable for Sun ($1.5 million
in cash and 35,715 shares of Common Stock) in an escrow account pending
resolution of the Sun ESOP compliance issues, and the escrowed cash and shares
will be used to the extent necessary to pay any taxes or other amounts and
professional fees resulting from or attributable to that resolution. The
remaining balance in the escrow account, if any, will be delivered to the Sun
ESOP.
The consideration being paid by TRIAD for each Founding Company other than
HTD was determined by arm's-length negotiations between TRIAD and a
representative of that Founding Company. The consideration being paid by TRIAD
for HTD was determined using generally the same valuation method TRIAD used to
negotiate the consideration being paid to the stockholders of the other Founding
Companies. See "Certain Transactions."
The closing of each Acquisition is subject to customary conditions. These
conditions include, among others: the accuracy on the closing date of the
Acquisitions of the representations and warranties made by the Founding
Companies, their principal stockholders and TRIAD; the performance of each of
their respective covenants included in the agreements relating to the
Acquisitions; and the nonexistence of a material adverse change in the results
of operations, financial condition or business of each Founding Company.
Any Founding Company's acquisition agreement may be terminated, under
certain circumstances, prior to the closing of this Offering: (i) by the mutual
consent of the boards of directors of TRIAD and the Founding Company; (ii) by
the Founding Company, its stockholders or TRIAD if this Offering and the
acquisition of that Founding Company are not closed by January 31, 1998; (iii)
by TRIAD if the schedules to the acquisition agreement are amended to reflect a
material adverse change in that Founding Company; or (iv) by the Founding
Company, its stockholders or TRIAD if a material breach or default under the
agreement by one party occurs and is not waived by the other party.
No assurance can be given the conditions to the closing of all the
Acquisitions will be satisfied or waived or that each of the Acquisitions will
close. For information regarding the employment agreements to be entered into by
certain key officers of the Founding Companies, see "Management -- Employment
Agreements."
TRIAD is a Delaware corporation. Its executive offices are located at 23161
Mill Creek Drive, Suite 300, Laguna Hills, California 92653, and its telephone
number at that address is (714) 770-0292.
17
<PAGE>
USE OF PROCEEDS
The net proceeds to TRIAD from the sale of the shares of Common Stock
offered hereby, after deducting the underwriting discount and estimated offering
expenses payable by TRIAD (including the repayment of $2.2 million of advances
by Equus II to fund a portion of the offering expenses), are estimated to be
approximately $36.5 million (approximately $42.7 million if the Underwriters
exercise their over-allotment option in full), assuming an initial public
offering price of $11.00 per share (the midpoint of the estimated initial public
offering price range). Of those net proceeds, approximately $22.2 million will
be used to pay the cash portion of the purchase prices for the Acquisitions and
approximately $13.5 million will be used concurrently for the repayment of
certain outstanding indebtedness of the Founding Companies (estimated as of the
closing of this Offering and excluding the repayment of the $2.2 million of
advances by Equus II referred to above). The approximately $0.8 million of
remaining net proceeds, together with available cash balances, will be available
to meet the Company's cash requirements following closing of the Acquisitions
and this Offering. See "The Company -- Summary of Terms of the Acquisitions"
and "Certain Transactions -- Organization of TRIAD."
The indebtedness to be repaid from the proceeds of this Offering (some of
which has been guaranteed by stockholders of the Founding Companies) bears
interest at rates ranging from 5.5% to 12.0% per annum. Such indebtedness would
otherwise mature at various dates through December 2001. For information as to
the amount, interest rates and maturity dates of such indebtedness which is
attributable to each of the Founding Companies, see "Certain
Transactions -- Organization of TRIAD" and notes to the financial statements of
certain of those companies on pages F-18, F-30, F-31, F-45, F-58, F-71, F-72,
F-91, F-102 and F-111.
DIVIDEND POLICY
It is the Company's current intention to retain earnings to finance the
expansion of its business. Any future dividends will be at the discretion of the
board of directors after taking into account various factors, including, among
others, the Company's financial condition, results of operations, cash flows
from operations, current and anticipated cash needs and expansion plans, the
income tax laws then in effect, the requirements of Delaware law, the
restrictions imposed by the New Credit Facility and any restrictions that may be
imposed by the Company's future credit facilities. The Company expects that the
New Credit Facility will require compliance with various loan covenants,
including restrictions on the payment of dividends. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Pro
Forma Combined -- Liquidity and Capital Resources."
18
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and current maturities
of long-term obligations and capitalization as of September 30, 1997: (i) of the
Company on a pro forma combined basis to give effect to the Acquisitions, and
the net incurrence of indebtedness by the Company since September 30, 1997; and
(ii) of the Company, on that pro forma combined basis as adjusted to give effect
to this Offering and the application of the estimated net proceeds therefrom.
See "Use of Proceeds" and Unaudited Pro Forma Combined Financial Statements
and the related notes thereto included elsewhere in this Prospectus.
SEPTEMBER 30, 1997
--------------------------
PRO FORMA
COMBINED AS ADJUSTED
----------- -----------
(IN THOUSANDS)
Short-term debt and current maturities
of long-term obligations(1)........... $31,597 $ 560
=========== ===========
Long-term obligations, less current
maturities............................ $ 6,162 $ 480
----------- -----------
Stockholders' equity:
Common Stock: $.001 par value
20,000,000 shares authorized;
5,094,973 shares issued and
outstanding pro forma; and
9,094,973 shares issued and
outstanding, as adjusted(1)...... 5 9
Warrant to purchase common stock... 500 500
Additional paid-in capital......... 16,321 52,424
Retained earnings.................. 859 859
----------- -----------
Total stockholders' equity.... 17,685 53,792
----------- -----------
Total capitalization....... $23,847 $54,272
=========== ===========
- ------------
(1) The pro forma combined balance includes $22.2 million of cash consideration
payable for the Founding Companies.
(2) Excludes: (i) an aggregate of 972,987 shares subject to options granted (or
to be granted prior to the closing of this Offering) pursuant to the
Incentive Plan, 831,200 of which will have an exercise price equal to the
initial public offering price per share and 141,787 of which will have a
weighted average exercise price per share of $5.85; (ii) 100,000 shares
issuable pursuant to the Equus Warrant; and (iii) 25,000 shares issuable
pursuant to the PENMAN Warrant. See "Management -- Incentive Plan" and
"Certain Transactions -- Organization of TRIAD."
19
<PAGE>
DILUTION
The deficit in pro forma combined net tangible book value of the Company as
of September 30, 1997 was approximately $10.5 million, or approximately $2.07
per share, after giving effect to the Acquisitions and the net incurrence of
indebtedness by the Company since September 30, 1997. The deficit in pro forma
net tangible book value per share represents the amount by which the Company's
pro forma total liabilities exceed the Company's pro forma net tangible assets
as of September 30, 1997, divided by the number of shares to be outstanding
after giving effect to the Acquisitions. After giving effect to the sale of the
4,000,000 shares offered hereby and deducting the estimated underwriting
discount and estimated offering expenses payable by TRIAD, the Company's pro
forma net tangible book value as of September 30, 1997 would have been
approximately $25.6 million, or approximately $2.81 per share, based on an
assumed initial public offering price of $11.00 per share (the midpoint of the
estimated initial public offering price range). This represents an immediate
increase in pro forma net tangible book value of approximately $4.88 per share
to existing stockholders and an immediate dilution of approximately $8.19 per
share to new investors purchasing shares in this Offering. The following table
illustrates this per share pro forma dilution:
Initial public offering price per
share................................. $ 11.00
Pro forma net tangible book value
(deficit) per share before this
Offering......................... $ (2.07)
Increase in pro forma tangible
value attributable to new
investors........................ 4.88
---------
Pro forma net tangible book value per
share after this Offering............. 2.81
---------
Dilution per share to new investors..... $ 8.19
=========
The following table sets forth, on a pro forma basis to give effect to the
Acquisitions and the closing of this Offering and the application of the
estimated net proceeds therefrom as of September 30, 1997, the number of shares
of Common Stock purchased from TRIAD, the total consideration paid to TRIAD and
the average price per share paid to TRIAD by existing stockholders (including
persons acquiring Common Stock in the Acquisitions) and the new investors
purchasing shares from TRIAD in this Offering (before deducting the underwriting
discount and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION(1) AVERAGE
---------------------- -------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- --------------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 5,094,973 56.0% $ (10,524,185) (31.4)% $ (2.07)
New investors................. 4,000,000 44.0 44,000,000 131.4 11.00
----------- ------- --------------- -------
Total.................... 9,094,973 100.0% $ 33,475,815 100.0%
=========== ======= =============== =======
</TABLE>
- ------------
(1) Total consideration paid by existing stockholders represents the pro forma
stockholders' equity of the Company less pro forma goodwill before giving
effect to the post-merger adjustments set forth on the Unaudited Pro Forma
Combined Balance Sheet of TRIAD and the Founding Companies included herein.
20
<PAGE>
SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
TRIAD will acquire the Founding Companies concurrently with and as a
condition to the consummation of this Offering. For financial statement
presentation purposes, THI has been identified as the accounting acquirer. The
following selected historical financial data of THI for the years ended December
31, 1994, 1995 and 1996 and as of December 31, 1995 and 1996, have been derived
from the audited consolidated financial statements of THI included elsewhere in
this Prospectus. The following selected historical financial data for THI as of
and for the years ended December 31, 1992 and 1993, for the nine months ended
September 30, 1996 and 1997 and as of December 31, 1994 have been derived from
unaudited consolidated financial statements of THI, which have been prepared on
the same basis as the audited financial statements and, in the opinion of THI,
reflect all adjustments, consisting of normal recurring adjustments, necessary
for a fair presentation of such data. The following summary unaudited pro forma
combined financial data present certain data for the Company, as adjusted for
(i) the effects of the Acquisitions on an historical basis, (ii) the effects of
certain pro forma adjustments to the historical financial statements and (iii)
the consummation of this Offering and application of the estimated net proceeds
therefrom. See the Unaudited Pro Forma Combined Financial Statements and the
notes thereto included in this Prospectus.
<TABLE>
<CAPTION>
THI
---------------------------------------------------------------------------
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............................ $ 13,715 $ 15,556 $ 22,667 $ 29,674 $ 36,258 $ 26,168 $ 36,387
--------- --------- --------- --------- --------- --------- ---------
Gross profit........................ 3,120 3,646 5,916 7,188 8,766 5,993 9,245
Selling expenses(1)................. 1,520 1,533 2,391 2,940 3,396 2,398 3,477
General and administrative
expenses(1)....................... 1,279 1,983 1,813 2,146 3,017 1,898 3,543
Depreciation and amortization....... 51 67 531 561 763 502 1,054
--------- --------- --------- --------- --------- --------- ---------
Income from operations.............. 270 63 1,181 1,541 1,590 1,195 1,171
Interest income (expense), net...... (357) (509) (468) (509) (305) (200) (398)
Other income (expense), net......... -- -- (22) 15 (114) (83) (51)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before provision for
income taxes...................... (87) (446) 691 1,047 1,171 912 722
Provision for income taxes.......... -- -- 103 420 465 358 276
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)................... $ (87) $ (446) $ 588 $ 627 $ 706 $ 554 $ 446
========= ========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
THE COMPANY
----------------------------------------
NINE MONTHS
ENDED
SEPTEMBER 30,
YEAR ENDED --------------------
DECEMBER 31, 1996 1996 1997
----------------- --------- ---------
PRO FORMA COMBINED STATEMENT OF
OPERATIONS DATA(2):
<S> <C> <C> <C>
Revenues........................................................................ $ 128,495 $ 96,659 $ 101,113
----------------- --------- ---------
Gross profit.................................................................... 40,282 29,814 30,340
Selling expenses(1)............................................................. 15,986 11,210 11,903
General and administrative expenses(1)(3)....................................... 13,718 10,176 11,209
Depreciation and amortization(4)................................................ 1,989 1,452 1,965
----------------- --------- ---------
Income from operations.......................................................... 8,589 6,976 5,263
Interest income (expense), net(5)............................................... 106 54 118
Other income (expense), net..................................................... 157 (9) 37
----------------- --------- ---------
Income before provision for income taxes........................................ 8,852 7,021 5,418
Provision for income taxes...................................................... 3,861 3,096 2,361
----------------- --------- ---------
Net income...................................................................... $ 4,991 $ 3,925 $ 3,057
================= ========= =========
Net income per share............................................................ $ 0.54 $ 0.43 $ 0.33
================= ========= =========
Shares used in computing pro forma net income per share(5)...................... 9,161 9,161 9,161
================= ========= =========
21
<PAGE>
THI
----------------------------------------------------- SEPTEMBER 30, 1997
(UNAUDITED)
DECEMBER 31, ----------------------
----------------------------------------------------- THI PRO FORMA
1992 1993 1994 1995 1996 ACTUAL COMBINED(2)
--------- --------- --------- --------- --------- --------- -----------
(UNAUDITED)
BALANCE SHEET DATA:
Working capital (deficit)........... $ (850) $ (1,683) $ (1,557) $ (527) $ 5,904 $ 4,272 $ (15,557)
Total assets........................ 6,282 7,095 9,432 10,753 18,062 23,786 82,194
Total debt, including current
portion........................... 4,998 2,019 915 3,185 5,442 6,252 15,539
Stockholders' equity (deficit)...... (918) (1,316) (687) (69) 6,547 7,472 17,685
</TABLE>
AS
ADJUSTED(6)
-----------
BALANCE SHEET DATA:
Working capital (deficit)........... $19,257
Total assets........................ 78,647
Total debt, including current
portion........................... 1,040
Stockholders' equity (deficit)...... 53,792
- ------------
(1) Selling expenses and general and administrative expenses for the nine months
ended September 30, 1997 include costs incurred by THI to (i) increase its
sales force to expand certain marketing efforts and (ii) enhance its
administrative infrastructure to support its expansion efforts.
(2) The pro forma combined statement of operations data assume that the
following transactions and events -- (i) the organization of TRIAD and its
issuance of shares of Common Stock and preferred stock; (ii) a split of the
outstanding Common Stock; (iii) the conversion of outstanding TRIAD
preferred stock into Common Stock; (iv) the Acquisitions; and (v) the
closing of this Offering and the application of the estimated net proceeds
therefrom -- were closed on January 1, 1996, and are not necessarily
indicative of the results the Company would have attained had these events
and transactions actually occurred then or of the Company's future results.
The pro forma combined balance sheet data assume the Acquisitions and the
net incurrence of indebtedness by the Company since September 30, 1997
occurred on that date. The pro forma combined financial data (i) are based
on preliminary estimates, available information and certain assumptions that
management deems appropriate and (ii) should be read in conjunction with the
other financial statements and notes thereto included elsewhere in this
Prospectus.
(3) The pro forma combined statement of operations data include the effect of:
(i) the following reductions in compensation and benefits prospectively
agreed to as part of the purchase agreements by the owners and certain key
employees of the Founding Companies: year ended December 31, 1996, $3.5
million; and the nine months ended September 30, 1996 and 1997, $2.5 million
and $1.5 million, respectively; (ii) the elimination of the $3.7 million
non-cash, non-recurring compensation charge by TRIAD for the nine months
ended September 30, 1997 (net of a $0.2 million charge for recurring salary
charges of management); (iii) distributions by certain Founding Companies of
cash and other assets prior to the closing of the Acquisitions; (iv) the
elimination of nonrecurring tax and other exposure relating to the Sun ESOP:
year ended December 31, 1996, $0.3 million; and the nine months ended
September 30, 1996 and 1997, $0.3 million and $0.3 million, respectively;
and (v) the elimination of a one-time settlement received from vendors for
early extinguishment of supply contract obligations: year ended December 31,
1996, $0.2 million; and nine months ended September 30, 1996 and 1997, $0.2
million and $0.6 million, respectively.
(4) Reflects amortization of the goodwill to be recorded as a result of the
Acquisitions over a 40-year period and computed on the basis described in
Note 5 of Notes to the Unaudited Pro Forma Combined Financial Statements.
(5) Computed on a basis described in Note 5 of Notes to the Unaudited Pro Forma
Combined Financial Statements.
(6) Reflects the closing of this Offering and TRIAD's application of its net
proceeds therefrom. See "Use of Proceeds."
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and related notes thereto and "Selected Historical and Pro Forma
Combined Financial Data" appearing elsewhere in this Prospectus.
INTRODUCTION
The Company's revenues are primarily derived from sales of specialty
medical products under sales and distribution agreements and agency arrangements
with various manufacturers. Cost of revenues consists primarily of product
costs, net of rebates, and freight charges. Selling expenses consist primarily
of sales commissions, salaries, travel and entertainment expenses, trade show
expenses and automobile allowances. General and administrative expenses consist
primarily of executive compensation and related benefits, administrative
salaries and benefits, office supplies, rent, utilities, insurance and
professional fees.
The Founding Companies have been managed throughout the periods discussed
below as independent private companies, and their results of operations reflect
different tax structures (S corporations and C corporations), which have
influenced, among other things, their historical levels of owners' compensation.
The owners of the Founding Companies and certain key employees have
prospectively agreed to certain reductions in their compensation and benefits in
connection with the Acquisitions.
TRIAD, which has conducted no operations to date other than in connection
with this Offering and the Acquisitions, intends to integrate these businesses
and their operations and administrative functions. This integration process may
present opportunities to reduce costs through the elimination of duplicative
functions and through economies of scale, but will necessitate additional costs
and expenditures for corporate management and administration. The Company will
also incur corporate expenses related to being a public company, implementation
of an acquisition program and systems integration. These various costs and
possible cost-savings may make comparison of historical operating results not
comparable to, nor indicative of, future performance. No such cost savings were
reflected in the pro forma combined statement of operations data, except for the
compensation reductions provided for in the agreements entered into in
connection with certain of the Acquisitions and other known cost eliminations.
During April and May of 1997, TRIAD sold 548,545 shares of Common Stock to
its management. As a result, TRIAD recorded a non-recurring, non-cash
compensation charge of $3.9 million in the second quarter of 1997, representing
the difference between the amount paid for the shares and the value of the
shares on the date of sale as if the companies were combined, estimated based on
the midpoint of the estimated initial public offering price range for the shares
of Common Stock offered hereby. This compensation charge is not included in the
pro forma financial information.
In July 1996, the SEC issued Staff Accounting Bulletin No. 97 ("SAB 97")
relating to business combinations immediately prior to an initial public
offering. SAB 97 requires that these combinations be accounted for using the
purchase method of accounting. Under the purchase method, the Founding Company
whose owners receive the largest portion of voting rights in the combined
enterprise is presumed to be the accounting acquirer. Accordingly, THI has been
designated as the accounting acquirer. For the remaining Founding Companies,
$22.3 million, representing the excess of the fair value of the merger
consideration to be received over the fair value of the net assets to be
acquired, will be recorded as goodwill on the Company's balance sheet. This
goodwill will be amortized as a non-cash charge to the Company's statements of
operations over a 40-year period. The pro forma impact of this amortization
expense, which is non-deductible for federal income tax purposes, is $0.6
million per year on an after-tax basis.
23
<PAGE>
PRO FORMA COMBINED -- RESULTS OF OPERATIONS
TRIAD will acquire the Founding Companies concurrently with and as a
condition to the consummation of this Offering. For financial statement
presentation purposes, THI, one of the Founding Companies, has been identified
as the accounting acquirer. The following summary of unaudited pro forma
financial data presents certain data for the Company, as adjusted for (i) the
effects of the Acquisitions on an historical basis, (ii) the effects of certain
pro forma adjustments to the historical financial statements and (iii) the
consummation of this Offering and the application of the estimated net proceeds
therefrom. See "Selected Historical and Pro Forma Combined Financial Data" and
the Unaudited Pro Forma Combined Financial Statements and the notes thereto
included in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- ------------------------------------------
1996 1996 1997
-------------------- -------------------- --------------------
(UNAUDITED AND DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues................................ $ 128,495 100.0% $ 96,659 100.0% $ 101,113 100.0%
Cost of revenues........................ 88,213 68.7 66,845 69.2 70,773 70.0
--------- --------- --------- --------- --------- ---------
Gross profit............................ 40,282 31.3 29,814 30.8 30,340 30.0
Selling expenses........................ 15,986 12.4 11,210 11.6 11,903 11.8
General and administrative expenses..... 13,718 10.7 10,176 10.5 11,209 11.1
Depreciation and amortization........... 1,989 1.5 1,452 1.5 1,965 1.9
--------- --------- --------- --------- --------- ---------
Income from operations.................. $ 8,589 6.7% $ 6,976 7.2% $ 5,263 5.2%
========= ========= ========= ========= ========= =========
</TABLE>
UNAUDITED INTERIM RESULTS
REVENUES -- Pro forma combined revenues increased $4.5 million from $96.7
million for the nine months ended September 30, 1996 to $101.1 million for the
nine months ended September 30, 1997. This increase was primarily due to (i) a
$4.2 million increase in pro forma combined revenues of THI and PCI primarily
attributable to an increased sales staff and additional distribution facilities
and (ii) a $2.3 million increase in HTD's revenues resulting from its
acquisition of Medical Alliance on March 1, 1997 and its representation of a new
product line. These increases were partially offset by (i) a $1.3 million
decrease in Kentec's revenues due to the loss of certain distribution rights for
Pall Biomedical, Inc. blood filters, which Kentec previously sold to blood
centers and (ii) a $1.1 million decrease in Products for Surgery's revenues due
to the loss of the Meadox Medicals, Inc. ("Meadox") product line following a
change in ownership of Meadox.
COST OF REVENUES -- Pro forma combined cost of revenues increased $4.0
million from $66.8 million for the nine months ended September 30, 1996 to $70.8
million for the nine months ended September 30, 1997. This increase was
primarily due to (i) a $4.0 million increase in pro forma combined cost of
revenues of THI and PCI consistent with the increase in their combined revenues
and (ii) a $1.6 million increase in HTD cost of revenues consistent with the
increase in its revenues. These increases were partially offset by a $1.0
million decrease at Products for Surgery and a $1.0 million decrease at Kentec
due primarily to the decreases in their respective revenues. As a percentage of
revenues, cost of revenues were 69.2% and 70.0%, respectively.
SELLING EXPENSES -- Pro forma combined selling expenses increased $0.7
million from $11.2 million, or 6.2%, for the nine months ended September 30,
1996 to $11.9 million for the nine months ended September 30, 1997. This
increase was primarily due to the addition of national sales management
positions at THI. As a percentage of revenues, selling expenses were 11.6% and
11.8%, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES -- Pro forma combined general and
administrative expenses increased $1.0 million, or 10.1%, from $10.2 million for
the nine months ended September 30, 1996 to $11.2 million for the nine months
ended September 30, 1997. As a percentage of revenues, general and
administrative expenses were 10.5% and 11.1%, respectively. The increase
primarily reflects (i) $0.4 million of administrative expenses incurred by TRIAD
in 1997 in connection with the Acquisitions and this
24
<PAGE>
Offering, (ii) a $0.2 million increase at Products for Surgery primarily due to
administrative expenses relating to its acquisition of a business in October
1996, and (iii) a $0.3 million increase at Kentec.
PRO FORMA COMBINED -- LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, on a pro forma combined basis, after giving effect
to (i) distributions by CMS and MegaTech from their AAA accounts (estimated at
approximately $3.1 million), (ii) the net incurrence of indebtedness by the
Company since September 30, 1997 (including approximately $1.8 million to fund
the AAA account distributions), (iii) the Acquisitions, (iv) the closing of this
Offering and TRIAD's application of its net proceeds therefrom to repay
indebtedness of the Founding Companies (approximately $13.5 million) and (v)
repayment by TRIAD of advances (approximately $2.2 million) from Equus II which
have been used to pay a part of the expenses of this Offering, the Company would
have had an aggregate of $3.1 million of cash and short-term investments, $19.3
million of working capital and $1.0 million of total debt (representing capital
lease obligations).
The Company has recently received a commitment letter from First Chicago to
provide the New Credit Facility, which would be available upon the closing of
this Offering. According to the proposed terms, the Company would have a line of
credit of up to $40.0 million, which may be used for general corporate purposes,
including acquisitions, capital expenditures and working capital. The New Credit
Facility will be secured by all accounts receivable, inventory, equipment, and
stock of subsidiaries of the Company. The Company expects the New Credit
Facility will require compliance with various affirmative and negative
covenants, including, but not limited to, (i) maintenance of certain financial
ratios, (ii) a restriction on additional indebtedness and (iii) restrictions on
liens, guarantees, advances, dividends and business activities unrelated to the
Company's existing operations. Failure to comply with such covenants and
restrictions would constitute an event of default under the New Credit Facility.
The Company intends to pursue acquisition opportunities. The Company
expects to fund future acquisitions through the issuance of additional Common
Stock, borrowings, including amounts available under the New Credit Facility,
and cash flow from operations. To the extent the Company funds a significant
portion of the consideration for future acquisitions with cash, it may have to
increase the amount available under the New Credit Facility or obtain other
sources of financing. There can be no assurance such financing will be available
on terms acceptable to the Company. The Company expects that its cash flow from
operations will provide cash sufficient to meet the Company's normal working
capital needs, debt service requirements and planned capital expenditures for
property and equipment (exclusive of acquisitions of other businesses) for at
least the next several years. On a pro forma combined basis, the Company made
capital expenditures for property and equipment of $1.0 million and $1.7 million
in fiscal 1996 and the nine months ended September 30, 1997, respectively. The
Company has no current material commitments for capital expenditures.
Due to the relatively low levels of inflation experienced in fiscal 1996
and the nine months ended September 30, 1997 inflation did not have a
significant effect on the pro forma combined results of operations of the
Company in those periods.
SEASONALITY
The Founding Companies historically have experienced quarterly fluctuations
in revenues, operating income and cash flows. In recent years, the Company has
experienced greater revenue, operating income and cash flows in the fourth
calendar quarter as compared with the first three calendar quarters, primarily
as a result of (i) increased purchases by the Company's institutional customers
primarily due to available budgeted capital, which often must be used prior to
year end, and (ii) increased elective procedures requested by patients during
that quarter after annual insurance deductible levels have been reached and
favorable tax treatment is available.
25
<PAGE>
THI -- RESULTS OF OPERATIONS
The following table sets forth certain historical financial data of THI and
that data as a percentage of revenues for the periods indicated (dollars in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------------------- --------------------
1994 1995 1996 1996
-------------------- -------------------- -------------------- --------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................ $ 22,667 100.0% $ 29,674 100.0% $ 36,258 100.0% $ 26,168 100.0%
Cost of revenues........................ 16,751 73.9 22,486 75.8 27,492 75.8 20,175 77.1
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit............................ 5,916 26.1 7,188 24.2 8,766 24.2 5,993 22.9
Selling expenses........................ 2,391 10.5 2,940 9.9 3,396 9.4 2,398 9.2
General and administrative expenses..... 1,813 8.0 2,146 7.2 3,017 8.3 1,898 7.2
Depreciation and amortization........... 531 2.4 561 1.9 763 2.1 502 1.9
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations.................. $ 1,181 5.2% $ 1,541 5.2% $ 1,590 4.4% $ 1,195 4.6%
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
1997
--------------------
Revenues................................ $ 36,387 100.0%
Cost of revenues........................ 27,142 74.6
--------- ---------
Gross profit............................ 9,245 25.4
Selling expenses........................ 3,477 9.6
General and administrative expenses..... 3,543 9.7
Depreciation and amortization........... 1,054 2.9
--------- ---------
Income from operations.................. $ 1,171 3.2%
========= =========
UNAUDITED INTERIM RESULTS
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1996
REVENUES. -- Revenues increased $10.2 million, or 39.1%, from $26.2 million
for the nine months ended September 30, 1996 to $36.4 million for the comparable
period in 1997. This increase was primarily due to (i) an increase in rental and
service revenue as a result of the acquisition of PCI in October 1996 and (ii)
an increase in distribution revenues as a result of an increased sales staff and
additional distribution facilities.
COST OF REVENUES -- Cost of revenues increased $6.9 million, or 34.5%, from
$20.2 million for the nine months ended September 30, 1996 to $27.1 million for
the comparable period in 1997. The overall increase was a result of the increase
in revenues, but cost of revenues did not increase consistent with the increase
in revenues margins associated with rental and service income which was
attributable primarily to the acquisition of PCI in October 1996.
SELLING EXPENSES -- Selling expenses increased $1.1 million, or 45.0%, from
$2.4 million for the nine months ended September 30, 1996 to $3.5 million for
the comparable period in 1997. The increase was primarily due to (i) an increase
in associated revenues of 39.1% and (ii) THI's addition in 1997 of a national
account sales director and a vice president of marketing.
GENERAL AND ADMINISTRATIVE EXPENSES -- General and administrative expenses
increased $1.6 million, or 86.7%, from $1.9 million for the nine months ended
September 30, 1996 to $3.5 million for the comparable period in 1997. The
increase was primarily due to THI's planned increase in expenditures on its
national infrastructure to accommodate expected future growth and consisted
primarily of administrative salaries and facility expenses such as rent and
utilities on new space occupied.
1996 COMPARED TO 1995
REVENUES. -- Revenues increased $6.6 million, or 22.2%, from $29.7 million
for 1995 to $36.3 million for 1996. This increase was due primarily to an
increase in distribution and service revenues consistent with THI's growth
strategy and also to the acquisition of PCI in October 1996.
COST OF REVENUES -- Cost of revenues increased $5.0 million, or 22.3%, from
$22.5 million in 1995 to $27.5 million in 1996. This increase was consistent
with the increase in revenues.
SELLING EXPENSES -- Selling expenses increased $0.5 million, or 15.5%, from
$2.9 million for 1995 to $3.4 million for 1996. This increase was primarily due
to the increase in associated revenues.
GENERAL AND ADMINISTRATIVE -- General and administrative expenses increased
$.9 million, or 40.6%, from $2.1 million for 1995 to $3.0 million for 1996. This
increase resulted principally from increased expenditures on infrastructure for
the second half of 1996 pursuant to THI's plan to strengthen its national
infrastructure.
26
<PAGE>
1995 COMPARED TO 1994
REVENUES. -- Revenues increased $7.0 million, or 31.0%, from $22.7 million
for 1994 to $29.7 million for 1995. This increase was due primarily to an
increase in distribution revenues of $6.6 million resulting from strong market
performance enhanced by the opening of THI's Chicago, Illinois distribution
facility.
COST OF REVENUES -- Cost of revenues increased $5.7 million, or 34.2%, from
$16.8 million for 1994 to $22.5 million for 1995. This increase was consistent
with the increase in revenue for the same period, but increased as a percentage
of revenues because of a change in the mix of products sold.
SELLING EXPENSES -- Selling expenses increased $0.5 million, or 23.0%, from
$2.4 million for 1994 to $2.9 million for 1995. This increase reflected the
building of a national sales force.
GENERAL AND ADMINISTRATIVE -- General and administrative expenses increased
by $0.3 million, or 18.4%, from $1.8 million for 1994 to $2.1 million for 1995.
This increase was due to the addition of several administrative positions.
THI -- LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information from THI's consolidated
statements of cash flows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
Net cash provided by (used in) operating
<S> <C> <C> <C> <C> <C>
activities............................ $ 662 $ 597 $ (1,071) $ (1,109) $ 2,392
Net cash used in investing activities... (91) (21) (4,202) (191) (3,214)
Net cash provided by (used in) financing
activities............................ (587) (570) 6,082 2,550 359
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents........................... $ (16) $ 6 $ 809 $ 1,250 $ (463)
========= ========= ========= ========= =========
</TABLE>
Net cash provided by operating activities in 1994, 1995 and the nine months
ended September 30, 1997 is the result of net income generated during the
period, plus depreciation and amortization adjusted for changes in working
capital. The decrease in cash provided by operating activities for 1996 and the
first nine months of 1996 was primarily due to the investment THI made in
working capital required to meet its growth objectives during the periods and to
reduce accounts payable.
Net cash used in investing activities is primarily amounts the Company used
to make acquisitions in the fourth quarter of 1996 and the first nine months of
1997 and to acquire additional rental equipment in the first nine months of
1997. Cash used in investing activities in 1994, 1995 and the first nine months
of 1996 reflects additions to property, plant and equipment, partly offset by
proceeds from the disposal of property.
Net cash provided by financing activities for 1996 and the nine months
ended September 30, 1996 reflects the sale of common stock and borrowings on
debt and capital leases offset by the paydowns on THI's line of credit and
repurchase of common stock. THI made additional borrowings in the first nine
months of 1997 to finance its expansion. Net cash used by financing activities
in 1994 and 1995 primarily reflects the payments on long-term debt partly offset
by additional borrowings for working capital purposes.
In September 1996, THI entered into a new credit agreement with a bank. The
agreement, which extends through May 31, 1998, provides a revolving line of
credit facility of up to $1.0 million. Borrowings under the credit agreement
bear interest at the bank's prime rate plus 0.25% or, at THI's option, a LIBOR
rate plus 3.25%. The credit agreement is collateralized by all of THI's assets
and includes certain restrictive covenants.
In October 1996, THI entered into an agreement with a bank for an
acquisition line of credit. The agreement extends through September 2001 and
provides a facility of up to $5.0 million. Borrowings under the agreement bear
interest at the bank's prime rate plus 0.625%. The agreement includes certain
restrictive covenants and provides that all borrowings thereunder are
collateralized by all THI's assets. The outstanding borrowings under the
agreement at September 30, 1997 were $4.5 million. In October, 1997, THI
converted this line of credit into an asset-based credit facility.
Management of THI believes that cash flows from operations, together with
THI's unused borrowing capacity, will be sufficient to fund THI's operating
needs into the forseeable future. THI has no current material commitments for
capital expenditures.
27
<PAGE>
BUSINESS
GENERAL
The Company was formed to create a national leader in the contract sales
and distribution of specialty medical products designed for the hospital and
alternate-site health care markets (including sub-acute care facilities, home
care companies and specialty physician groups). The Company contracts with
specialty medical product manufacturers to provide outsourcing of the sales,
marketing, distribution and customer service functions for all or certain of
their product lines, thereby eliminating the manufacturers' need to develop and
maintain their own sales force or rely on a number of independent local and
regional distributors to achieve national coverage. The Company provides a broad
range of specialty medical products across the full continuum of patient care,
including products used in the surgical, anesthesiology / pain management,
critical care, cardiovascular / vascular and infusion therapy markets. It
represents over 180 manufacturers and sells products in all 50 states.
The sale and distribution of specialty medical products require a focused
selling effort by representatives capable of marketing the products' clinical
features and benefits to physicians and other health care professionals and
demonstrating the economic benefits associated with these products to purchasing
departments and operating management of health care providers. To satisfy the
sales and related needs of its represented manufacturers, the Company has a
sales staff of over 140 representatives, who average in excess of 15 years'
medical product sales experience. Through this sales staff and other support
staff the Company employs at its 21 sales and distribution facilities located
throughout the United States, the Company provides its represented manufacturers
and customers with a variety of value-added services designed to facilitate
access to the marketplace and product procurement on a time-efficient and cost-
effective basis. These services include product introduction and support,
education and training, equipment maintenance and repair, manufacturer warranty
support and product usage reporting.
The Company believes significant external growth opportunities are
available to it through acquisitions of leading local and regional distributors
of complementary products due to fragmentation of the Company's industry. It
also believes internal growth opportunities can be realized by (i) achieving
operating efficiencies, (ii) adding product lines and territories through the
leveraging of its existing manufacturer and customer relationships, (iii)
cross-selling products between the alternate-site and hospital markets and (iv)
expanding its higher margin service, repair and rental business. In addition, by
establishing one of the first national contract sales and distribution
businesses of specialty medical products, the Company believes it can
aggressively pursue national consolidated supply arrangements with GPOs.
INDUSTRY OVERVIEW
According to the Health Industry Distributor Association, the medical
instrument and supply industry (excluding pharmaceuticals) in the United States
represented an estimated annual market in excess of $30 billion in 1996, of
which the hospital and the alternate-site markets represented approximately $16
billion and $14 billion, respectively.
Institutional health care providers in the hospital and alternate-site
markets served by the Company purchase medical products from one or more of
three distinct groups: (i) national medical product distributors, such as Owens
& Minor, Inc., Allegiance Corporation and General Medical, Inc., which typically
provide a broad range of high-volume, low-margin, low- and medium-technology
products; (ii) contract sales and distribution companies that focus on specialty
medical products not typically provided by the national medical distributors
because of the complexity of the products and the need for highly trained local
sales and service staffs; and (iii) manufacturers that sell and distribute their
own products directly.
The Company estimates there are over 1,200 companies engaged in the
contract sales and distribution of specialty medical products in the United
States, most of which are small businesses serving local or regional markets and
providing representation for a limited number of manufacturers and product
lines. Several of the manufacturers represented by these sales and distribution
organizations have highly focused, limited product lines. Accordingly, these
manufacturers typically make large ongoing commitments to their product
development, market research and marketing efforts while relying on the
currently fragmented network of contract sales and distribution companies to
sell, distribute and service their products. The
28
<PAGE>
Company believes a national contract sales and distribution organization focused
on specialty medical products can provide the following advantages to
manufacturers and health care providers:
o PROVIDE MANUFACTURERS WITH BENEFITS OF ECONOMIES OF SCALE AND
ESTABLISHED SALES CHANNELS. By utilizing contract sales and
distribution companies, manufacturers of specialty medical products can
avoid the substantial up-front and ongoing expenses associated with
hiring, training and coordinating their own sales force and related
customer support staff. Contract sales and distribution companies
typically are more efficient because of their ability to spread sales,
distribution and other product-related costs across multiple
complementary product lines produced by different manufacturers. In
addition, because contract sales and distribution companies generally
employ sales representatives who have substantial experience in
individual medical sub-specialties and have developed long-term
relationships with physicians and other health care professionals in
those areas, they can provide manufacturers of new products with access
to established sales channels for those products.
o PROVIDE HEALTH CARE PROVIDERS WITH A CONSOLIDATED SUPPLY SOURCE. In an
effort to increase efficiency and reduce costs, health care providers
are increasingly seeking to reduce and consolidate their vendor
relationships. By consolidating their vendor bases, customers can
reduce the costs and administrative time associated with receiving
individual sales calls and individual product deliveries from a
multitude of manufacturers. The Company believes that contract sales
and distribution companies are attractive to providers because they
consolidate the purchasing and distribution functions.
Despite the advantages that contract sales and distribution companies
provide to both their manufacturers and customers, the fragmented network of
such companies is generally not capable of serving multiple manufacturers on a
national basis. Local or regional contract sales and distribution companies do
not have the distribution infrastructure necessary to efficiently deliver
product on a nationwide basis, nor do they have a product offering that is broad
enough to enable them to service customers across a variety of sub-specialty
markets.
To become more cost-effective, health care providers have created national
GPOs and regional IDNs that aggressively seek to lower product procurement costs
and reduce the number of vendors that service their organizations by
consolidating their purchase contracts. These trends have placed pressure on
manufacturers and contract sales and distribution companies to be more
efficient, provide value-added services and obtain sufficient breadth of product
offering and geographic coverage to warrant attention in this changed market
place. As a result, the Company believes that the emergence of a national
contract sales and distribution company capable of selling, distributing and
servicing a broad array of specialty medical products would meet the evolving
needs of both manufacturers and purchasers of specialty medical products. In
addition, the Company believes such a national company would (i) enhance the
manufacturers' access to the national market and reduce cost and administrative
time attributable to dealing with multiple local and regional companies and (ii)
have opportunities to negotiate national or regional contracts with selected
GPOs and IDNs.
BUSINESS STRATEGY
The Company's objective is to become the leading national contract sales
and distribution organization focused on specialty medical products. Due to the
fragmented state of the industry, the Company believes significant opportunities
are available to a contract sales and distribution company employing customer-
oriented sales and service personnel and providing a broad range of specialty
medical products and related services on a national basis. To achieve its
objective, the Company's strategy emphasizes the following elements:
GROWTH THROUGH ACQUISITIONS. The Company intends to implement an
aggressive acquisition program targeting leading contract sales and distribution
businesses serving markets similar to those served by the Company. The Company
intends to pursue acquisitions to expand its product representation. In new and
certain existing markets, the Company will target one or more leading local or
regional contract sales and distribution businesses with sufficient critical
mass to permit the consolidation of other local or regional operations. The
Company will also pursue smaller acquisitions in its existing markets and those
gained
29
<PAGE>
through subsequent acquisitions with a view to increasing market share and
expanding the range of products and services offered within those markets
without increasing the Company's existing infrastructure.
PROFITABILITY IMPROVEMENTS. The Company believes it can achieve certain
operating efficiencies and cost savings by reducing facilities, centralizing
certain administrative functions and implementing a "best practices" operating
strategy throughout the Company. The Company intends to consolidate overlapping
warehouse and office facilities in the near term. However, additional facilities
may be acquired as the Company implements its acquisition strategy. The Company
believes that, as it increases its size and market share, it will achieve cost
savings from its plan to centralize certain functions, including acquisition
planning, marketing, national contracting, financing, accounting, investor
relations, legal and risk management. The Company also believes centralizing
these functions will enable the local and regional offices to concentrate their
efforts on sales, customer service, inventory management and distribution.
INTERNAL GROWTH. A key component of the Company's business strategy is to
accelerate internal growth in its existing businesses and subsequently acquired
businesses. The Company believes it will be able to leverage its existing
manufacturer and customer relationships to gain representation of additional
territories and product lines and expand its product offerings. It will (i)
pursue cross-selling opportunities between the alternate-site and hospital
markets and (ii) review its sales and marketing procedures at the local and
regional levels to identify practices that will be uniformly implemented
throughout its operations to enhance its sales and marketing programs in an
effort to obtain new product lines, stimulate sales of existing products and
improve customer service. The Company also will seek to (i) continue to attract
high-quality sales representatives by offering them a broader range of products
concentrated in their area of specialization, with a view to gaining and
improving product representation in certain specialty areas and achieving
greater productivity from the Company's sales force, and (ii) attempt to expand
its medical equipment repair and service operations.
STRATEGIC RELATIONSHIPS. As one of the first national contract sales and
distribution companies focused on specialty medical products, the Company
believes it is positioned to obtain expanded relationships with manufacturers
and customers and to selectively pursue limited proprietary interests in certain
product lines. The Company intends to pursue arrangements with certain
manufacturers on a national basis, negotiate to obtain longer term contracts
with manufacturers and seek to satisfy the demands of GPOs, IDNs and other
customers desiring to reduce their vendor base. The Company also intends to
selectively pursue ownership interests in, or otherwise obtain long-term
exclusive marketing rights to, noncompetitive domestic and international
emerging product technologies that compliment its existing product lines. The
Company also may pursue private label relationships with certain manufacturers
whereby a product line would be manufactured and marketed through the Company's
national sales and distribution network.
ACQUISITION STRATEGY
The Company intends to implement an aggressive acquisition program
targeting leading contract sales and distribution companies serving markets
similar to those served by the Company. Certain acquisitions will be large
enough to warrant their own operating and management structure while other
smaller acquisitions will be folded into an existing operation without
significantly increasing the Company's infrastructure. Of the over 1,200
contract sales and distribution companies estimated to be serving local and
regional markets in the United States, the Company believes there are numerous
candidates that meet the Company's acquisition criteria. These criteria include
profitability, potential for revenue growth, reputation, the size and other
characteristics of the customer base, the quality and experience levels of
operational management and sales personnel and the nature of the product mix.
The Company intends to use various combinations of its Common Stock, cash
and notes as consideration for future acquisitions. The consideration for each
future acquisition will vary on a case-by-case basis. The Company believes it
will be regarded as an attractive acquirer to owners of contract sales and
distribution businesses because of: (i) the Company's potential access to large
national purchasing contracts; (ii) the Company's strategy for creating a large,
professionally managed company with national name recognition; (iii)
management's industry experience; (iv) the Company's increased visibility and
access to financial resources as a public company; (v) access to new products;
and (vi) the ability of the
30
<PAGE>
acquired business to participate in the Company's growth and expansion, while
the owner realizes improved liquidity.
The Company currently has no binding agreements or letters of intent
relating to any acquisition (other than the Acquisitions). The timing, size and
success of the Company's acquisition efforts and the associated potential
capital commitments cannot be readily predicted. See "Risk
Factors -- Dependence on Acquisitions for Growth" and "-- Need for Additional
Financing."
PRODUCTS AND SERVICES
The Company sells and distributes a broad array of specialty medical
products. These products require significant value-added support services, such
as product introduction and support, education and training, equipment
maintenance and repair, manufacturer warranty support and product usage
reporting. The following chart sets forth for fiscal 1996 the five principal
product categories offered by the Company and the top selling products (measured
by pro forma combined revenues) in each category:
SURGICAL PRODUCTS CARDIOVASCULAR/VASCULAR PRODUCTS
SURGICAL INSTRUMENTS HEPARIN MONITORING EQUIPMENT
BOVINE PERICARDIUM PATCHING PTFE VASCULAR GRAFTS
AESTHETIC AND SURGICAL LASERS VASCULAR ACCESS PRODUCTS
FIBER OPTIC LIGHT SOURCES BLOOD/IV FILTERS AND RELATED PRODUCTS
ENDOSCOPY INSTRUMENTATION BOVINE PERICARDIUM PATCHING
IMPLANTABLE PORTS AND CATHETERS SURGICAL INSTRUMENTS
CRITICAL CARE PRODUCTS IV THERAPY PRODUCTS
NEEDLELESS IV CONNECTORS PLASMA DERIVATIVES AND
BLOOD/IV FILTERS AND RELATED PRODUCTS PHARMACEUTICALS
HEPARIN MONITORING EQUIPMENT IV SOLUTION AND NUTRITIONAL SUPPORT
CENTRAL VENOUS CATHETERS PRODUCTS
CARDIAC FUNCTION MONITORS INFUSION DEVICES (INCLUDING IV
NON-INVASIVE BLOOD PRESSURE MONITORS INFUSION
ANESTHESIOLOGY/PAIN MANAGEMENT PUMPS AND PHARMACY PRODUCTS)
PRODUCTS PATIENT CARE PRODUCTS
BLOOD/IV FILTERS AND RELATED PRODUCTS INFECTION CONTROL PRODUCTS
HEPARIN MONITORING EQUIPMENT VASCULAR ACCESS DEVICES
IMPLANTABLE SPINAL CORD STIMULATORS
HYPOTHERMIA PRODUCTS
DISPOSABLE PRESSURE TRANSDUCERS
NON-INVASIVE CARDIAC FUNCTION
MONITORS
Blood/IV filters and related products, needleless IV connectors, heparin
monitoring equipment, implantable spinal cord stimulators and plasma derivatives
and pharmaceuticals were the Company's top five selling product lines in fiscal
1996. None of these product lines accounted for more than 10% of the Company's
fiscal 1996 pro forma combined revenues. While the Company generates its
revenues primarily by selling and distributing specialty medical products it
purchases under sales and distribution arrangements with manufacturers, it also
has agency relationships with certain manufacturers pursuant to which it earns a
commission on generated sales. See "-- Manufacturer Relationships."
The Company intends to continue to add additional product lines
complementary to its existing product lines as customer demand warrants. The
Company's Product Committee will supervise product selection and pricing
decisions primarily through periodic evaluations of sales data, customer
response to product offerings and the input of local and regional management.
The Company generates significant revenues from the service, repair, rental
and leasing of certain product lines, including infusion pumps, automated
pharmacy compounding equipment, dental implant products and surgical lasers.
Revenues from the Company's service, repair, rental and leasing activities
accounted for approximately 9.1% of the Company's fiscal 1996 pro forma combined
revenues.
SALES AND MARKETING
At September 30, 1997, the Company employed a direct sales force of
approximately 140 representatives who have primary responsibility for
maintaining relationships with existing customers and identifying and soliciting
new customers. The Company's sales and marketing efforts emphasize development
and
31
<PAGE>
maintenance of close relationships with customers, regular presentation of
products and prototypes of new products and responsiveness to customer
requirements. The Company's sales representatives devote substantial time and
attention to direct dealings with customers, regularly visit hospitals and
alternate-site facilities and meet with the administrators and clinicians to
assess customer needs, provide product support and introduce new product lines.
Due to the technical nature of many of the Company's products, education and
training is essential to the sales and marketing of these products. The
Company's sales representatives regularly conduct educational seminars and make
presentations to discuss product usage and the positive patient and health care
provider outcomes that may be achieved. The sales representatives are regularly
invited into the operating rooms, emergency rooms, intensive care and other
critical care units of hospitals and other health care facilities to observe
medical procedures utilizing represented products and to provide advice as to
proper product usage. With respect to certain of the Company's lower technology
products, the Company maintains a limited inside sales staff to market these
products by telephone. In addition to the Company's sales staff, the Company has
five product specialists on staff to assist the customer in selecting the best
product for the procedure involved and to assist in quantity selection.
The Company's sales representatives average 15 years' medical product sales
experience. The future success of the Company will depend in part on its ability
to continue to attract, retain, motivate and train qualified sales
representatives. The Company has continuous national and regional training
programs in place for its sales representatives to enhance selling skills and
provide detailed product knowledge. Certain manufacturers also support the
training of the Company's sales and support personnel by providing, from time to
time, training and educational programs relating to product lines represented by
the Company.
CUSTOMERS
The Company's customers consist primarily of acute care hospitals and
alternate-site health care providers (including sub-acute care facilities, home
care companies and specialty physician groups). The Company also sells directly
to national medical supply distributors, such as Owens & Minor and Allegiance.
No single customer accounted for more than 5% of the Company's fiscal 1996 pro
forma combined revenues.
During recent years, as cost-containment pressures have resulted in
increased demand for lower product procurement costs and value-added services,
the customer base in the health care industry has consolidated to include GPOs,
IDNs and other large alliances formed by health care providers in an effort to
reduce costs and consolidate their vendor bases. The Company believes further
consolidation of its customer base will continue in the future. It intends to
target these purchasing organizations and believes it is well positioned to
satisfy their needs, given its strategy to provide a broad offering of specialty
medical products and related services through a national contract sales and
distribution organization. No assurance can be given the Company will be awarded
contracts by these purchasing organizations.
MANUFACTURER RELATIONSHIPS
Currently, the Company has arrangements with over 180 manufacturers, 20 of
whose product lines accounted for approximately 49.9% of the Company's fiscal
1996 pro forma combined revenues. The manufacturers of the Company's top five
selling products for fiscal 1996 were Pall Biomedical, Inc., ICU Medical, Inc.,
International Technidyne Corporation, Advanced Neuromodulation Systems, Inc. and
Bayer Corporation.
The Company primarily enters into sales and distribution arrangements with
manufacturers pursuant to which it purchases products for resale. While the
terms of these arrangements vary, they generally describe the product line to be
represented, define the coverage territory of the representation, outline the
value-added services to be performed with respect to the represented product
line, quantify the minimum sales level requirements and provide termination
rights on prior notice typically ranging from 30 to 90 days. Many of these
manufacturing arrangements contain non-competition provisions that prohibit the
Company from selling competitive product lines in specified territories.
Manufacturers may impose additional requirements on the Company under these
arrangements concerning such matters as minimum size of purchase orders,
maintenance of minimum inventory levels, maintenance of facilities and equipment
to perform specified services relating to the product line and training of sales
and service personnel. The Company's representation of its manufacturers in the
hospital market is typically on an exclusive basis with
32
<PAGE>
a local or regional geographic coverage area, while representation of its
manufacturers in the alternate-site health care market is generally on a
non-exclusive basis with a national coverage area.
The Company also has agency relationships with certain manufacturers
pursuant to which it generates factory-direct sales to customers and does not
purchase products from the manufacturer for resale or maintain an inventory of
products. The Company earns a commission percentage on its agency sales ranging
between 10% and 30%. Agency relationships are typically terminable by either
party on prior notice ranging from 30 to 90 days.
The Company seeks to purchase the medical products it sells at the lowest
possible price through volume discounts, rebates and product line
consolidations. Individual orders are placed by the Company's purchasing agents,
located at certain of the Company's facilities, who are responsible for
purchasing and maintaining the inventory. Medical products are delivered
directly to the distribution facilities.
The Founding Companies have, from time to time, lost significant product
lines due to, among other causes, manufacturers' decisions to sell the product
lines directly to health care providers, acquisitions of the manufacturers or
their product lines by other entities with existing sales forces or failure of a
Founding Company to satisfy sales volume or other performance requirements.
While the Company believes that, as a result of its larger size and national
presence following the Acquisitions, it will have greater bargaining power and
therefore be in a position to negotiate longer-term contracts with its
manufacturers, there can be no assurance the Company will not lose significant
product lines in the future. The loss of any significant product line, for any
reason, could have a material adverse effect on the Company's financial
condition and results of operations.
OPERATIONS
The Company is committed to providing accurate and complete order
fulfillment and reliable, consistent deliveries. The Company's order entry
process is designed to make ordering products convenient, easy and flexible for
its customers. Approximately 90% of customer orders are received by the
Company's toll-free telephone number, and the Company also is able to receive
orders electronically. The Company intends to expand the availability of
electronic order-entry ordering for customers and EDI transmission for both
vendors and customers. In addition, the Company is actively researching Internet
utilization for electronic catalogs, ordering, training and enhanced market
information. All orders are received by the customer service representatives at
the Company's distribution facilities located throughout the United States. The
customer service representatives utilize on-line computer terminals to enter
customer orders and to access information about products, product availability,
pricing, promotions and the customer's purchasing history. Following entry of an
order, a packing slip for the entire order is printed for order fulfillment. The
Company ships its ordered products primarily by Federal Express Corporation and
United Parcel Service of America, Inc. and, to a lesser extent, by various
common carriers. See "Risk Factors -- Reliance on Efficiency of Distribution
and Third Parties."
Since many of the Company's products are high value items, accurate
inventory control is critical to business profitability. The Company plans to
utilize its broad regional distribution network and information technology to
minimize inventory levels while continuing to maintain high levels of product
availability and rapid order fulfillment.
The Company intends to perform certain corporate activities from its
executive offices. These activities will include national marketing and sales
support, national vendor contracting, accounting, financing, management
information systems support, national customer contracting, contract
administration and human resources and administration. Certain operating
functions will be conducted at specific regional offices, including sales and
sales management, customer service, purchasing, inventory control, distribution,
regional marketing support and regional accounting. Day-to-day decision making
and operating control will remain at the regional operating locations whenever
possible and practical. Regional offices will be required to adhere to
Company-wide policies relating to training, accounting and internal controls and
customer satisfaction. The management information systems in place will allow
for information to be disseminated at the local and regional level, which the
Company believes will help to improve operating efficiencies and lower operating
costs.
33
<PAGE>
The Company is committed to providing high levels of customer service and
support. The Company intends to integrate the existing centralized computer
operating system of THI with each of the primary facilities of the Company's
operations in the near term. The host computer system is located at the
Company's principal executive offices in Laguna Hills, California. This
operating system facilitates various functions, including accounts payable,
accounts receivable and general ledger, as well as functions critical to
customer service and support, such as order entry and tracking, purchasing and
inventory control and product pricing and selection. As of the date of this
Prospectus, seven of the Company's facilities located throughout the United
States are networked to this computer operating system by dedicated circuits.
COMPETITION
The Company competes with manufacturers that sell their medical products
directly to health care providers and, to a lesser extent, with national medical
products distributors. Competition from national medical distributors does not
generally occur until a product line has substantially matured, which usually
takes several years into its life cycle. Some of these manufacturers and
national distributors are substantially larger and have substantially greater
financial and other resources than the Company. The Company also faces
competition from many regional and local distributors in its niche markets which
are generally relatively small local or regional owner-operated businesses.
Barriers to entry for distribution in the specialty medical product market are
relatively low, and the risk of new competitors entering the market,
particularly in local and regional areas, is high. In response to competitive
pressures from any of its current or future competitors, the Company may be
required to lower selling prices in order to maintain or increase market share,
and such measures could adversely affect the Company's operating results.
The Company believes the principal competitive factors in the contract
sales and distribution business are the experience, training and educational
support capabilities of the sales force, the quality and level of customer
support service, the breadth and quality of products offered, the information
systems and infrastructure available, the consistency and stability of business
relationships with customers and product pricing.
FACILITIES
The Company's facilities, all located in the United States, consist
principally of sales offices and warehouse facilities. The Company leases 21
warehouse and office facilities located throughout the continental United
States, which range in size from less than 1,000 square feet to approximately
37,000 square feet, for an aggregate of approximately 224,000 square feet. The
Company intends to reduce the number of its facilities in the near term.
However, additional facilities may be added as the Company implements its
acquisition strategy. Its current leases have remaining terms ranging from two
to five years on rental and other terms the Company believes are commercially
reasonable. Some of these leases are with affiliates of the Founding Companies
or officers of the Company. The Company believes its facilities are
well-maintained and adequate for the Company's existing and planned operations
at each operating location.
EMPLOYEES
As of September 30, 1997, the Company had approximately 360 employees, of
which approximately 140 were sales representatives. The Company is not a party
to any collective bargaining agreements, has not experienced any strikes or work
stoppages and believes its relationship with its employees is good.
GOVERNMENT REGULATION
The Company and its customers and suppliers are subject to federal and
state regulation in the United States, and the Company cannot predict the extent
to which future legislative and regulatory developments concerning their
practices and products or the health care industry may affect the Company.
Federal and state laws and regulations govern or influence the testing,
manufacture, safety, labeling, storage, recordkeeping, marketing and
distributing of specialty medical products. In connection with its limited
manufacturing operations, the Company is required to obtain the approval of
federal and state governmental agencies, including the Food and Drug
Administration, prior to manufacturing, marketing and distributing certain of
those products. Further, the Company's facilities and operations are subject to
reporting to, and review and inspection by, federal, state and local
governmental entities.
34
<PAGE>
LITIGATION AND INSURANCE
From time to time, the Company is a party to litigation arising in the
normal course of its business. The Company is not currently involved in any
litigation the Company believes will have a material adverse effect on its
financial condition or results of operations.
The Company maintains insurance in such amounts and against such risks as
it deems prudent, including comprehensive, general property and product
liability insurance. It will attempt to obtain a product liability policy with
an insurance company having an A rating or better, with coverage limits of $3.0
million per each occurrence and $3.0 million in the aggregate. No assurance can
be given the Company's insurance will be sufficient under all circumstances to
protect the Company against significant claims for damages. The occurrence of a
significant event not fully insured against could materially and adversely
affect the Company's financial condition and results of operations. Moreover, no
assurance can be given the Company will be able to maintain adequate insurance
in the future at commercially reasonable rates or on acceptable terms.
35
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information respecting the
individuals who will be TRIAD's directors, and executive officers when this
Offering closes (ages as of September 30, 1997):
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION CLASS
- ----------------------------------- --- ------------------------------------------ ---------
<S> <C> <C> <C>
William C. Klintworth, Jr.(1)(4)... 44 Chief Executive Officer, Chairman of the Class I
Board
R. Tucker Coop(1)(4)............... 51 President*, Director* Class III
Clyde A. Blankenship, Jr........... 53 Executive Vice President, Director Class III
Walter D. Wallach.................. 53 Senior Vice President,* Chief Financial
Officer* and Secretary*
Lance C. Ruud...................... 39 Senior Vice President-Corporate Finance
and Development*
Marvin L. Marks.................... 61 President of MegaTech, Director* Class I
Kent J. Wilken..................... 60 President of Kentec, Director* Class I
Greg H. Sellards(1)................ 49 President of Sun, Director* Class II
Michael W. Thomas.................. 42 President of CMS, Director* Class II
Nolan Lehmann(1)(2)(3)(4).......... 53 Director Class I
John B. Benear, II, MD(2)(3)....... 44 Director* Class II
Edward T. Kuklenski(2)(3).......... 39 Director* Class III
Kelvin J. Pennington(1)(2)(3)(4)... 39 Director* Class III
</TABLE>
- ------------
* Appointment will become effective on closing of this Offering.
(1) Member of the Board's Executive Committee.
(2) Member of the Board's Audit Committee.
(3) Member of the Board's Compensation Committee.
(4) Member of the Board's Nominating Committee.
William C. Klintworth, Jr. has been the president, chief executive officer
and a director of TRIAD since its formation in April 1997. Mr. Klintworth has
served as president and a director of HTD since April 1997, and from June 1994
to February 1997, he served as the president of Medical Alliance. He co-founded
both HTD and Medical Alliance. From November 1990 to May 1994, he served as the
president and a director of Alpha ProTech, Inc., a manufacturer and distributor
of medical products. Mr. Klintworth has approximately 23 years experience in the
health care industry, working in sales, distribution and manufacturing.
R. Tucker Coop will be appointed the president and a director of TRIAD on
closing of this Offering. He has been the president and chief executive officer
of THI since its formation in May 1996 and of its predecessor, Triad Medical
Inc., a California corporation ("TMI"), since its inception in 1981. Mr. Coop
has approximately 25 years experience in the health care field, working in both
the hospital and alternate-site markets. Before founding TMI, he was president
of Coop Medical Products and prior to that served in marketing and sales
positions with McGaw Laboratories, a division of American Hospital Supply
Corporation.
Clyde A. Blankenship, Jr. has been the executive vice president and a
director of TRIAD since its formation in April 1997. He has also served as
president of Futuretech, HTD's principal operating subsidiary, since he founded
it in 1977. Since April 1997, Mr Blankenship has served as executive vice
president and a director of HTD.
Walter D. Wallach will be appointed as a senior vice president and the
chief financial officer and secretary of TRIAD on closing of this Offering. He
has been the chief operating officer of THI since its formation in May 1996 and
of TMI since May 1993. From May 1991 to December 1992, Mr. Wallach served as the
executive vice president and chief financial officer of International Medication
Systems, a manufacturer of generic drugs. From January 1986 to April 1991, he
served as the chief financial officer of
36
<PAGE>
McGaw Inc., a manufacturer and distributor of intravenous solutions and sets.
Prior to that time, Mr. Wallach worked with The Kendall Company and
Colgate-Palmolive Company as a financial executive.
Lance C. Ruud has been the senior vice president and chief financial
officer, secretary and treasurer of TRIAD since its formation in April 1997.
From September 1993 to April 1997, Mr. Ruud served as the senior vice president
and chief financial officer of TransAmerican Waste Industries, Inc. From May
1990 to May 1993, he was employed by Republic Industries, Inc. last serving as
the vice president of finance beginning August 1991. Prior to that time, Mr.
Ruud was employed by Arthur Andersen LLP. Mr. Ruud is a certified public
accountant.
Marvin L. Marks will be appointed a director of TRIAD on the closing of
this Offering. Mr. Marks has been the president of MegaTech since he founded it
in 1976. He also serves as the president of JAJ Enterprises Ltd., a medical
products leasing and training company and is president-elect of the Independent
Medical Distributors Association, a trade association of companies that market
specialty medical products throughout the United States.
Kent J. Wilken will be appointed a director of TRIAD on the closing of this
Offering. Mr. Wilken has served as the president of Kentec since he founded it
in 1970.
Greg H. Sellards will be appointed a director of TRIAD on the closing of
this Offering. Mr. Sellards has served as the chief executive officer of Sun
since he founded it in 1978.
Michael W. Thomas will be appointed a director of TRIAD on the closing of
the Offering. Mr. Thomas has served as the president of CMS since he founded it
in 1989. He also serves as a director of Specialty Medical Marketing Alliance,
Inc., a trade association of companies that market specialty medical products
throughout the United States and Canada.
Nolan Lehmann has been a director of TRIAD since its formation in April
1997. He has also served as a director of HTD since April 1997. Since 1983, Mr.
Lehmann has served as the president and a director of Equus Capital Management
Corporation, a registered investment advisor. He also serves as the president
and a director of Equus II, a registered investment company. Mr. Lehmann also
serves as a director of Allied Waste Industries, Inc., a solid waste management
company, American Residential Services, Inc., a residential services company,
Brazos Sportswear, Inc., a casual sportswear company, Drypers Corporation, a
manufacturer of disposable diapers, and Garden Ridge Corporation, a specialty
retailer, all of which are public companies. He was appointed to the board of
directors pursuant to TRIAD's funding agreement with Equus II. See "Certain
Transactions."
John B. Benear, II, MD will be appointed a director of TRIAD on the closing
of this Offering. He has served as a medical oncologist for the Natalie Warran
Bryan Cancer Center of Saint Francis Hospital located in Tulsa, Oklahoma since
May 1989. Since 1995, he has served as the president of Cancer Care Associates,
a 22-physician oncology practice located throughout Oklahoma. He also serves as
the medical director of Practice Standards and of Clinical Information Systems
for American Oncology Resources, a public physician practice management company.
Dr. Benear serves on the boards of various professional associations.
Edward T. Kuklenski will be appointed a director of TRIAD on the closing of
this Offering. Since 1995, Mr. Kuklenski has served as the president and a
director of Alliance of Children's Hospitals, Inc., a product research and
testing company, and since 1989, as a senior vice president of Child Health
Corporation of America, a national alliance of 36 children's hospitals. Mr.
Kuklenski also serves as a director of the Anesthesia Patient Safety Foundation,
a non-profit consumer safety organization, and National Contracts, Inc., a
national account services company providing services to small and medium-sized
manufacturers of medical products.
Kelvin J. Pennington will be appointed a director of TRIAD on the closing
of this Offering. Since January 1992, Mr. Pennington has served as managing
general partner of PENMAN Asset Management, L.P. ("PENMAN Management"), the
general partner of PENMAN. He also serves as a director of AFC Enterprises,
Inc., an owner and franchisor of restaurants.
BOARD OF DIRECTORS CLASSES; DIRECTOR COMPENSATION
The Board of Directors is divided into three classes, each of which,
following a transitional period, will serve for three years, with one class
being elected each year at the annual stockholders' meeting. During the
37
<PAGE>
transitional period, the terms of the Class I directors will expire at the 1998
meeting, while the terms of the Class II directors and the Class III directors
will expire at the 1999 meeting and the 2000 meeting, respectively.
Classification of the Board could have the effect of lengthening the time
necessary to change the composition of a majority of the members comprising the
Board. In general, at least two annual meetings of stockholders will be
necessary for stockholders to effect a change in a majority of the members of
the Board.
Directors who are employees of the Company do not receive additional
compensation for serving as directors. Following the closing of this Offering,
each director who is not an employee of the Company (an "Outside Director")
initially will receive a fee of $2,000 for each board meeting attended and
$1,000 for each board committee meeting attended (or $500 if held on the same
day as a board meeting) and will periodically be granted options to purchase
Common Stock pursuant to the Incentive Plan. See " -- Incentive Plan." When
this Offering closes, each of TRIAD's four Outside Directors will be granted
options to purchase 10,000 shares of Common Stock at an exercise price per share
equal to the initial public offering price. TRIAD will reimburse directors for
out-of-pocket expenses they incur in attending board of directors or board
committee meetings in their capacity as directors.
EXECUTIVE COMPENSATION; EMPLOYMENT AGREEMENTS
On closing of this Offering, TRIAD will have employment agreements with
Messrs. Klintworth, Coop, Blankenship, Wallach and Ruud which provide for annual
base salaries of $150,000, $176,400, $150,000, $145,000 and $145,000,
respectively. As of the closing of the Acquisitions, the Company will enter into
employment agreements with a total of 23 key officers of the Founding Companies,
including Messrs. Marks, Wilken, Sellards and Thomas, each of whom is a director
nominee of TRIAD. The following summary of the employment agreements of these
executives and key officers does not purport to be complete and is qualified by
reference to them, a form of which has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. Each of these
agreements entitles the employee to participate in all TRIAD employee benefit
plans in which other members of TRIAD management participate. Each of these
agreements also has a three-year term subject to the right of the Company to
terminate the employee's employment at any time after one year. If the
employee's employment is terminated by the Company within the first three years
without cause (as defined), the employee will be entitled to the payment of any
annual base salary and continuation of health insurance benefits for one year.
Each employment agreement contains a covenant limiting competition with the
Company following the termination of employment for a period of (i) the longer
of 12 months or the remaining term of the employment agreement, if the
employment agreement is terminated by the Company without cause or on account of
disability, or (ii) the fourth anniversary of the effective date of the
employment agreement, if employment is otherwise terminated within its initial
three-year term.
INCENTIVE PLAN
The description set forth below summarizes the principal terms and
conditions of the Incentive Plan, does not purport to be complete and is
qualified in its entirety by reference to the Incentive Plan, a copy of which
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
GENERAL. The objectives of the Incentive Plan, which was approved by
TRIAD's board of directors and stockholders, are to attract and retain selected
key employees, consultants and Outside Directors, encourage their commitment,
motivate their superior performance, facilitate their obtaining ownership
interests in the Company (aligning their personal interests to those of the
Company's stockholders) and enable them to share in the long-term growth and
success of the Company.
SHARES SUBJECT TO INCENTIVE PLAN. Under the Incentive Plan, TRIAD may
issue Incentive Awards (as defined below) covering at any one time an aggregate
of the greater of (i) 1,130,000 shares of Common Stock and (ii) 12.5% of the
number of shares of Common Stock issued and outstanding on the last day of the
then preceding calendar quarter. No more than 1,130,000 shares of Common Stock
will be available for ISOs (as defined below). As of the closing of the
Acquisitions, options covering 972,987 shares of Common Stock will be
outstanding and 157,013 shares of Common Stock then will be available for
subsequent Incentive Awards. The number of securities available under the
Incentive Plan and outstanding Incentive Awards are subject to adjustments to
prevent enlargement or dilution of rights resulting from stock
38
<PAGE>
dividends, stock splits, recapitalizations or similar transactions or resulting
from a change in applicable laws or other circumstances.
ADMINISTRATION. The Incentive Plan will be administered by the
compensation committee of the Board of Directors (the "Committee"). Following
this Offering, the Committee will consist solely of directors each of whom is
(i) an "outside director" under Section 162(m) of the Internal Revenue Code of
1986, as amended (the "Code"), and (ii) a "non-employee director" under Rule
16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Committee may delegate to the chief executive officer or other
senior officers of the Company its duties under the Incentive Plan, except with
respect to any authority to grant Incentive Awards or take other action with
respect to persons who are subject to Section 16 of the Exchange Act or Section
162(m) of the Code. In the case of an Incentive Award to an Outside Director,
the Board of Directors shall act as the Committee. Subject to the express
provisions of the Incentive Plan, the Committee is authorized to, among other
things, select grantees under the Incentive Plan and determine the size,
duration and type, as well as the other terms and conditions (which need not be
identical), of each Incentive Award. The Committee also construes and interprets
the Incentive Plan and any related agreements. All determinations and decisions
of the Committee are final, conclusive and binding on all parties. TRIAD will
indemnify members of the Committee against any damage, loss, liability, cost or
expenses arising in connection with any claim, action, suit or proceeding by
reason of any action taken or failure to act under the Incentive Plan, except
for any such act or omission constituting willful misconduct or gross
negligence.
ELIGIBILITY. Key employees, including officers (whether or not they are
directors), and consultants of the Company and Outside Directors are eligible to
participate in the Incentive Plan. A key employee generally is any employee of
the Company who, in the opinion of the Committee, is in a position to contribute
materially to the growth and development and to the financial success of the
Company.
TYPES OF INCENTIVE AWARDS. Under the Incentive Plan, the Committee may
grant (i) incentive stock options ("ISOs"), as defined in Section 422 of the
Code, (ii) "nonstatutory" stock options ("NSOs"), (iii) stock appreciation
rights ("SARs"), (iv) shares of restricted stock, (v) performance units and
performance shares, (vi) other stock-based awards, and (vii) supplemental
payments dedicated to the payment of income taxes (collectively, "Incentive
Awards"). ISOs and NSOs are sometimes referred to collectively herein as
"Options." The terms of each Incentive Award will be reflected in an agreement
(the "Incentive Agreement") between TRIAD and the participant.
OPTIONS. Generally, Options must be exercised within 10 years of the grant
date. ISOs may be granted only to employees, and the exercise price of each ISO
may not be less than 100% of the fair market value of a share of Common Stock on
the date of grant. The Committee will have the discretion to determine the
exercise price of each NSO granted under the Incentive Plan. To the extent that
the aggregate fair market value of shares of Common Stock with respect to which
ISOs are exercisable for the first time by any employee during any calendar year
exceeds $100,000, such options must be treated as NSOs.
The exercise price of each Option is payable in cash or, in the discretion
of the Committee, by the delivery of shares of Common Stock owned by the
Optionee or the withholding of shares that would otherwise be acquired on the
exercise of the Option or by any combination of the foregoing.
An employee will not recognize any income for federal income tax purposes
at the time an ISO is granted, nor on the qualified exercise of an ISO, and will
recognize capital gain or loss (as applicable) upon the subsequent sale of
shares acquired in a qualified exercise. The exercise of an ISO is qualified if
a participant does not dispose of the shares acquired by such exercise within
two years after the ISO grant date and one year after such exercise. TRIAD is
not entitled to a tax deduction as a result of the grant or qualified exercise
of an ISO.
An optionee will not recognize any income for federal income tax purposes,
nor will TRIAD be entitled to a deduction, at the time an NSO is granted.
However, when an NSO is exercised, the optionee will recognize ordinary income
in an amount equal to the difference between the fair market value of the shares
received and the exercise price of the NSO, and TRIAD will generally recognize a
tax deduction in the same amount at the same time.
39
<PAGE>
The foregoing federal income tax information is a summary only, does not
purport to be a complete statement of the relevant provisions of the Code and
does not address the effect of any state of local taxes.
SARS. Upon exercise of an SAR, the holder will receive cash, shares of
Common Stock or a combination thereof, as specified in the related Incentive
Agreement, the aggregate value of which equals the amount by which the fair
market value per share of the Common Stock on the date of exercise exceeds the
exercise price of the SAR, multiplied by the number of shares underlying the
exercised portion of the SAR. An SAR may be granted in tandem with or
independently of an NSO. SARs will be subject to such terms and conditions and
will be exercisable at such times as determined by the Committee, provided, that
the exercise price per share must equal at least 100% of the fair market value
of a share of a Common Stock on the date of grant. The value of an SAR may be
paid in cash, shares of Common Stock or a combination thereof, as determined by
the Committee.
RESTRICTED STOCK. Restricted stock may be subject to substantial risk of
forfeiture, a restriction on transferability or rights of repurchase or first
refusal of the Company, as determined by the Committee. Unless otherwise
determined by the Committee, during the period of restriction, the grantee will
have all other rights of a stockholder, including the right to vote the shares
and receive the dividends paid thereon.
PERFORMANCE UNITS AND PERFORMANCE SHARES. Performance units and
performance shares may be granted only to employees and consultants. For each
performance period (to be determined by the Committee), the Committee will
establish specific financial or non-financial performance objectives, the number
of performance units or performance shares and their contingent values, which
values may vary depending on the degree to which such objectives are met.
OTHER STOCK-BASED AWARDS. Other stock-based awards are awards denominated
or payable in, valued in whole or in part by reference to or otherwise related
to shares of Common Stock. Subject to the terms of the Incentive Plan, the
Committee may determine any terms and conditions of other stock-based awards,
provided that, in general, the amount of consideration to be received by TRIAD
shall be either (i) no consideration other than services actually rendered or to
be rendered (in the case of the issuance of shares) or (ii) in the case of an
award in the nature of a purchase right, consideration (other than services
rendered) at least equal to 50% of the fair market value of the shares covered
by such grant on the date of grant. Payment or settlement of other stock-based
awards will be in shares of Common Stock or in other consideration related to
such shares.
SUPPLEMENTAL PAYMENTS FOR TAXES The Committee may grant, in connection
with an Incentive Award (except for ISOs), a supplemental payment in an amount
not to exceed the amount necessary to pay the federal and state income taxes
payable by the grantee with respect to the Incentive Award and the receipt of
such supplemental payment.
OTHER TAX CONSIDERATIONS. Upon accelerated exercisability of Options and
accelerated lapsing of restrictions upon restricted stock or other Incentive
Awards in connection with a Change in Control (as defined in the Incentive
Plan), certain amounts associated with such Incentive Awards could, depending
upon the individual circumstances of the participant, constitute "excess
parachute payments" under Section 280G of the Code, thereby subjecting the
participant to a 20% excise tax on those payments and denying TRIAD a deduction
with respect thereto. The limit on the deductibility of compensation under
Section 162(m) of the Code is also reduced by the amount of any excess parachute
payments. Whether amounts constitute excess parachute payments depends upon,
among other things, the value of the Incentive Awards accelerated and the past
compensation of the participant.
Taxable compensation earned by executive officers who are subject to
Section 162(m) of the Code in respect of Incentive Awards is subject to certain
limitations set forth in the Incentive Plan generally intended to satisfy the
requirements for "qualified performance-based compensation," but no assurance
can be given that TRIAD will be able to satisfy these requirements in all cases,
and TRIAD may, in its sole discretion, determine in one or more cases that it is
in its best interest not to satisfy these requirements even if it is able to do
so.
TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL. Except as otherwise
provided in the applicable Incentive Agreement, if a participant's employment or
other service with the Company (or its subsidiaries) is terminated (i) other
than due to his death, Disability, Retirement or for Cause (each capitalized
term as
40
<PAGE>
defined in the Incentive Plan), his then exercisable Options will remain
exercisable for 60 days after such termination, (ii) by reason of Disability or
death, his then exercisable Options will remain exercisable for one year
following such termination (except for ISOs, which will remain exercisable for
three months), (iii) due to his retirement, his then exercisable Options will
remain exercisable for six months (except for ISOs, which will remain
exercisable for three months), or (iv) for Cause, all his Options will expire at
the commencement of business on the date of such termination.
Upon a Change in Control of TRIAD, any restrictions on restricted stock and
other stock-based awards will be deemed satisfied, all outstanding Options and
SARs will become immediately exercisable and all the performance shares and
units and any other stock-based awards will be fully vested and deemed earned in
full. These provisions could in some circumstances have the effect of an
"anti-takeover" defense because, as a result of these provisions, a Change in
Control of TRIAD could be more difficult or costly.
INCENTIVE AWARDS NONTRANSFERABLE. No Incentive Award may be assigned, sold
or otherwise transferred by a participant, other than by will or by the laws of
descent and distribution, or be subject to any encumbrance, pledge, lien,
assignment or charge. An Incentive Award may be exercised during the
participant's lifetime only by the participant or the participant's legal
guardian.
AMENDMENT AND TERMINATION. TRIAD's board of directors may amend or
terminate the Incentive Plan at any time, except that the Incentive Plan may not
be modified or amended, without stockholder approval, if such amendment would
(i) increase the number of shares of Common Stock which may be issued
thereunder, except in connection with a recapitalization of the Common Stock,
(ii) amend the eligibility requirements for employees to purchase Common Stock
under the Incentive Plan, (iii) increase the maximum limits on Incentive Awards
that may be issued to executive officers who are subject to Section 162(m) of
the Code, (iv) extend the term of the Incentive Plan or (v) decrease the
authority granted to the Committee under the Incentive Plan in contravention of
Rule 16b-3 under the Exchange Act. No termination or amendment of the Incentive
Plan shall adversely affect in any material way any outstanding Incentive Award
previously granted to a participant without his consent.
On the closing of this Offering, TRIAD expects Options to purchase a total
of 972,987 shares of Common Stock will be outstanding. Of these Options, Options
to purchase 141,787 shares (including Options to purchase 22,489 shares to be
held by Mr. Wallach) will represent replacement options for former THI options
held by THI employees and will have a weighted average exercise price per share
of $5.85. The remaining Options to purchase up to 831,200 shares will include
Options granted to the following persons to purchase the number of shares
indicated: (i) Messrs. Klintworth, Coop and Ruud (50,000 shares each); (ii) Mr.
Wallach (40,000 shares); (iii) Mr. Thomas (15,000 shares); and (iv) other
employees and the Outside Directors as a group (626,200 shares). All these
options will have an initial exercise price per share equal to the initial
public offering price and will become exercisable as to 25% of such shares six
months after the date this Offering closes and as to 25% of such shares on each
anniversary of that date.
BONUS AWARDS; OTHER PLANS
The 1997 bonuses for officers and key employees of the Company, if any,
will be based upon the performance standards to be established by the
Compensation Committee. The Company expects the Compensation Committee to
establish such performance standards for the remainder of 1997 following the
closing of this Offering.
The Company has adopted or intends to adopt deferred compensation,
supplemental disability, supplemental life and retirement or other benefit or
welfare plans in which executive officers of the Company will be eligible to
participate.
On the closing of this Offering, the Compensation Committee will be
established. In the past, matters with respect to the compensation of executive
officers of TRIAD were determined by its Board of Directors, including those
members who serve as executive officers.
41
<PAGE>
CERTAIN TRANSACTIONS
ORGANIZATION OF TRIAD
TRIAD was initially capitalized with (i) $41,000 provided by Messrs.
Klintworth, Blankenship and Ruud and an officer of HTD in exchange for 548,545
shares of Common Stock and (ii) $300,000 provided by Equus II in exchange for
300,000 shares of TRIAD's Series A Preferred Stock. Equus II subsequently
converted the Series A Preferred Stock, in accordance with its terms, into
449,213 shares of Common Stock. Mr. Lehmann, who will become a director of
TRIAD, is a director and the president of Equus II. In September 1997, TRIAD
issued a warrant to purchase 25,000 shares of Common Stock at the initial public
offering price per share to PENMAN in connection with assisting TRIAD in the
acquisition of one of the Founding Companies. Mr. Pennington, who will become a
director of TRIAD, is managing general partner of the general partner of PENMAN.
In September 1997, TRIAD sold 100,000 shares of Common Stock for $5.00 per
share, as follows: (i) to Messrs. Benear and Sellards (8,000 shares each), Marks
(5,000 shares) and Thomas (1,000 shares), each of whom will become a director of
TRIAD; (ii) to a family trust of which Mr. Klintworth is an affiliate (7,000
shares); (iii) to Child Health Investment Corporation (30,000 shares), of which
Mr. Kuklenski (who will become a director of TRIAD) is an officer; (iv) to
affiliates or employees of certain Founding Companies (35,000 shares); and (v)
to an unrelated third party (6,000 shares).
Since April 1997, Equus II has advanced funds to TRIAD pursuant to a $2.2
million short-term promissory note (the "Equus Note") for use in connection
with TRIAD's efforts to create the Company and effect this Offering. In
connection therewith, TRIAD issued the Equus Warrant, which entitles its holder
to purchase 100,000 shares of Common Stock at the initial public offering price
per share. The Equus Note bears interest at a designated prime rate plus 1/2%.
At October 31, 1997, approximately $1.3 million was outstanding under the Equus
Note. TRIAD expects to borrow an additional $0.9 million under the Equus Note
before this Offering closes.
Concurrently with the closing of this Offering, TRIAD will close the
Acquisitions. The aggregate consideration it will pay consists of (i)
approximately $22.2 million in cash, (ii) 3,997,215 shares of Common Stock and
(iii) options to purchase up to an aggregate of 141,787 shares of Common Stock
at a weighted average exercise price of $5.85 per share. These options will
replace options to purchase THI common stock which were granted to employees of
THI. In addition, the Company will assume all the indebtedness of the Founding
Companies (estimated to be approximately $13.5 million when this Offering
closes) and repay substantially all such indebtedness with the proceeds of this
Offering.
Subject to certain adjustments described below, the following table sets
forth for each Founding Company the consideration TRIAD will pay to its
stockholders in the Acquisitions in cash and shares of Common Stock.
CASH SHARES OF
FOUNDING COMPANY CONSIDERATION COMMON STOCK
- ---------------------------------------- ------------- ------------
THI..................................... $ 8,696,559 1,451,322
HTD..................................... 2,475,000 530,357
Sun..................................... 2,050,000 571,429
CMS..................................... 1,600,000 350,000
Kentec.................................. 3,240,000 232,857
Products for Surgery.................... 2,250,000 203,571
MegaTech................................ -- 300,000
Omni Medical............................ 200,000 128,571
New England Specialties................. 553,500 88,750
Professional Equipment.................. 435,000 48,929
Wilson.................................. 720,000 91,429
------------- ------------
Totals............................. $ 22,220,059 3,997,215
============= ============
42
<PAGE>
In addition, TRIAD will issue options to purchase 141,787 shares of Common
Stock to replace outstanding options to purchase THI common stock in connection
with the THI acquisition. The Company will also repay an aggregate of $13.5
million of indebtedness of certain of the Founding Companies with the proceeds
of this Offering, as follows: THI -- $6.3 million; Sun Medical -- $0.9 million;
HTD -- $0.5 million; CMS -- $1.5 million; Products for Surgery -- $0.3 million;
MegaTech -- $1.4 million; Omni Medical -- $1.5 million; New England
Specialties -- $0.5 million; and Professional Equipment -- $0.6 million. The
indebtedness of CMS and MegaTech to be repaid includes $1.8 million these S
corporations have borrowed or are expected to borrow after September 30, 1997 in
order to distribute their AAA account balances to their stockholders prior to
the closing of the Acquisitions. See "The Company -- Summary of Terms of the
Acquisitions."
Prior to the closing of the Acquisitions, certain Founding Companies may
make additional distributions to their stockholders of certain assets and
related liabilities with an aggregate net book value of approximately $0.3
million.
The purchase price TRIAD will pay for Sun includes $1.5 million in cash and
35,715 shares of Common Stock that will be placed in escrow pending resolution
of certain loss contingencies relating to the Sun ESOP, Sun's sole stockholder.
See "The Company -- Summary of Terms of the Acquisitions." No part of the
escrowed cash or shares will revert to TRIAD.
Pursuant to the Acquisition Agreements, certain stockholders of each of the
Founding Companies (other than Equus II, PENMAN and others who are not
restricted from competing with TRIAD under employment agreements) have agreed
not to compete with the Company for a period of three years commencing on the
date of closing of the Acquisitions.
In connection with the Acquisitions, TRIAD will grant certain registration
rights to former stockholders of the Founding Companies. See "Shares Eligible
for Future Sale."
ACQUISITIONS INVOLVING CERTAIN OFFICERS, DIRECTORS AND STOCKHOLDERS
Persons who or which are or will become directors, executive officers, or
beneficial owners of 5% or more of the Common Stock of TRIAD will receive the
following consideration in the Acquisitions for their equity interests in the
Founding Companies.
CASH SHARES OF
NAME CONSIDERATION COMMON STOCK
- ------------------------------------- ------------- ------------
William C. Klintworth, Jr.(1)........ $ 990,000 36,969
R. Tucker Coop(2).................... 1,224,132 204,289
Clyde A. Blankenship, Jr............. 990,000 212,496
Walter D. Wallach(3)................. 249,113 41,573
Marvin L. Marks(4)................... -- 268,736
Kent J. Wilken(5).................... 3,240,000 232,857
Michael W. Thomas(6)................. 1,600,000 350,000
PENMAN(7)............................ 4,739,650 790,974
Sun ESOP(8).......................... 2,050,000 571,429
Equus II(9).......................... -- 70,714
- ------------
(1) Represents 100% of the cash and approximately 26.0% of the shares payable to
HTD Holdings, L.C., a limited liability company ("HTD Holdings") in which
Mr. Klintworth has an approximately 51.0% ownership interest. The members of
HTD Holdings have agreed to this allocation of the consideration.
(2) Represents cash and shares payable to a family trust of which Mr. Coop and
his spouse are co-trustees.
(3) Excludes options to purchase 22,489 shares of Common Stock which are to be
granted on closing of this Offering in replacement of THI options at
exercise prices per share of $6.13 (13,493 shares) and $8.06 (8,996 shares).
(FOOTNOTES CONTINUED ON NEXT PAGE)
43
<PAGE>
(4) Excludes a AAA account distribution in the amount of approximately $1.3
million to Mr. Marks preceding the closing of the Acquisitions. Any
indebtedness incurred to fund this distribution will be repaid by TRIAD on
closing of this Offering. Also excludes certain assets valued at
approximately $60,000 to be distributed to Mr. Marks prior to the closing of
the Acquisitions.
(5) Represents cash and shares payable to a family trust of which Mr. Wilken and
his spouse are co-trustees. Excludes certain assets valued at approximately
$0.2 million to be distributed to Mr. Wilken prior to the closing of the
Acquisitions.
(6) Excludes a AAA account distribution in the amount of approximately $1.7
million to Mr. Thomas preceding the closing of the Acquisitions. Any
indebtedness incurred to fund this distribution will be repaid by TRIAD on
closing of this Offering.
(7) Represents the cash and shares PENMAN will receive for its THI common stock
that it acquired from THI for approximately $7.5 million in May 1996.
Excludes shares issuable on exercise of the PENMAN Warrant.
(8) Includes $139,000 in cash to be paid to Mr. Sellards under Sun's
Supplemental Executive Retirement Plan, and 50,714 shares to be received by
Mr. Sellards in partial payment of a promissory note. Of the net $1.9
million in cash and 520,715 shares to be paid to the Sun ESOP, $1.5 million
in cash and 35,715 shares are to be deposited in escrow by TRIAD for
purposes of resolving Sun ESOP compliance issues. See "The
Company -- Summary of Terms of the Acquisitions."
(9) Excludes $2.2 million in repayment of the Equus Note and $0.5 million paid
by HTD in redemption of HTD preferred stock held by Equus II.
HTD
Messrs. Blankenship, and Campbell, Equus II and HTD Holdings (of which Mr.
Klintworth is a 50% owner) currently own all the capital stock of HTD. For
information regarding the organization of HTD, the reorganization of Futuretech,
Inc. ("Futuretech") as a subsidiary of HTD, HTD's acquisition of Medical
Alliance (of which Mr. Klintworth is an executive officer and former owner) and
HTD's sales of its equity securities to Equus II, see Notes 1 and 13 to the
Consolidated Financial Statements of HTD included elsewhere herein.
HTD is being acquired by TRIAD for consideration of approximately $2.5
million in cash and 530,357 shares of Common Stock. In September 1997, HTD
redeemed for $450,000 the HTD preferred stock Equus II purchased from HTD in
April 1997. TRIAD valued HTD on a basis consistent with the other Acquisitions,
using generally the same multiple of cash flow adjusted for stockholders'
compensation and other non-recurring items.
TRIAD reimbursed Futuretech and Medical Alliance approximately $200,000 for
expenses relating to its formation.
REAL ESTATE AND OTHER TRANSACTIONS
HTD leases office space and warehouse facilities in Bessemer, Alabama from
a partnership owned 50% by Mr. Blankenship. TRIAD and the partnership have
agreed to extend the lease term until late 2002 at the present annual rental of
$154,800.
Kentec leases its two facilities from Mr. Wilken. TRIAD and Mr. Wilken have
agreed to extend the leases until late 1999 at the present aggregate annual
rental of $228,000.
Sun leases its offices from a partnership in which Mr. Sellards owns a 70%
general partnership interest. TRIAD and the partnership have agreed to extend
the lease, which provides for annual payments by Sun of approximately $240,000,
until late 2001.
Certain Founding Companies have also entered into financing agreements to
which certain of the principals of the Company are parties. Futuretech has a
$1.5 million revolving line of credit which Mr. Blankenship has personally
guaranteed. Mr. Blankenship also loaned funds to Futuretech for working capital
purposes. This loan was evidenced by a promissory note payable to Mr.
Blankenship with a outstanding balance of approximately $102,000 at September
30, 1997, bearing interest at 8% per annum, payable monthly. This note payable
to Mr. Blankenship was repaid in full in October 1997.
44
<PAGE>
In February 1997, Sun borrowed $325,000 from Cysco Enterprises, Inc., a
corporation wholly owned by Mr. Sellards. Under the terms of the note (the
"Cysco Note"), Sun is to repay Cysco principal and interest at the rate of
prime plus 3%, in amounts equal to one half of collections by Sun of principal
and interest under a line of credit Sun extended to Rejuvena Corporation (the
"Rejuvena Note"). At September 30, 1997, $325,000 was outstanding under the
Cysco Note. Prior to or concurrent with this Offering, Mr. Sellards will repay
all amounts outstanding under the Cysco Note in exchange for which he will
receive the stock ownership, options and conversion rights in Rejuvena
Corporation which Sun received under the Rejuvena Note.
Sun loaned $225,000 to Mr. Sellards in January 1991. Mr. Sellards repaid
this loan in March 1996. In May 1995, Sun guaranteed a promissory note (the
"Sellards Note") payable by Mr. Sellards to an unrelated third party, which
note has a current outstanding balance of approximately $514,000. Sun also
guaranteed a loan (the "ESOP Loan") payable by the Sun ESOP to Mr. Sellards,
which loan has a current balance of approximately $2.0 million. In connection
with the closing of the Sun acquisition, TRIAD will repay the ESOP Loan in full
through the repayment of the Sellards Note, a cash payment of approximately $0.7
million and the issuance of 50,714 shares of Common Stock.
MegaTech provided certain services to JAJ Enterprises, Ltd., d/b/a S.O.S.
Technologies ("SOS"), a medical products leasing and training company wholly
owned beneficially by Mr. Marks, including office and warehouse space and
administrative services. SOS paid to MegaTech approximately $120,000, $120,000
and $135,000 in 1994, 1995 and 1996, respectively, for these services. The
relationship between MegaTech and SOS ended as of June 30, 1997.
The Company believes the consideration paid under each of the leases
described above is at fair market rates and the other agreements described above
are fair to the Company.
COMPANY POLICY
In the future, any transactions with directors, officers, employees or
affiliates of the Company are anticipated to be minimal and will, in any case,
be approved in advance by a majority of the board of directors, including a
majority of disinterested members of the board of directors.
45
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table shows, immediately after giving effect to the closing
of the Acquisitions and this Offering, the beneficial ownership of the Common
Stock of (i) each person who or which then will beneficially own more than five
percent of the outstanding shares of TRIAD Common Stock, (ii) each person who
then will be a director of TRIAD, (iii) each person who then will be an
executive officer of TRIAD and (iv) all persons who then will be directors and
executive officers of TRIAD as a group. The table assumes none of these persons
intends to acquire shares directly from the Underwriters in connection with this
Offering.
SHARES BENEFICIALLY OWNED
AFTER OFFERING(2)
---------------------------
BENEFICIAL OWNER(1) NUMBER PERCENT
- ---------------------------------------- ----------- -------
PENMAN Private Equity and Mezzanine
Fund, L.P. (3)........................ 815,974 8.9%
333 West Wacker Drive, Suite 700
Chicago, Illinois 60606
Equus II Incorporated(4)................ 619,927 6.7%
2929 Allen Parkway, Suite 2500
Houston, Texas 77019
Sun Medical Employee Stock Ownership
Plan(5)............................... 485,000 5.3%
1179 Corporate Drive West, Suite 100
Arlington, Texas 76006
William C. Klintworth, Jr.(6)........... 414,536 4.6%
R. Tucker Coop(7)....................... 204,289 2.2%
Clyde A. Blankenship, Jr................ 334,799 3.7%
Walter D. Wallach(8).................... 46,071 *
Lance C. Ruud........................... 44,332 *
Michael W. Thomas....................... 351,000 3.9%
Marvin L. Marks......................... 273,736 3.0%
Greg H. Sellards(9)..................... 79,121 *
Kent J. Wilken(10)...................... 232,857 2.6%
Nolan Lehmann(4)(11).................... 619,927 6.7%
Kelvin J. Pennington(3)(12)............. 815,974 8.9%
John B. Benear II, MD................... 8,000 *
All directors and officers as a group
(12 persons)(6)-(11).................. 3,424,642 37.1%
- ------------
* Less than 1%.
(1) All persons listed have sole voting and investment power with respect to
their shares unless otherwise indicated.
(2) Shares shown do not include shares of Common Stock that could be acquired
on exercise of currently outstanding options which do not vest within 60
days hereof.
(3) Includes 25,000 shares of Common Stock issuable on exercise of the PENMAN
Warrant.
(4) Includes 100,000 shares of Common Stock issuable on exercise of the Equus
Warrant.
(5) Excludes 35,715 shares to be deposited in escrow for purposes of resolving
Sun ESOP compliance issues and 50,714 shares payable to Mr. Sellards in
partial repayment of a promissory note. Consulting Fiduciaries, Inc., 2745
Riverwoods Road, Riverwoods, Illinois 60015, has been appointed independent
fiduciary of the Sun ESOP.
(6) Includes (i) 3,500 shares representing 50% of the shares held by the
Klintworth Family Trust to which Mr. Klintworth is one of two beneficiaries
and (ii) 141,429 shares of Common Stock issuable to HTD Holdings, in which
Mr. Klintworth has an approximately 51.0% ownership interest. Mr.
Klintworth disclaims beneficial ownership of 104,460 of the shares referred
to in the preceding clause (ii). See "Certain Transactions -- Acquisitions
Involving Certain Officers, Directors and Stockholders."
(FOOTNOTES CONTINUED ON NEXT PAGE)
46
<PAGE>
(7) All these shares are owned by a family trust of which Mr. Coop and his
spouse are co-trustees.
(8) Includes 4,498 shares of Common Stock issuable on exercise of stock
options.
(9) Includes 20,407 shares of Common Stock issuable to the Sun ESOP for Mr.
Sellards' account and 50,714 shares of Common Stock issuable in partial
repayment of Sun ESOP indebtedness to Mr. Sellards.
(10) All these shares are owned by a family trust of which Mr. Wilken and his
spouse are co-trustees.
(11) All these shares are beneficially owned by Equus II. Mr Lehmann, a director
of TRIAD, is the president and director of Equus II and thus may be deemed
to be the beneficial owner of shares held by Equus II. Mr. Lehmann
disclaims beneficial ownership of all those shares.
(12) All these shares are beneficially owned by PENMAN. Mr. Pennington, a
director nominee of TRIAD, is the managing general partner of PENMAN
Management, the general partner of PENMAN, and thus may be deemed to be the
beneficial owner of shares held by PENMAN. Mr. Pennington disclaims
beneficial ownership of all those shares.
47
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
On closing of the Acquisitions and this Offering, 9,094,973 shares of
Common Stock will be outstanding. The shares sold in this Offering (other than
to affiliates of the Company) will be freely tradable by the public. The
remaining outstanding shares of Common Stock (collectively, the "Restricted
Shares") have not been registered under the Securities Act and may be resold
publicly only following their effective registration under the Securities Act or
pursuant to an available exemption from the registration requirements of the
Securities Act, such as Rule 144 thereunder.
In general, under Rule 144 as currently in effect, if a minimum of one year
has elapsed since the later of the date of acquisition of the Restricted Shares
from TRIAD or from an affiliate of TRIAD, a person (or persons whose shares of
Common Stock are aggregated), including persons who may be deemed "affiliates"
of TRIAD, would be entitled to sell within any three-month period a number of
Restricted Shares which does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock and (ii) the average weekly trading volume of
the Common Stock during a preceding period of four calendar weeks. Sales under
Rule 144 are also subject to certain provisions as to the manner of sale, notice
requirements and the availability of current public information about TRIAD. In
addition, under Rule 144, if a period of at least two years has elapsed since
the later of the date Restricted Shares were acquired from TRIAD or the date
they were acquired from an affiliate of TRIAD, a stockholder who is not an
affiliate of TRIAD at the time of sale and has not been such an affiliate for at
least three months prior to the sale would be entitled to sell shares of Common
Stock in the public market immediately without compliance with the foregoing
Rule 144 requirements. Rule 144 does not require the same person to have held
the Restricted Shares for the applicable periods under certain circumstances.
The foregoing summary of Rule 144 is not intended to be a complete description
thereof. The SEC has proposed certain amendments to Rule 144 that would, among
other things, eliminate the manner of sale requirements and revise the notice
provisions of that rule. The SEC has also solicited comments on other possible
changes to Rule 144, including possible revisions to the one- and two-year
holding periods and the volume limitations referred to above.
TRIAD has agreed generally not to offer, sell or otherwise dispose of any
shares of Common Stock for a period of two years (the "lockup period")
following the date of this Prospectus without the prior written consent of
NationsBanc Montgomery Securities, Inc., except that TRIAD may issue Common
Stock in connection with acquisitions, pursuant to awards under the Incentive
Plan or pursuant to the exercise of warrants outstanding as of the closing of
this Offering. Further, all of TRIAD's officers, directors and current
stockholders (including Equus II) and all persons who acquire shares in
connection with the Acquisitions (including PENMAN) have agreed that they
generally will not offer, sell or otherwise dispose of any of their shares for
two years following the date of this Prospectus without the prior written
consent of NationsBanc Montgomery Securities, Inc.
TRIAD will enter into a registration rights agreement with the former
stockholders of the Founding Companies, Equus II and PENMAN (the "RRA"), which
will provide certain registration rights with respect to the Common Stock issued
to such stockholders in the Acquisitions or on the exercise of the Equus Warrant
or the PENMAN Warrant. The RRA will provide for a single demand registration
right, exercisable by the holders of at least 51.0% of the shares of Common
Stock initially subject to the RRA, pursuant to which TRIAD will file a
registration statement under the Securities Act to register the sale of not less
than 1,000,000 shares by those requesting stockholders and any other holders of
Common Stock subject to the agreement who desire to sell pursuant to such
registration statement. The demand request may not be made until December ,
1999. The demand registration rights conferred by the RRA will terminate on
December 31, 2001. In addition, subject to certain conditions and limitations,
the RRA will provide the holders of Common Stock subject to the RRA with the
right to participate in registrations by TRIAD of its equity securities in
underwritten offerings commencing on December , 1999.
The RRA requires TRIAD to pay the costs associated with an offering subject
thereto, other than underwriting discounts and commissions and transfer taxes
attributable to the shares sold on behalf of the selling stockholders. The RRA
provides that the number of shares of Common Stock that must be registered on
behalf of selling stockholders is subject to limitation if the managing
underwriter determines that market
48
<PAGE>
conditions require such a limitation. Pursuant to the RRA, TRIAD will indemnify
the selling stockholders, and such selling stockholders will indemnify TRIAD,
against certain liabilities in respect of any registration statement or offering
covered by the RRA.
TRIAD may register additional shares of Common Stock under the Securities
Act in the future for its use in connection with future acquisitions. Pursuant
to Securities Act Rule 145, the volume limitations and certain other
requirements of Rule 144 will apply to resales of these shares by affiliates of
the businesses the Company acquires for a period of one year from the date of
their acquisition (or such shorter period as the SEC may prescribe). Otherwise
these shares generally will be freely tradable after their issuance by persons
not affiliated with TRIAD unless TRIAD contractually restricts their sale, and
sales of these shares during the lockup period would require the prior written
consent of NationsBanc Montgomery Securities, Inc.
TRIAD intends to file a registration statement on Form S-8 under the
Securities Act to register the shares of Common Stock reserved or to be
available for issuance pursuant to the Incentive Plan. Shares of Common Stock
issued pursuant to the Incentive Plan after the effective date of that
registration statement generally will be available for sale in the open market
by holders who are not affiliates of TRIAD and, subject to the volume and other
limitations of Rule 144, by holders who are affiliates of TRIAD.
DESCRIPTION OF CAPITAL STOCK
TRIAD's authorized capital stock consists of 20,000,000 shares of Common
Stock and 1,000,000 shares of preferred stock, par value $.001 per share (the
"Preferred Stock"). At September 30, 1997, 1,097,758 shares of Common Stock
and no shares of Preferred Stock were issued and outstanding. On closing of the
Acquisitions and this Offering, 9,094,973 shares of Common Stock (9,694,973 if
the underwriters' over-allotment option is exercised in full) will be issued,
outstanding and nonassessable and 1,097,987 shares of Common Stock then will be
reserved for issuance pursuant to all then outstanding options, warrants and
other rights (consisting only of Incentive Plan options and the warrants issued
to Equus II and PENMAN). The following summary is qualified in its entirety by
reference to the Charter, which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
COMMON STOCK
The Common Stock possesses ordinary voting rights for the election of
directors and in respect of other corporate matters, and each share has one
vote. The Common Stock affords no cumulative voting rights, and the holders of a
majority of the shares voting for the election of directors can elect all the
directors if they choose to do so. The Common Stock carries no preemptive rights
and is not convertible, redeemable, assessable or entitled to the benefits of
any sinking fund. The holders of Common Stock are entitled to dividends in such
amounts and at such times as may be declared by the Board of Directors out of
funds legally available therefor, subject to the dividend preference of any
stock ranking senior to the Common Stock, including the Preferred Stock. See
"Dividend Policy" for information regarding the initial dividend policy of
TRIAD.
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more classes or series. Subject to the provisions
of the Charter and limitations prescribed by law, the Board of Directors is
expressly authorized to adopt resolutions to issue the shares, to fix the number
of shares and to change the number of shares constituting any series, and to
provide for the powers, designations, preferences and relative, participating,
optional or other rights, and the qualifications, limitations or restrictions
thereof, including without limitation, voting powers, dividend rights (including
whether dividends are cumulative), dividend rates, terms of redemption
(including sinking fund provisions), redemption prices, conversion rights and
liquidation preferences of the shares constituting any class or series of the
Preferred Stock, in each case without any further action or vote by the holders
of Common Stock. Although TRIAD has no present intention to issue shares of
Preferred Stock, the issuance of shares of Preferred Stock, or the issuance of
rights to purchase such shares, could be used to discourage an unsolicited
acquisition proposal. For example, the issuance of a series of Preferred Stock
might impede a business combination by including class voting rights that would
enable the holders to block such a transaction; or
49
<PAGE>
such issuance might facilitate a business combination by including voting rights
that would provide a required percentage vote of the stockholders. In addition,
under certain circumstances, the issuance of Preferred Stock could adversely
affect the voting power of the holders of the Common Stock. The Board of
Directors could act in a manner that would discourage an acquisition attempt or
other transaction that some or a majority of the stockholders might believe to
be in their best interests or in which stockholders might receive a premium for
their stock over the then market price of such stock. The Board of Directors
does not at present intend to seek stockholder approval prior to any issuance of
currently authorized stock, unless otherwise required by law or the rules of any
market on which TRIAD's securities are traded.
WARRANTS
The Equus Warrant to purchase up to 100,000 shares of Common Stock and the
PENMAN Warrant to purchase up to 25,000 shares of Common Stock have an initial
exercise price per share equal to the initial public offering price and expire
in April 2002 and September 2002, respectively. The exercise price and the
number of shares underlying these warrants are subject to adjustment in certain
events, including the declaration or payment of certain dividends on the Common
Stock or securities convertible into Common Stock (subject to certain
exceptions), stock splits, combinations and reclassification of shares. In
addition, the exercise price is subject to adjustment on the issuance of
additional shares of Common Stock or rights thereto, subject to certain
exceptions, at certain price levels. In the case of certain extraordinary
transactions, including, without limitation, a merger or consolidation or the
sale of all or substantially all the assets of TRIAD, these warrants become
exercisable for the number of shares of stock, securities or other property
which the Common Stock issuable on exercise of these warrants would have been
entitled as a result of such transactions, together with any necessary
adjustments.
STATUTORY BUSINESS COMBINATION PROVISION
TRIAD is a Delaware corporation and is subject to Section 203 of the DGCL.
In general, Section 203 prevents an "interested stockholder" (defined
generally as a person owning 15% or more of a corporation's outstanding voting
stock) from engaging in a "business combination" (as defined) with a Delaware
corporation for three years following the date such person became an interested
stockholder unless: (i) before such person became an interested stockholder, the
board of directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved the business
combination; (ii) upon consummation of the transaction that resulted in the
interested stockholder's becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding stock held by
directors who are also officers of the corporation and by employee stock plans
that do not provide employees with the rights to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer); or (iii) following the transaction in which such person became an
interested stockholder, the business combination was approved by the board of
directors of the corporation and authorized at a meeting of stockholders by the
affirmative vote of the holders of 66 2/3% of the outstanding voting stock of
the corporation not owned by the interested stockholder. Under Section 203, the
restrictions described above also do not apply to certain business combinations
proposed by an interested stockholder following the announcement or notification
of one of certain extraordinary transactions involving the corporation and a
person who had not been an interested stockholder during the previous three
years or who became an interested stockholder with the approval of the majority
of the corporation's directors, if such extraordinary transaction is approved or
not opposed by a majority of the directors who were directors prior to any
person becoming an interested stockholder during the previous three years or
were recommended for election or elected to succeed such directors by a majority
of such directors.
OTHER MATTERS
Delaware law authorizes Delaware corporations to limit or eliminate the
personal liability of their directors to them and their stockholders for
monetary damages for breach of a director's fiduciary duty of care. The duty of
care requires that, when acting on behalf of the corporation, directors must
exercise an informed business judgment based on all material information
reasonably available to them. Absent the limitations authorized by Delaware law,
directors are accountable to Delaware corporations and their
50
<PAGE>
stockholders for monetary damages for conduct constituting gross negligence in
the exercise of their duty of care. Delaware law enables Delaware corporations
to limit available relief to equitable remedies such as injunction or
rescission. The Charter limits the liability of directors of TRIAD to TRIAD or
its stockholders to the fullest extent permitted by Delaware law. Specifically,
no member of the Board of Directors will be personally liable for monetary
damages for breach of a director's fiduciary duty as a director, except for
liability (i) for any breach of the member's duty of loyalty to TRIAD or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the DGCL or (iv) for any transaction from which the member
derived an improper personal benefit. This Charter provision may have the effect
of reducing the likelihood of derivative litigation against directors and may
discourage or deter stockholders or management from bringing a lawsuit against
directors for breach of their duty of care, even though such an action, if
successful, might otherwise have benefited TRIAD and its stockholders. The
Charter and Bylaws provide indemnification to TRIAD's officers and directors and
certain other persons with respect to certain matters, and TRIAD has entered
into agreements with each of its directors and executive officers providing for
indemnification with respect to certain matters.
The Charter provides that: (i) stockholders may act only at an annual or
special meeting of stockholders and may not act by written consent; and (ii)
special meetings of the stockholders can be called only by the chairman of the
board, the chief executive officer, the president or a majority of the Board of
Directors. The Charter also provides that the Board of Directors shall consist
of three classes of directors serving for staggered terms. It is currently
contemplated that approximately one-third of the Board of Directors will be
elected each year. The classified board provision could prevent a party who
acquires control of a majority of the outstanding voting stock of TRIAD from
obtaining control of the Board of Directors until the second annual
stockholders' meeting following the date the acquirer obtains the controlling
interest. See "Management -- Directors and Executive Officers." The Charter
provides that the number of directors shall be as determined by the Board of
Directors from time to time, but shall not be less than three. It also provides
that directors may be removed only for cause, and then only by the affirmative
vote of the holders of at least two-thirds of all outstanding voting stock. This
provision, in conjunction with the Charter provisions authorizing the board of
directors to fill vacant directorships, will prevent stockholders from removing
incumbent directors without cause and filling the resulting vacancies with their
own nominees.
STOCKHOLDER PROPOSALS
TRIAD's Bylaws contain provisions requiring that advance notice be
delivered to TRIAD of any business to be brought by a stockholder before an
annual meeting of stockholders and establishing certain procedures to be
followed by stockholders in nominating persons for election to the Board of
Directors. Generally, such advance notice provisions provide that written notice
must be given to the secretary of TRIAD by a stockholder (i) in the event of
business to be brought by a stockholder before an annual meeting and (ii) in the
event of nominations of persons for election to the Board of Directors by any
stockholder, not less than 60 nor more than 180 days prior to the anniversary
date of the immediately preceding annual meeting of stockholders (with certain
exceptions if the date of the annual meeting is different by more than specified
periods from the anniversary date). Such notice must set forth specific
information regarding such stockholder and such business or director nominee, as
described in TRIAD's Bylaws. The foregoing summary is qualified in its entirety
by reference to TRIAD's Bylaws, which are filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
51
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), represented by
NationsBanc Montgomery Securities, Inc., Smith Barney Inc. and Wedbush Morgan
Securities (the "Representatives"), have severally agreed, subject to the
terms and conditions in the underwriting agreement (the "Underwriting
Agreement") by and between TRIAD and the Underwriters, to purchase from TRIAD
the aggregate number of shares of Common Stock indicated below, opposite their
respective names, at the initial public offering price less the underwriting
discount set forth on the cover page of this Prospectus. The Underwriting
Agreement provides that the obligations of the Underwriters are subject to
certain conditions precedent, and that the Underwriters are committed to
purchase all of the shares of Common Stock, if they purchase any.
NUMBER OF
UNDERWRITERS SHARES
- ---------------------------------------- ---------
NationsBanc Montgomery Securities,
Inc. .................................
Smith Barney Inc........................
Wedbush Morgan Securities...............
---------
Total.............................. 4,000,000
=========
The Representatives have advised TRIAD that the Underwriters propose
initially to offer the Common Stock to the public on the terms set forth on the
cover page of this Prospectus. The Underwriters may allow selected dealers a
concession of not more than $ per share; and the Underwriters may allow, and
such dealers may reallow, a concession of not more than $ per share to
certain other dealers. After the initial public offering, the public offering
price and other selling terms may be changed by the Representatives. The Common
Stock is offered subject to receipt and acceptance by the Underwriters, and to
certain other conditions, including the right to reject orders in whole or in
part.
TRIAD has granted an option to the Underwriters, exercisable during the
30-day period after the date of this Prospectus, to purchase up to a maximum of
600,000 additional shares of Common Stock to cover over-allotments, if any, at
the same price per share as the initial 4,000,000 shares to be purchased by the
Underwriters. To the extent that the Underwriters exercise such over-allotment
option, each of the Underwriters will be committed, subject to certain
conditions, to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may purchase such
shares only to cover over-allotments made in connection with this Offering.
The Underwriting Agreement provides that TRIAD will indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or will contribute to payments the Underwriters may be required
to make in respect thereof.
The individuals who will be officers or directors of TRIAD when this
Offering closes, TRIAD's current stockholders (including Equus II) and all
persons who acquire shares of Common Stock in the Acquisitions who, immediately
following this Offering, collectively will beneficially own an aggregate of at
least 5,241,540 shares of Common Stock (including shares issuable upon the
exercise of outstanding options and warrants exercisable within 60 days of the
closing of this Offering), have agreed that for a period of two years after the
date of this Prospectus they will not, without the prior written consent of
NationsBanc Montgomery Securities, Inc., directly or indirectly sell, offer,
contract or grant any option to sell, pledge, transfer, establish an open put
equivalent position or otherwise dispose of any shares of Common Stock, options
or warrants to acquire shares of Common Stock, or securities exchangeable or
52
<PAGE>
exercisable for or convertible into shares of Common Stock. TRIAD has also
agreed not to, directly or indirectly, sell, offer, contract or grant any option
to sell, pledge, transfer or establish an open put equivalent position or
otherwise dispose of or transfer, or announce the offering of, or file any
registration statement under the Securities Act in respect of, any shares of
Common Stock, options or warrants to acquire shares of the Common Stock or
securities exchangeable or exercisable for or convertible into shares of Common
Stock, for a period of two years after the date of this Prospectus without the
prior written consent of NationsBanc Montgomery Securities, Inc., except (i)
shares of Common Stock issued in connection with the Acquisitions, (ii) shares
of Common Stock issued on the exercise of Options awarded under the Incentive
Plan, the Equus Warrant or the PENMAN Warrant, (iii) additional Options awarded
under the Incentive Plan and (iv) shares of Common Stock issued in connection
with future acquisitions (but not greater than an aggregate of 3,000,000 shares
during the first year of the two-year lock-up period), so long as, (a) in the
case of issuances described in the preceding clauses (ii) and (iii), the
recipient agrees to remain subject to the lock-up until the end of the two-year
period (or, if the recipient is an employee of the Company but is neither an
officer or director of TRIAD nor the holder of 5% or more of the outstanding
shares of Common Stock, until the elapse of the first 180 days of the two-year
period) and (b) in the case of issuances described in the preceding clause (iv),
the recipient agrees to remain subject to the lock-up during the first year of
the two year period, In evaluating any request for a waiver of the lockup
period, NationsBanc Montgomery Securities, Inc. will consider, in accordance
with its customary practice, all relevant facts and circumstances at the time of
the request, including, without limitation, the recent trading market for the
Common Stock, the size of the request and, with respect to a request by TRIAD to
issue additional equity securities, the purpose of that issuance. See "Shares
Eligible for Future Sale."
The Representatives have informed TRIAD that the Underwriters do not expect
to make sales of Common Stock offered by this Prospectus to accounts over which
they exercise discretionary authority in excess of 5% of the number of shares of
Common Stock offered hereby.
Prior to this Offering, there has been no public trading market for the
Common Stock. Consequently, the initial public offering price of the Common
Stock will be determined by negotiations between TRIAD and the Representatives.
Among the factors they will consider in such negotiations are the history of,
and the prospects for, the Company and the industry in which the Company
competes, an assessment of the Company's management, its financial condition,
its past and present earnings and the trend of such earnings, the prospects for
future earnings of the Company, the present state of the Company's development,
the general condition of the economy and the securities markets at the time of
this Offering and the market prices of and demand for publicly traded common
stock of comparable companies in recent periods.
Until the distribution of the Common Stock is completed, rules of the SEC
may limit the ability of the Underwriters and certain selling group members to
bid for and purchase the Common Stock. As an exception to these rules, the
Representatives are permitted to engage in certain transactions that stabilize
the price of the Common Stock. Such transactions consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in connection
with this Offering, I.E., if they sell more shares of Common Stock than are set
forth on the cover page of this Prospectus, the Representatives may reduce that
short position by purchasing Common Stock in the open market. The
Representatives may also elect to reduce any short position by exercising all or
part of the over-allotment option described above. The Representatives may also
impose a penalty bid on certain Underwriters and selling group members. This
means that if the Representatives purchase shares of Common Stock in the open
market to reduce the Underwriters' short position or to stabilize the price of
the Common Stock, they may reclaim the amount of the selling concession from the
Underwriters and selling group members who sold those shares as part of this
Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security. Neither TRIAD nor any of the Underwriters
makes any representation or predictions as to the direction or magnitude of any
effect that the transactions described above may have on the price of
53
<PAGE>
the Common Stock. In addition, neither TRIAD nor any of the Underwriters makes
any representation that the Underwriters will engage in such transactions or
that such transactions, once commenced, will not be discontinued without notice.
LEGAL MATTERS
Certain legal matters in connection with the sale of the Common Stock
offered hereby are being passed upon for TRIAD by Porter & Hedges, L.L.P.,
Houston, Texas, and for the Underwriters by Baker & Botts, L.L.P., Houston,
Texas.
EXPERTS
The audited financial statements included in this Prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
ADDITIONAL INFORMATION
TRIAD has not previously been subject to the reporting requirements of the
Exchange Act. TRIAD has filed a Registration Statement on Form S-1 (the
"Registration Statement") under the Securities Act with the SEC with respect
to this Offering. This Prospectus, filed as a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement, or the exhibits thereto, in accordance with the rules and regulations
of the SEC, and reference is hereby made to such omitted information. The
statements made in this Prospectus concerning documents filed as exhibits to the
Registration Statement accurately describe the material provisions of such
documents and are qualified in their entirety by reference to such exhibits for
complete statements of their provisions. The Registration Statement and the
exhibits thereto may be inspected, without charge, at the public reference
facilities of the SEC at its principal office at Judiciary Plaza, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, and its regional offices at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661,
and at 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of all
or any portion of the Registration Statement can be obtained at prescribed rates
from the Public Reference Section of the SEC at its principal office at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. The
SEC maintains a World Wide Web site that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the SEC. The address of that site is http://www.sec.gov.
54
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
TRIAD MEDICAL INC. AND FOUNDING
COMPANIES
Unaudited Pro Forma Combined Financial
Statements
Basis of Presentation.............. F-3
Unaudited Pro Forma Combined
Balance Sheet..................... F-4
Unaudited Pro Forma Combined
Statements of Operations.......... F-5
Notes to Unaudited Pro Forma
Combined Financial Statements..... F-8
FOUNDING COMPANIES
Historical Financial Statements
TRIAD Medical Inc.
Report of Independent Public
Accountants................... F-12
Balance Sheets................ F-13
Statements of Operations...... F-14
Statements of Stockholders'
Equity........................ F-15
Statements of Cash Flows...... F-16
Notes to Financial
Statements.................... F-17
TRIAD Holdings, Inc. and
Subsidiaries
Report of Independent Public
Accountants................... F-21
Consolidated Balance Sheets... F-22
Consolidated Statements of
Operations.................... F-23
Consolidated Statements of
Stockholders' Equity.......... F-24
Consolidated Statements of
Cash Flows.................... F-25
Notes to Consolidated
Financial Statements.......... F-26
Healthcare Technology Delivery,
Inc. and Subsidiaries
Report of Independent Public
Accountants................... F-36
Consolidated Balance Sheets... F-37
Consolidated Statements of
Operations.................... F-38
Consolidated Statements of
Stockholders' Equity.......... F-39
Consolidated Statements of
Cash Flows.................... F-40
Notes to Consolidated
Financial Statements.......... F-41
Sun Medical, Inc.
Report of Independent Public
Accountants................... F-49
Balance Sheets................ F-50
Statements of Operations...... F-51
Statements of Stockholder's
Deficit....................... F-52
Statements of Cash Flows...... F-53
Notes to Financial
Statements.................... F-54
F-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS -- (CONTINUED)
PAGE
-----
Custom Medical Specialties, Inc.
Report of Independent Public
Accountants................... F-63
Balance Sheets................ F-64
Statements of Operations...... F-65
Statements of Stockholder's
Equity........................ F-66
Statements of Cash Flows...... F-67
Notes to Financial
Statements.................... F-68
Kentec Medical, Inc.
Report of Independent Public
Accountants................... F-73
Balance Sheets................ F-74
Statements of Operations...... F-75
Statements of Stockholder's
Equity........................ F-76
Statements of Cash Flows...... F-77
Notes to Financial
Statements.................... F-78
Products for Surgery, Inc. and
Subsidiaries
Report of Independent Public
Accountants................... F-83
Consolidated Balance Sheets... F-84
Consolidated Statements of
Operations.................... F-85
Consolidated Statements of
Stockholders' Equity.......... F-86
Consolidated Statements of
Cash Flows.................... F-87
Notes to Consolidated
Financial Statements.......... F-88
MegaTech Medical, Inc.
Report of Independent Public
Accountants................... F-95
Balance Sheets................ F-96
Statements of Operations...... F-97
Statements of Stockholders'
Equity........................ F-98
Statements of Cash Flows...... F-99
Notes to Financial
Statements.................... F-100
Omni Medical, Inc.
Report of Independent Public
Accountants................... F-104
Balance Sheets................ F-105
Statements of Operations...... F-106
Statements of Stockholders'
Equity (Deficit).............. F-107
Statements of Cash Flows...... F-108
Notes to Financial
Statements.................... F-109
PCI Medical, Inc.
Report of Independent Public
Accountants................... F-114
Statement of Operations....... F-115
Statement of Cash Flows....... F-116
Notes to Financial
Statements.................... F-117
F-2
<PAGE>
TRIAD MEDICAL INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma combined statements of operations give
effect to the following transactions and events (the Transactions) as if they
had occurred on January 1, 1996: (i) the organization of TRIAD Medical Inc.
(TRIAD) and the issuance of shares of its common stock (Common Stock) and
preferred stock; (ii) the conversion of outstanding TRIAD preferred stock into
Common Stock; (iii) a split of the outstanding Common Stock; (iv) the
acquisitions (the Acquisitions) by TRIAD of (a) Triad Holdings, Inc. (THI), (b)
Healthcare Technology Delivery, Inc. (HTD), (c) Sun Medical, Inc. (Sun), (d)
Custom Medical Specialties, Inc. (CMS), (e) Kentec Medical, Inc. (Kentec), (f)
Products for Surgery, Inc. (Products for Surgery), (g) MegaTech Medical, Inc.
(MegaTech), (h) Omni Medical, Inc. (Omni), (i) New England Medical Specialties
Inc. (New England Specialties), (j) Professional Equipment Co., Inc.
(Professional Equipment) and (k) Wilson Medical Specialties, Inc. (Wilson)
(together, the Founding Companies); and (v) the closing of TRIAD's initial
public offering of Common Stock (the Offering) and the application of the
estimated proceeds therefrom. The following unaudited pro forma balance sheet
gives effect to the following as if they had occurred on September 30, 1997: (i)
the Acquisitions; (ii) the net incurrence of indebtedness by TRIAD and the
Founding Companies since September 30, 1997; and (iii) the Offering and the
application of the estimated proceeds therefrom.
TRIAD and the Founding Companies are hereinafter collectively referred to
as the Company. New England Specialties, Wilson and Professional Equipment are
sometimes hereinafter collectively referred to as the Other Founding Companies.
The Acquisitions will become effective concurrently with the closing of the
Offering and TRIAD will account for the Acquisitions (except for the acquisition
of THI) using the purchase method of accounting. THI is presented as the
accounting acquirer.
These pro forma statements do not purport to represent what the Company's
financial position or results of operations actually would have been had the
Transactions in fact occurred when assumed or to project that financial position
or those results of operations for any future period.
TRIAD has preliminarily analyzed the savings it expects to realize from
reductions in compensation and benefits to the owners and certain key employees
of the Founding Companies to which they have contractually agreed and other
known cost eliminations, and the pro forma combined statements of operations
reflect these reductions. TRIAD cannot currently quantify other potential cost
savings it may achieve through combining and integrating the operations of the
Founding Companies and expects those savings will be offset by incremental costs
TRIAD expects to incur, but also cannot currently quantify, such as costs
associated with corporate management and being a public company. The pro forma
combined statements of operations reflect neither the unquantifiable savings nor
the unquantifiable incremental costs.
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions that management deems appropriate and may be
revised as additional information becomes available. However, management does
not expect the final purchase price allocation to be materially different from
the preliminary allocation nor does it expect there to be any material post
closing adjustments. The unaudited pro forma combined financial information
presented herein does not reflect pro forma adjustments giving effect to the
acquisitions of (i) Medical Companies Alliance, Inc. (MCA) by HTD in 1997, (ii)
three companies by THI in 1997 or (iii) one company by Products for Surgery in
1996 because the individual and combined effect of including such adjustments
would not be material. Because the Founding Companies have not been under common
control or management, their historical combined results may not be comparable
to, or indicative of, future performance. The unaudited pro forma combined
financial statements should be read in conjunction with the other financial
statements and notes thereto included elsewhere in this Prospectus. See "Risk
Factors."
The Company has recently received a commitment from First Chicago Capital
Markets, Inc. to provide the Company with a $40.0 million credit facility, which
may be used for acquisitions, working capital and other general corporate
purposes. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Pro Forma Combined -- Liquidity and Capital
Resources."
F-3
<PAGE>
TRIAD MEDICAL INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PRODUCTS
FOR
TRIAD THI HTD SUN CMS KENTEC SURGERY
-------- ---------- --------- --------- --------- --------- ----------
ASSETS
CURRENT ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents........... $349,177 $ 353,338 $ 82,101 $ 608,211 $1,329,864 $ 618,464 $ 115,253
Short-term investments.............. -- -- -- -- -- 112,481 --
Accounts receivable................. -- 9,238,611 2,157,884 2,543,067 1,118,468 1,407,069 870,677
Notes receivable.................... -- 56,649 -- -- -- -- 17,274
Inventories......................... -- 4,275,413 2,462,720 1,178,641 875,662 1,647,056 1,474,985
Prepaids............................ -- 429,644 11,965 62,633 62,723 -- 40,115
Deferred income taxes............... -- 345,000 36,306 126,941 -- 23,370 119,266
Other current assets................ -- 142,516 -- -- -- -- --
-------- ---------- --------- --------- --------- --------- ----------
TOTAL CURRENT ASSETS................. 349,177 14,841,171 4,750,976 4,519,493 3,386,717 3,808,440 2,637,570
-------- ---------- --------- --------- --------- --------- ----------
PROPERTY AND EQUIPMENT, net.......... 14,345 4,545,595 313,541 79,383 51,138 132,269 184,413
GOODWILL............................. -- 4,175,202 1,665,592 -- -- -- 95,350
OTHER NON-CURRENT ASSETS............. 3,587,441 224,434 35,669 719,899 3,685 217,955 345,222
-------- ---------- --------- --------- --------- --------- ----------
TOTAL ASSETS......................... $3,950,963 $23,786,402 $6,765,778 $5,318,775 $3,441,540 $4,158,664 $3,262,555
======== ========== ========= ========= ========= ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current Maturities of Long-Term
Debt............................... $ -- $1,335,308 $ 169,136 $ 450,000 $ -- $ -- $ --
Current obligations under capital
leases............................. -- 527,301 32,403 -- -- -- --
Short-term debt..................... 1,059,586 100,000 703,396 -- 1,100,000 -- 292,473
Accounts payable and accrued
liabilities........................ 2,135,314 8,606,865 3,079,047 3,546,281 790,083 1,072,903 1,293,111
Pro forma cash considerations due to
Founding Companies................. -- -- -- -- -- -- --
-------- ---------- --------- --------- --------- --------- ----------
TOTAL CURRENT LIABILITIES............ 3,194,900 10,569,474 3,983,982 3,996,281 1,890,083 1,072,903 1,585,584
-------- ---------- --------- --------- --------- --------- ----------
OBLIGATIONS UNDER CAPITAL LEASES..... -- 416,932 63,670 -- -- -- --
LONG-TERM DEBT, net of current
maturities.......................... -- 3,403,809 -- 400,000 -- -- 142,914
STOCKHOLDERS' NOTES.................. -- 468,229 -- 1,500,000 9,500 -- --
DEFERRED INCOME TAX LIABILITIES...... -- 322,000 10,824 6,959 -- -- 44,766
OTHER................................ -- 1,133,988 -- 259,983 -- -- 500,000
STOCKHOLDERS' EQUITY:
Common stock........................ 1,098 24,104 900 2,673,357 1,000 46,000 10,588
Warrants to purchase common stock... 500,000 -- -- -- -- --
Additional paid-in capital.......... 4,720,999 6,618,948 1,611,800 (222,789) -- -- 355,892
Retained earnings................... (4,466,034) 828,918 1,094,602 (3,295,016) 1,752,957 3,039,761 622,811
Treasury stock...................... -- -- -- -- (212,000) -- --
-------- ---------- --------- --------- --------- --------- ----------
TOTAL STOCKHOLDERS' EQUITY........... 756,063 7,471,970 2,707,302 (844,448) 1,541,957 3,085,761 989,291
-------- ---------- --------- --------- --------- --------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY.............................. $3,950,963 $23,786,402 $6,765,778 $5,318,775 $3,441,540 $4,158,664 $3,262,555
======== ========== ========= ========= ========= ========= ==========
OTHER
FOUNDING PRO FORMA POST MERGER AS
MEGATECH OMNI COMPANIES ADJUSTMENTS PRO FORMA ADJUSTMENTS ADJUSTED
---------- --------- --------- ----------- ---------- ----------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........... $ 67,143 $ 53,426 $ 23,849 $(1,300,000) $2,300,826 $ 840,487 $3,141,313
Short-term investments.............. -- -- -- -- 112,481 -- 112,481
Accounts receivable................. 988,334 762,954 1,420,736 -- 20,507,800 -- 20,507,800
Notes receivable.................... -- -- 6,249 -- 80,172 -- 80,172
Inventories......................... 683,347 1,977,070 1,393,583 -- 15,968,477 -- 15,968,477
Prepaids............................ 18,036 -- 55,651 -- 680,767 -- 680,767
Deferred income taxes............... -- -- 25,000 -- 675,883 -- 675,883
Other current assets................ 49 -- -- -- 142,565 -- 142,565
---------- --------- --------- ----------- ---------- ----------- ---------
TOTAL CURRENT ASSETS................. 1,756,909 2,793,450 2,925,068 (1,300,000 ) 40,468,971 840,487 41,309,458
---------- --------- --------- ----------- ---------- ----------- ---------
PROPERTY AND EQUIPMENT, net.......... 59,158 8,586 300,529 -- 5,688,957 -- 5,688,957
GOODWILL............................. -- -- -- 22,272,737 28,208,881 -- 28,208,881
OTHER NON-CURRENT ASSETS............. 37,925 113,750 208,941 2,331,968 7,826,889 (4,387,441) 3,439,448
---------- --------- --------- ----------- ---------- ----------- ---------
TOTAL ASSETS......................... $1,853,992 $2,915,786 $3,434,538 $23,304,705 $82,193,698 $(3,546,954) $78,646,744
========== ========= ========= =========== ========== =========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current Maturities of Long-Term
Debt............................... $ -- $ -- $297,613 $ -- $2,252,057 $(2,252,057) $ --
Current obligations under capital
leases............................. -- -- -- -- 559,704 -- 559,704
Short-term debt..................... 30,000 1,450,000 29,941 1,800,000 6,565,396 (6,565,396) --
Accounts payable and accrued
liabilities........................ 75,525 1,567,401 1,461,747 800,000 24,428,277 (2,935,314) 21,492,963
Pro forma cash considerations due to
Founding Companies................. -- -- -- 22,220,059 22,220,059 (22,220,059) --
---------- --------- --------- ----------- ---------- ----------- ---------
TOTAL CURRENT LIABILITIES............ 105,525 3,017,401 1,789,301 24,820,059 56,025,493 (33,972,826) 22,052,667
---------- --------- --------- ----------- ---------- ----------- ---------
OBLIGATIONS UNDER CAPITAL LEASES..... -- -- -- -- 480,602 -- 480,602
LONG-TERM DEBT, net of current
maturities.......................... -- -- 695,211 (325,000 ) 4,316,934 (4,316,934) --
STOCKHOLDERS' NOTES.................. -- -- 96,924 (710,000 ) 1,364,653 (1,364,653) --
DEFERRED INCOME TAX LIABILITIES...... -- -- -- -- 384,549 -- 384,549
OTHER................................ 42,800 -- -- -- 1,936,771 -- 1,936,771
STOCKHOLDERS' EQUITY:
Common stock........................ 35,000 1,700 15,954 (2,804,606 ) 5,095 4,000 9,095
Warrants to purchase common stock... -- -- -- -- 500,000 -- 500,000
Additional paid-in capital.......... -- 83,300 30,000 3,122,927 16,321,077 36,103,459 52,424,536
Retained earnings................... 1,723,667 (186,615) 851,253 (1,107,780 ) 858,524 -- 858,524
Treasury stock...................... (53,000) -- (44,105 ) 309,105 -- -- --
---------- --------- --------- ----------- ---------- ----------- ---------
TOTAL STOCKHOLDERS' EQUITY........... 1,705,667 (101,615) 853,102 (480,354 ) 17,684,696 36,107,459 53,792,155
---------- --------- --------- ----------- ---------- ----------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY.............................. $1,853,992 $2,915,786 $3,434,538 $23,304,705 $82,193,698 $(3,546,954) $78,646,744
========== ========= ========= =========== ========== =========== =========
F-4
<PAGE>
TRIAD MEDICAL INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
TRIAD THI HTD SUN CMS KENTEC
---------- ---------- ---------- ---------- --------- ----------
REVENUES............................. $ -- $36,257,683 $16,475,288 $13,037,884 $9,599,162 $14,412,116
COST OF REVENUES..................... -- 27,492,002 11,042,497 8,595,560 7,022,412 10,060,368
---------- ---------- ---------- ---------- --------- ----------
Gross profit........................ -- 8,765,681 5,432,791 4,442,324 2,576,750 4,351,748
SELLING EXPENSES..................... -- 3,395,801 2,724,858 1,820,170 674,321 1,750,968
GENERAL & ADMINISTRATIVE EXPENSES.... -- 3,017,319 2,353,122 2,121,559 781,362 2,316,731
DEPRECIATION & AMORTIZATION.......... -- 763,071 120,445 60,544 20,933 100,715
---------- ---------- ---------- ---------- --------- ----------
INCOME FROM OPERATIONS............... -- 1,589,490 234,366 440,051 1,100,134 183,334
OTHER INCOME (EXPENSE)
Interest income..................... -- 64,588 11,525 48,308 35,010 28,750
Interest expense.................... -- (368,831) (44,425) (246,549) (950) --
Other............................... -- (113,990) (63,615) -- 7,025 (7,666)
---------- ---------- ---------- ---------- --------- ----------
INCOME BEFORE INCOME TAXES........... -- 1,171,257 137,851 241,810 1,141,219 204,418
PROVISION FOR INCOME TAXES........... -- 464,885 54,782 242,589 -- 50,496
---------- ---------- ---------- ---------- --------- ----------
NET INCOME (LOSS).................... $ -- $ 706,372 $ 83,069 $ (779) $1,141,219 $ 153,922
========== ========== ========== ========== ========= ==========
PRO FORMA NET INCOME PER SHARE.......
SHARES USED IN COMPUTING PRO FORMA
NET INCOME PER SHARE................
OTHER
PRODUCTS FOR FOUNDING PRO FORMA
SURGERY MEGATECH OMNI PCI COMPANIES ADJUSTMENTS
------------ --------- --------- ---------- ---------- -----------
REVENUES............................. $8,824,903 $6,820,737 $6,081,614 $6,049,214 $10,936,076 $ --
COST OF REVENUES..................... 5,407,012 4,214,729 4,266,448 2,967,047 7,144,545 --
------------ --------- --------- ---------- ---------- -----------
Gross profit........................ 3,417,891 2,606,008 1,815,166 3,082,167 3,791,531 --
SELLING EXPENSES..................... 1,151,109 1,327,796 617,375 724,656 1,798,981
GENERAL & ADMINISTRATIVE EXPENSES.... 1,909,709 932,104 827,166 1,558,923 1,686,396 (3,453,703)(h)
(332,865)(j)
DEPRECIATION & AMORTIZATION.......... 103,951 17,657 7,602 131,644 105,894 556,818(k)
------------ --------- --------- ---------- ---------- -----------
INCOME FROM OPERATIONS............... 253,122 328,451 363,023 666,944 200,260 3,229,750
OTHER INCOME (EXPENSE)
Interest income..................... 3,698 901 5,935 4,888 2,161
Interest expense.................... (107,623) (18,212) (489) (6,460) (126,177) 819,716(l)
Other............................... 304,925 135,000 -- 65,186 33,485 (203,549)(m)
------------ --------- --------- ---------- ---------- -----------
INCOME BEFORE INCOME TAXES........... 454,122 446,140 368,469 730,558 109,729 3,845,917
PROVISION FOR INCOME TAXES........... 91,600 -- -- -- 41,024 2,915,238(n)
------------ --------- --------- ---------- ---------- -----------
NET INCOME (LOSS).................... $ 362,522 $ 446,140 $ 368,469 $ 730,558 $ 68,705 $ 930,679
============ ========= ========= ========== ========== ===========
</TABLE>
PRO FORMA NET INCOME PER SHARE.......
SHARES USED IN COMPUTING PRO FORMA
NET INCOME PER SHARE................
AS
ADJUSTED
-----------
REVENUES............................. $128,494,677
COST OF REVENUES..................... 88,212,620
-----------
Gross profit........................ 40,282,057
SELLING EXPENSES..................... 15,986,035
GENERAL & ADMINISTRATIVE EXPENSES.... 13,717,823
DEPRECIATION & AMORTIZATION.......... 1,989,274
-----------
INCOME FROM OPERATIONS............... 8,588,925
OTHER INCOME (EXPENSE)
Interest income..................... 205,764
Interest expense.................... (100,000)
Other............................... 156,801
-----------
INCOME BEFORE INCOME TAXES........... 8,851,490
PROVISION FOR INCOME TAXES........... 3,860,614
-----------
NET INCOME (LOSS).................... $ 4,990,876
===========
PRO FORMA NET INCOME PER SHARE....... $ 0.54
===========
SHARES USED IN COMPUTING PRO FORMA
NET INCOME PER SHARE................ 9,161,355(o)
===========
F-5
<PAGE>
TRIAD MEDICAL INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PRODUCTS FOR
TRIAD THI HTD SUN CMS KENTEC SURGERY
--------- ---------- ---------- --------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES............................. $ $26,167,703 $12,202,645 $9,780,791 $7,029,495 $10,968,994 $6,680,965
COST OF SALES........................ 20,175,059 8,217,283 6,792,836 5,123,931 7,673,528 4,498,464
--------- ---------- ---------- --------- --------- ---------- ------------
Gross profit........................ 5,992,644 3,985,362 2,987,955 1,905,564 3,295,466 2,182,501
SELLING.............................. 2,397,533 1,986,077 941,440 527,849 1,360,928 813,484
GENERAL & ADMINISTRATIVE............. 1,898,138 1,787,624 1,378,739 590,468 1,687,306 1,346,747
DEPRECIATION & AMORTIZATION
EXPENSE............................. 502,095 89,159 45,000 16,177 91,990 58,264
--------- ---------- ---------- --------- --------- ---------- ------------
INCOME (LOSS) FROM OPERATIONS........ 1,194,878 122,502 622,776 771,070 155,242 (35,994)
OTHER INCOME (EXPENSE)
Interest income..................... 48,188 263 27,949 15,612 23,492 3,645
Interest expense.................... (248,140) (30,349) (176,195) (475) -- (87,688)
Other............................... (83,406) (908) -- (475) (7,851) 185,046
--------- ---------- ---------- --------- --------- ---------- ------------
INCOME BEFORE INCOME TAXES........... 911,520 91,508 474,530 785,732 170,883 65,009
PROVISION FOR INCOME TAXES........... 357,436 36,365 199,014 -- 40,965 16,295
--------- ---------- ---------- --------- --------- ---------- ------------
NET INCOME FROM OPERATIONS........... $ $ 554,084 $ 55,143 $ 275,516 $ 785,732 $ 129,918 $ 48,714
========= ========== ========== ========= ========= ========== ============
PRO FORMA INCOME PER SHARE...........
SHARES USED IN COMPUTING PRO FORMA
INCOME PER SHARE....................
OTHER
FOUNDING PRO FORMA AS
MEGATECH OMNI PCI COMPANIES ADJUSTMENTS ADJUSTED
--------- --------- --------- --------- ----------- ----------
REVENUES............................. $5,072,584 $4,702,781 $6,049,214 $8,003,432 $ -- $96,658,604
COST OF SALES........................ 2,815,612 3,255,092 2,967,047 5,325,962 -- 66,844,814
--------- --------- --------- --------- ----------- ----------
Gross profit........................ 2,256,972 1,447,689 3,082,167 2,677,470 -- 29,813,790
SELLING.............................. 876,883 389,479 724,656 1,191,260 -- 11,209,589
GENERAL & ADMINISTRATIVE............. 777,487 676,327 1,558,923 1,274,254 (2,466,642 )(h) 10,176,506
(332,865 )(j)
DEPRECIATION & AMORTIZATION
EXPENSE............................. 10,293 5,921 131,644 83,725 417,614 (k) 1,451,882
--------- --------- --------- --------- ----------- ----------
INCOME (LOSS) FROM OPERATIONS........ 592,309 375,962 666,944 128,231 2,381,893 6,975,813
OTHER INCOME (EXPENSE)
Interest income..................... 62 3,682 4,888 1,621 129,402
Interest expense.................... -- (443) (6,460) (94,712 ) 569,462 (l) (75,000)
Other............................... -- -- 65,186 2,614 (169,110 )(m) (8,904)
--------- --------- --------- --------- ----------- ----------
INCOME BEFORE INCOME TAXES........... 592,371 379,201 730,558 37,754 2,782,245 7,021,311
PROVISION FOR INCOME TAXES........... -- -- -- 16,397 2,414,023 (n) 3,096,212
--------- --------- --------- --------- ----------- ----------
NET INCOME FROM OPERATIONS........... $ 592,371 $ 379,201 $ 730,558 $ 21,357 $ 368,222 $3,925,099
========= ========= ========= ========= =========== ==========
PRO FORMA INCOME PER SHARE........... $ 0.43
==========
SHARES USED IN COMPUTING PRO FORMA
INCOME PER SHARE.................... 9,161,355(o)
==========
F-6
<PAGE>
TRIAD MEDICAL INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
TRIAD THI HTD SUN CMS KENTEC
---------- ---------- ---------- ---------- ---------- ---------
REVENUES............................. $ -- $36,387,356 $14,492,286 $10,613,669 $6,848,143 $9,650,138
COST OF SALES........................ -- 27,142,668 9,823,034 7,039,412 5,060,636 6,713,218
---------- ---------- ---------- ---------- ---------- ---------
Gross profit........................ -- 9,244,688 4,669,252 3,574,257 1,787,507 2,936,920
SELLING.............................. -- 3,476,813 2,278,747 1,226,358 487,855 1,102,924
GENERAL & ADMINISTRATIVE............. 4,092,883 3,543,152 1,562,044 1,024,132 596,930 1,917,316
DEPRECIATION & AMORTIZATION
EXPENSE............................. 1,600 1,053,849 166,344 45,000 19,710 63,161
---------- ---------- ---------- ---------- ---------- ---------
INCOME (LOSS) FROM OPERATIONS........ (4,094,483) 1,170,874 662,117 1,278,767 683,012 (146,481)
OTHER INCOME (EXPENSE)
Interest income..................... 1,557 30,950 7,068 84,771 10,752 28,560
Interest expense.................... (373,108) (428,107) (41,391) (176,778) (1,109) --
Other............................... -- (51,328) (18,193) -- 20,995 (9,091)
---------- ---------- ---------- ---------- ---------- ---------
INCOME (LOSS) BEFORE INCOME TAXES.... (4,466,034) 722,389 609,601 1,186,760 713,650 (127,012)
PROVISION FOR INCOME TAXES........... -- 276,552 240,330 448,968 -- (16,689)
---------- ---------- ---------- ---------- ---------- ---------
NET INCOME FROM OPERATIONS........... $(4,466,034) $ 445,837 $ 369,271 $ 737,792 $ 713,650 $(110,323)
========== ========== ========== ========== ========== =========
PRO FORMA INCOME PER SHARE...........
SHARES USED IN COMPUTING PRO FORMA
INCOME PER SHARE....................
OTHER
PRODUCTS FOR FOUNDING PRO FORMA AS
SURGERY MEGATECH OMNI COMPANIES ADJUSTMENTS ADJUSTED
------------ --------- --------- --------- ----------- -----------
REVENUES............................. $5,764,410 $4,986,669 $4,759,774 $7,610,293 $ $101,112,738
COST OF SALES........................ 3,459,920 2,933,428 3,573,528 5,026,572 70,772,416
------------ --------- --------- --------- ----------- -----------
Gross profit........................ 2,304,490 2,053,241 1,186,246 2,583,721 -- 30,340,322
SELLING.............................. 911,262 828,569 437,129 1,153,112 11,902,769
GENERAL & ADMINISTRATIVE............. 1,582,354 688,404 567,818 1,145,239 (1,496,840 )(h) 11,209,369
(3,697,097 )(i)
(316,966 )(j)
DEPRECIATION & AMORTIZATION
EXPENSE............................. 57,389 26,264 73,256 40,510 417,614 (k) 1,964,697
------------ --------- --------- --------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS........ (246,515) 510,004 108,043 244,860 5,093,289 5,263,487
OTHER INCOME (EXPENSE)
Interest income..................... 25,909 -- 2,392 488 192,447
Interest expense.................... (27,480) (8,333) (5,775) (83,422 ) 1,070,503 (l) (75,000)
Other............................... 408,743 60,000 181,986 34,590 (590,459 )(m) 37,243
------------ --------- --------- --------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES.... 160,657 561,671 286,646 196,516 5,573,333 5,418,177
PROVISION FOR INCOME TAXES........... 129,527 -- -- 82,421 1,200,185 (n) 2,361,294
------------ --------- --------- --------- ----------- -----------
NET INCOME FROM OPERATIONS........... $ 31,130 $ 561,671 $ 286,646 $114,095 $4,373,148 $ 3,056,883
============ ========= ========= ========= =========== ===========
PRO FORMA INCOME PER SHARE........... $ 0.33
===========
SHARES USED IN COMPUTING PRO FORMA
INCOME PER SHARE.................... 9,161,355(o)
===========
</TABLE>
F-7
<PAGE>
TRIAD MEDICAL INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. TRIAD MEDICAL INC. BACKGROUND:
TRIAD was founded to create a national leader in the contract sale and
distribution of specialty medical products designed for the hospital and
alternate-site health care markets (including sub-acute facilities, home care
companies and specialty physician groups). TRIAD has conducted no operations to
date and will acquire the Founding Companies concurrently with the closing of
the Offering.
2. HISTORICAL FINANCIAL STATEMENTS:
The historical financial statements represent the financial position and
results of operations of the Founding Companies and were derived from the
respective Founding Companies' financial statements. All Founding Companies have
a December 31 year-end or have been converted to a December 31 year-end, except
for Professional Equipment, which has an October 31 year-end, and New England
Specialties, which has a March 31 year-end. The historical financial statements
included elsewhere in this Prospectus have been included in accordance with
Regulation S-X, Rule 3-05, promulgated by the Securities and Exchange
Commission.
3. ACQUISITION OF FOUNDING COMPANIES:
TRIAD will account for the Acquisitions using the purchase method of
accounting, with THI being treated as the acquirer for financial statement
presentation purposes.
The following table sets forth the consideration to be paid in (i) cash and
(ii) shares of TRIAD's Common Stock, par value $0.001 per share (Common Stock),
for the Founding Companies. For purposes of computing the estimated purchase
price for accounting purposes, the value of the Common Stock was determined
using an estimated fair value of $8.25 per share, which represents a discount of
25 percent from the assumed initial public offering price of $11.00 due to
restrictions on the sale and transferability of the shares issued. The estimated
purchase price for the Acquisitions is based on preliminary estimates and is
subject to certain purchase price adjustments at and following closing, however,
management does not expect the final purchase price allocation to be materially
different from the preliminary allocation nor does it expect there to be any
material post closing adjustments. The table does not reflect (i) distributions
totaling $3.1 million by Founding Companies that are S Corporations to their
stockholders which constitute undistributed earnings, which have been or will be
taxed to those shareholders ("S Corporation Distributions") or (ii)
distributions of the cash surrender value of certain insurance policies and
other personal assets of $0.3 million.
SHARES OF
CASH COMMON
CONSIDERATION STOCK
-------------- -----------
THI.................................. $ 8,696,559 1,451,322
HTD.................................. 2,475,000 530,357
Sun.................................. 2,050,000 571,429
CMS.................................. 1,600,000 350,000
Kentec............................... 3,240,000 232,857
Products for Surgery................. 2,250,000 203,571
MegaTech............................. -- 300,000
Omni................................. 200,000 128,571
New England Specialties.............. 553,500 88,750
Professional Equipment............... 435,000 48,929
Wilson............................... 720,000 91,429
-------------- -----------
Total...................... $ 22,220,059 3,997,215
============== ===========
F-8
<PAGE>
TRIAD MEDICAL INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Of the estimated total purchase price of $35.5 million (based on the fair
value of the shares to be issued in the Acquisitions and excluding THI, the
accounting acquirer), $13.2 million has been allocated to the assets acquired
and liabilities assumed. The remaining $22.3 million represents the purchase
price paid to holders of the common stock of the Founding Companies in excess of
the net assets acquired.
Management of TRIAD anticipates, based on its preliminary analysis, that
the historical carrying value of the Founding Companies' assets and liabilities
will approximate fair value. Accordingly, the amount allocated to goodwill is
$22.3 million. Management of TRIAD has not identified any other material
tangible or identifiable intangible assets of the Founding Companies to which a
portion of the purchase price should be allocated.
4. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
(a) Records the S Corporation Distributions of Founding Companies.
(b) Records the distribution of cash surrender value of life insurance
policies and other personal assets to stockholders.
(c) Records the purchase of the Founding Companies, including receivables from
prior stockholders for any potential sales tax liability from prior
operations, elimination of other receivables and payables to prior
stockholders, and recording of additional acquisition costs.
(d) Records TRIAD's issuance of shares of Common Stock and the accrued payable
of $8.7 million to the former stockholders of THI, the accounting
acquirer.
(e) Reflects the net deferred income tax assets attributable to the temporary
differences between financial reporting and income tax bases of assets and
liabilities currently held in S Corporations.
(f) Records the estimated proceeds from the issuance of 4,000,000 shares of
Common Stock at an assumed offering price of $11 per share, net of
estimated underwriting discount and offering costs of $7.5 million ($3.6
million incurred as of September 30, 1997), including repayment of
advances received from Equus II to fund offering costs. Offering costs
primarily consist of accounting fees, legal fees, regulatory filing fees
and printing expenses.
(g) Records the payment to founders and the repayment of certain liabilities
and debt obligations with the net proceeds from the Offering, including
$2.4 million of notes payable to stockholders or related parties of
certain Founding Companies of which $0.4 million was current at September
30, 1997.
F-9
<PAGE>
TRIAD MEDICAL INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PRO FORMA
<S> <C> <C> <C> <C> <C> <C>
(A) (B) (C) (D) (E) ADJUSTMENTS
--------- --------- ---------- --------- --------- -----------
Cash and cash acquisitions........... (1,300,000) (1,300,000 )
Goodwill............................. 22,272,737 22,272,737
Other noncurrent assets.............. (260,638) 2,563,000 29,606 2,331,968
Short-term debt...................... (1,800,000) (1,800,000 )
Accounts payable and accrued
liabilities........................ (800,000) (800,000 )
Pro forma cash consideration due to
Founding Companies................. (13,523,500) (8,696,559) (22,220,059)
Long-term debt, net of current
maturities......................... 325,000 325,000
Notes payable to stockholders and
related parties, net of current
maturities......................... 710,000 710,000
Common stock......................... 2,781,953 22,653 2,804,606
Additional paid-in capital........... 3,100,000 260,638 (19,623,505) 13,139,940 (3,122,927 )
Retained earnings.................... 5,603,420 (4,466,034) (29,606) 1,107,780
Treasury stock....................... (309,105) (309,105 )
--------- --------- ---------- --------- --------- -----------
-- -- -- -- -- --
========= ========= ========== ========= ========= ===========
</TABLE>
<TABLE>
<CAPTION>
POST-
MERGER
(F) (G) ADJUSTMENTS
---------- ---------- -----------
<S> <C> <C> <C>
Cash and cash equivalents............ 36,500,000 (35,659,513) 840,487
Other noncurrent assets.............. (4,387,441) (4,387,441 )
Current maturities of long-term
debt............................... 2,252,057 2,252,057
Short-term debt...................... 1,059,586 5,505,810 6,565,396
Accounts payable and accrued
liabilities........................ 2,935,314 2,935,314
Pro forma cash consideration due to
Founding Companies................. 22,220,059 22,220,059
Long-term debt, net of current
maturities......................... 4,316,934 4,316,934
Notes payable to stockholders and
related parties, net of current
maturities......................... 1,364,653 1,364,653
Common stock......................... (4,000) (4,000 )
Additional paid-in capital........... (36,103,459) (36,103,459)
---------- ---------- -----------
-- -- --
========== ========== ===========
</TABLE>
F-10
<PAGE>
TRIAD MEDICAL INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS:
(h) Reduce compensation expenses to the contractual levels the owners and key
employees of the Founding Companies have agreed to receive subsequent to
the Acquisitions.
(i) Reflects the reversal of the $3.9 million non-recurring non-cash
compensation charge by TRIAD related to the issuance of 548,545 shares of
Common Stock to management. The historical financial statements of TRIAD
include a compensation charge representing the difference between the
amounts paid for the shares issued to TRIAD's management and their
estimated value on the date of the sale as if the Acquisitions had
occurred. This reversal is offset by a $184,000 charge for recurring
contractual salary expenses of management.
(j) Eliminates non-recurring ESOP tax exposure recorded by one of the Founding
Companies.
(k) Records goodwill amortization expense using a 40-year estimated life.
(l) Reduce interest expense for repayment of certain debt obligations which
will be repaid from the net proceeds from the Offering.
(m) Eliminates non-recurring settlements received from vendors for early
extinguishment of supply contract obligations.
(n) Records the incremental provision for federal and state income taxes
relating to the compensation expenses, S Corporation income, other pro
forma adjustments and the inclusion of all Founding Companies in a
consolidated federal income tax return.
(o) The number of shares estimated to be outstanding on completion of the
Offering includes the following (reflects the September 5, 1997 stock
split):
Issued to management............... 548,545
Issued to financial sponsor in
exchange for convertible preferred
stock................................. 449,213
Sale to investors, including
management............................ 100,000
Issued to acquire Founding
Companies............................. 3,997,215
Issued in the Offering............. 4,000,000
-----------
Shares estimated to be
outstanding........................... 9,094,973
-----------
Net effect of TRIAD stock options
using the Treasury Stock method....... 66,382
-----------
Shares used in computing pro forma
net income per share.................. 9,161,355
===========
Such share number does not include (i) an aggregate of 831,200 shares
subject to options granted under TRIAD's 1997 Incentive Plan which have an
exercise price equal to the initial Offering price per share, and (ii)
warrants to purchase up to 100,000 and 25,000 shares of Common Stock, each
at a purchase price equal to the initial Offering price per share, issued
by TRIAD to Equus II Incorporated in connection with TRIAD's start-up
funding and PENMAN Private Equity and Mezzanine Fund, L.P. in connection
with assisting TRIAD in the acquisition of one of the Founding Companies,
respectively. See "Management -- Option Grants" and "Certain
Transactions -- Organization of TRIAD."
F-11
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To TRIAD Medical Inc.:
We have audited the accompanying balance sheet of TRIAD Medical Inc. (a
Delaware corporation) as of June 30, 1997, and the related statements of
operations, stockholders' equity and cash flows for the period from inception
(April 7, 1997) to June 30, 1997. 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 TRIAD Medical Inc. as of
June 30, 1997 and the results of its operations and its cash flows for the
period from inception (April 7, 1997) to June 30, 1997 in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Houston, Texas
September 5, 1997
F-12
<PAGE>
TRIAD MEDICAL INC.
BALANCE SHEETS
SEPTEMBER
JUNE 30, 30,
1997 1997
-------------- ------------
(UNAUDITED)
ASSETS
CASH................................. $ 134,843 $ 349,177
DEFERRED OFFERING COSTS.............. 2,071,193 3,587,441
EQUIPMENT, net....................... 15,145 14,345
-------------- ------------
Total assets............... $ 2,221,181 $ 3,950,963
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
NOTES PAYABLE, net of discount of
$228,571 and $57,142,
respectively....................... $ 646,429 $ 1,059,586
ACCRUED ACCOUNTING, LEGAL AND
PROFESSIONAL FEES.................. 1,150,883 2,091,281
ACCRUED EXPENSES AND OTHER CURRENT
LIABILITIES........................ 15,825 44,033
-------------- ------------
Total liabilities.......... 1,813,137 3,194,900
-------------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par
value; 1,000,000 shares
authorized, 300,000 shares
(Series A Convertible) issued
and outstanding at June 30,
1997........................... 300 --
Common stock, $.001 par value;
20,000,000 shares authorized,
548,545 shares and 1,097,758
shares issued and outstanding
at June 30, 1997 and September
30, 1997, respectively......... 549 1,098
Warrant to purchase common
stock.......................... 400,000 500,000
Additional paid-in capital...... 4,221,248 4,720,999
Accumulated deficit............. (4,214,053) (4,466,034)
-------------- ------------
Total stockholders'
equity....................... 408,044 756,063
-------------- ------------
Total liabilities and
stockholders' equity... $ 2,221,181 $ 3,950,963
============== ============
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE>
TRIAD MEDICAL INC.
STATEMENTS OF OPERATIONS
PERIOD
FROM INCEPTION THREE MONTHS
(APRIL 7, 1997) ENDED SEPBEMBER
TO JUNE 30, 1997 30, 1997
---------------- ----------------
(UNAUDITED)
OPERATING EXPENSES:
Compensation expense relating to
common stock issued to
management.................... $ 3,881,097 $ --
General and administrative...... 153,762 58,024
Depreciation.................... 800 800
---------------- ----------------
Total operating expenses... 4,035,659 58,824
---------------- ----------------
Loss from operations....... (4,035,659) (58,824)
---------------- ----------------
OTHER INCOME (EXPENSE):
Interest income................. 1,241 316
Interest expense................ (179,635) (193,473)
---------------- ----------------
NET LOSS............................. $ (4,214,053) $ (251,981)
================ ================
The accompanying notes are an integral part of these financial statements.
F-14
<PAGE>
TRIAD MEDICAL INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A
PREFERRED STOCK COMMON STOCK WARRANT TO ADDITIONAL
------------------ ------------------- PURCHASE PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT COMMON STOCK CAPITAL DEFICIT
--------- ------ ---------- ------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at inception (April 7, 1997).... -- $ -- -- $ -- $ -- $ -- $ --
Issuance of preferred stock............. 300,000 300 -- -- -- 299,700 --
Issuance of common stock................ -- -- 548,545 549 -- 3,921,548 --
Issuance of warrant to purchase common
stock in connection with the issuance
of notes payable...................... -- -- -- -- 400,000 -- --
Net loss................................ -- -- -- -- -- -- (4,214,053)
--------- ------ ---------- ------ ------------ ---------- -----------
Balance at
June 30, 1997......................... 300,000 300 548,545 549 400,000 4,221,248 (4,214,053)
Conversion of preferred stock
(unaudited)........................... (300,000) (300 ) 449,213 449 -- (149) --
Issuance of common stock (unaudited).... -- -- 100,000 100 -- 499,900 --
Issuance of warrant to purchase common
stock (unaudited)..................... -- -- -- -- 100,000 -- --
Net loss (unaudited).................... -- -- -- -- -- -- (251,981)
--------- ------ ---------- ------ ------------ ---------- -----------
Balance at September 30, 1997
(unaudited)........................... -- $-- 1,097,758 $1,098 $500,000 $4,720,999 $(4,466,034)
========= ====== ========== ====== ============ ========== ===========
</TABLE>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
Balance at inception (April 7, 1997).... $ --
Issuance of preferred stock............. 300,000
Issuance of common stock................ 3,922,097
Issuance of warrant to purchase common
stock in connection with the issuance
of notes payable...................... 400,000
Net loss................................ (4,214,053)
-------------
Balance at
June 30, 1997......................... 408,044
Conversion of preferred stock
(unaudited)........................... --
Issuance of common stock (unaudited).... 500,000
Issuance of warrant to purchase common
stock (unaudited)..................... 100,000
Net loss (unaudited).................... (251,981)
-------------
Balance at September 30, 1997
(unaudited)........................... $ 756,063
=============
The accompanying notes are an integral part of these financial statements.
F-15
<PAGE>
TRIAD MEDICAL INC.
STATEMENTS OF CASH FLOWS
PERIOD
FROM INCEPTION THREE MONTHS
(APRIL 7, 1997) ENDED SEPTEMBER
TO JUNE 30, 1997 30, 1997
---------------- ----------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................ $ (4,214,053) $ (251,981)
Adjustments to reconcile net loss
to net cash used in operating
activities --
Amortization of debt discount
and depreciation................ 172,229 172,229
Compensation expense relating to
common stock issued to
management.................... 3,881,097 --
Increase (decrease) in operating
cash flows resulting from:
Deferred offering costs....... (2,071,193) (1,416,246)
Accrued accounting, legal and
professional fees.......... 1,150,883 940,396
Accrued expenses and other
current liabilities........ 15,825 28,208
---------------- ----------------
Net cash used in operating
activities.............. (1,065,212) (527,394)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment........... (15,945) --
---------------- ----------------
Net cash used in investing
activities.............. (15,945) --
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes
payable and related common
stock warrant................. 875,000 241,728
Proceeds from issuance of series
A convertible preferred
stock......................... 300,000 --
Proceeds from issuance of common
stock......................... 41,000 500,000
---------------- ----------------
Net cash provided by
financing activities.... 1,216,000 741,728
---------------- ----------------
NET INCREASE IN CASH................. 134,843 214,334
CASH, beginning of period............ -- 134,843
---------------- ----------------
CASH, end of period.................. $ 134,843 $ 349,177
================ ================
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE>
TRIAD MEDICAL INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
TRIAD Medical Inc., a Delaware corporation (the Company or TRIAD), was
founded in April 1997 to create a national leader in the contract sales and
distribution of specialty medical products designed for the hospital and
alternate-site health care markets (including sub-acute care facilities, home
care companies and specialty physician groups). The Company intends to (i) enter
into definitive merger agreements to acquire in separate transactions (the
Acquisitions) 11 other companies (the Founding Companies) for a total of
$22,220,000 in cash and 3,997,215 shares of the Company's common stock, $0.001
par value (Common Stock), and (ii) complete an initial public offering of
4,000,000 shares of the Common Stock (the Offering). Subsequent to the Offering,
the Company intends to continue to acquire, through merger or purchase, similar
businesses to expand its national operations.
The Company's primary assets at June 30, 1997 and September 30, 1997 are
cash and deferred offering costs. The Company has not conducted any operations,
and its activities to date have related to the Acquisitions and the Offering.
There is no assurance that the acquisitions of the Founding Companies will be
completed and that the Company will be able to generate future operating
revenues. Equus II Incorporated (Equus II) has committed to fund up to
$2,200,000 in pre-Offering costs. The Company is dependent on the Offering to
fund the amounts due to Equus II, the pending Acquisitions and related
transactions and future operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The financial statements presented have been prepared on the accrual basis
of accounting.
INTERIM FINANCIAL INFORMATION
The interim financial statements as of September 30, 1997, and for the
three months ended September 30, 1997 are unaudited, and certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and notes
payable. The carrying amounts of those instruments reported in the balance sheet
are considered to be representative of their respective fair values, due to the
short-term nature of such financial instruments and the current interest rate
environment.
DEFERRED OFFERING COSTS
Deferred offering costs consist of accounting, legal and consulting fees.
These costs will be treated as a reduction of the Offering proceeds.
F-17
<PAGE>
TRIAD MEDICAL INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
EQUIPMENT
Equipment is stated at cost and depreciation is computed using the
straight-line method over a five year estimated useful life.
INCOME TAXES
The Company applies the liability method of accounting for income taxes.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are received or settled.
The Company has recorded a full valuation allowance against all deferred
income tax assets due to the uncertainty of ultimate realizability. Accordingly,
no income tax benefit has been recorded for the current period loss.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 129, "Disclosure of Information
About Capital Structure." SFAS No. 129 requires nonpublic entities to disclose
certain information about an entity's capital structure, including the pertinent
rights and privileges of the various securities outstanding. If the Company does
not complete the Offering in 1997, it will be required to adopt SFAS No. 129 in
1997. In the opinion of management, SFAS No. 129 will not significantly change
the Company's existing financial statement disclosures.
3. EQUIPMENT:
Equipment consists of the following:
JUNE 30, SEPTEMBER 30,
1997 1997
--------- -------------
(UNAUDITED)
Office equipment and fixtures........... $ 15,945 $15,945
Less -- accumulated depreciation........ (800) (1,600)
--------- -------------
Equipment, net.......................... $ 15,145 $14,345
========= =============
4. NOTES PAYABLE:
The Company has borrowings from Equus II under a $2,200,000 credit facility
totaling $875,000 and $1,116,728 at June 30, 1997 and September 30, 1997,
respectively. The borrowings are unsecured, bear interest at a bank's prime rate
plus 0.5 percent (9.0 percent at June 30, 1997), and mature at the earlier of
January 31, 1998 or the date the Offering closes. The credit facility contains
various restrictive covenants, including provisions relating to restrictions on
the issuance of additional shares of capital stock or convertible securities,
declaration of dividends and additional indebtedness. The Company was in
compliance with all its covenants at June 30, 1997 and September 30, 1997. In
addition, the credit facility requires Equus II to have a representative on the
Company's Board of Directors.
In connection with the credit facility, the Company issued a warrant to
Equus II to purchase up to 100,000 shares of Common Stock at a purchase price
equal to the initial public offering price per share in the Offering, subject to
adjustment in certain circumstances. The warrant may be exercised at any time or
from time to time until five years from the date the Offering closes. The
warrant was valued at $400,000, which resulted in an original issue discount on
the notes payable. The original issue discount is being amortized as additional
interest expense over the expected life of the notes payable. The unamortized
original issue discount at June 30, 1997 and September 30, 1997 was $228,571 and
$57,142, respectively.
F-18
<PAGE>
TRIAD MEDICAL INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. STOCKHOLDERS' EQUITY:
In connection with its organization and capitalization, the Company issued
and sold 548,545 shares of Common Stock at approximately $.08 per share to
certain officers of the Company for total proceeds of $41,000. The Company
recorded a non-recurring, non-cash compensation charge of $3,881,097,
representing the difference between the amount paid and the value of the shares
on the date of issuance estimated based on an assumed initial public offering
price of $11.00 per share.
In connection with the credit facility discussed in Note 4, the Company
issued 300,000 shares of its series A convertible preferred stock at $1.00 per
share to Equus II. Such shares are subject to certain voting restrictions and
are convertible into 449,213 shares of Common Stock one year after the date of
issuance. On September 5, 1997, the series A convertible preferred stock was
amended to remove the one-year holding restriction and was converted into
449,213 shares of Common Stock.
TRIAD's Certificate of Incorporation, as amended, authorizes the issuance,
without stockholder approval, of one or more series of preferred stock having
such preferences, powers and relative, participating, optional and other rights
(including preferences over the Common Stock respecting dividends and
distributions and voting rights) as TRIAD's board of directors may determine.
SFAS No. 123, "Accounting for Stock-Based Compensation," allows entities
to choose between a new fair value based method of accounting for employee stock
options or similar equity instruments and the current intrinsic, value-based
method of accounting prescribed by Accounting Principles Board Opinion No. 25
(APB No. 25). Entities electing to remain with the accounting in APB No. 25 must
make pro forma disclosures of net income and earnings per share as if the fair
value method of accounting had been applied. No awards were issued for which
such disclosure would be required. The Company will provide pro forma disclosure
of net income and earnings per share, as applicable, in the notes to its future
financial statements.
On September 5, 1997 the Company effected an approximately 1.34-for-one
stock split of the outstanding Common Stock for each share of Common Stock
outstanding. The effects of the stock split have been retroactively reflected in
the accompanying financial statements and in these notes.
6. INCOME TAXES:
There were no income taxes recorded for the periods ended June 30, 1997 and
September 30, 1997 due to the Company incurring a net operating loss for
financial reporting and income tax reporting purposes. Management has provided a
valuation allowance equal to the amount of the deferred income tax asset related
to the net operating loss carryforward.
As of June 30, 1997 and September 30, 1997, the Company has a net operating
loss carryforwards for income tax reporting purposes of approximately $333,000
and $586,000, respectively. These net operating loss carryforwards are scheduled
to expire in 2012.
7. RELATED PARTY TRANSACTIONS:
The Company leases its office space from a company owned in part by an
officer of the Company under a month-to-month lease. The total rent paid under
the lease was approximately $5,600 and $6,400 for the period from inception
(April 7, 1997) to June 30, 1997 and for the three months ended September 30,
1997, respectively.
8. COMMITMENTS AND CONTINGENCIES:
EMPLOYMENT CONTRACTS
The Company has entered into employment agreements with certain officers of
the Company. These officers cannot be terminated within one year. If an
officer's employment is terminated after the first year
F-19
<PAGE>
TRIAD MEDICAL INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
without cause, the officer would be entitled to one year's compensation from the
date of termination for the first three years of employment.
COMMON STOCK OPTIONS
The Company has committed to issue options to purchase 972,987 shares of
Common Stock, 831,200 of which will have an exercise price equal to the initial
public offering price per share and 141,787 of which will have a weighted
average exercise price of $5.85 per share. In general, the terms of the option
awards (including vesting schedules) will be established by the compensation
committee of the Company's board of directors.
9. SUBSEQUENT EVENTS (UNAUDITED):
On September 8, 1997, the Company and its stockholders approved the TRIAD
Medical Inc. 1997 Incentive Plan (the Plan), which provides for the granting or
awarding of stock options to employees, nonemployee directors and nonemployee
consultants who provide services to TRIAD. The number of shares authorized and
reserved for issuance under the Plan is limited to the greater of 1,130,000 or
12.5 percent of the number of shares of Common Stock outstanding on the last day
of the preceding calendar quarter. As discussed in Note 8, the Company has
previously committed to issue options to purchase 972,987 shares of Common
Stock.
On September 8, 1997, the Company issued and sold in a private placement
100,000 shares of Common Stock at a price of $5.00 per share to certain
directors, executive officers of the Founding Companies and certain other
investors.
On September 8, 1997, the Company issued a warrant to a shareholder of one
of the Founding Companies to purchase 25,000 shares of Common Stock at a price
equal to the initial public offering price per share issued in connection with
the acquisition of one of the Founding Companies.
On September 9, 1997, the Company entered into definitive merger agreements
with the Founding Companies, providing for the acquisition of the Founding
Companies by TRIAD.
The Company has recently received a commitment from First National Bank of
Chicago to provide the Company with a $40.0 million credit facility, which may
be used for acquisitions, working capital and other general corporate purposes.
On September 11, 1997, the Company filed a registration statement on Form
S-1 relating to the Offering. An investment in shares of Common Stock involves a
high degree of risk, including, among others, absence of a combined operating
history, dependence on acquisitions for growth, history of loss of product
lines, need for additional financing and dependence on key personnel. See "Risk
Factors."
F-20
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To TRIAD Holdings, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of TRIAD
Holdings, Inc. (a Delaware corporation) and subsidiaries, as of December 31,
1995 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. 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 audits.
We conducted our audits 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 audits provide 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
TRIAD Holdings, Inc. and subsidiaries, as of December 31, 1995 and 1996, and the
results of their consolidated operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Houston, Texas
August 1, 1997
F-21
<PAGE>
TRIAD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------ SEPTEMBER 30,
1995 1996 1997
-------------- -------------- --------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
<S> <C> <C> <C>
Cash and cash equivalents.......... $ 7,273 $ 816,560 $ 353,338
Accounts receivable, net of
allowance of $147,959, $193,863
and $95,721, respectively........ 4,579,763 5,915,999 9,238,611
Inventories, net................... 2,889,002 3,993,437 4,275,413
Prepaid expenses and other current
assets........................... 774,484 929,112 628,809
Deferred income taxes.............. 289,000 420,000 345,000
-------------- -------------- --------------
Total current assets..... 8,539,522 12,075,108 14,841,171
-------------- -------------- --------------
PROPERTY AND EQUIPMENT, net............. 251,981 626,409 644,749
RENTAL EQUIPMENT, net................... 1,844,053 2,465,225 3,900,846
INTANGIBLES............................. -- 2,812,436 4,352,262
OTHER NON-CURRENT ASSETS................ 117,388 83,301 47,374
-------------- -------------- --------------
Total assets............. $ 10,752,944 $ 18,062,479 $ 23,786,402
============== ============== ==============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit..................... $ -- $ -- $ 100,000
Current obligations under capital
leases........................... 321,865 564,093 527,301
Current maturities of long-term
debt............................. 2,490,664 778,000 1,101,194
Current maturities of notes payable
to stockholders.................. 27,094 234,114 234,114
Accounts payable and accrued
expenses......................... 6,227,034 4,594,473 8,606,865
-------------- -------------- --------------
Total current
liabilities........... 9,066,657 6,170,680 10,569,474
-------------- -------------- --------------
CAPITAL LEASE OBLIGATIONS, net of
current maturities.................... 274,884 479,878 416,932
LONG-TERM DEBT, net of current
maturities............................ -- 2,917,500 3,403,809
NOTES PAYABLE TO STOCKHOLDERS, net of
current maturities.................... 70,547 468,229 468,229
DEFERRED INCOME TAXES................... 267,000 307,000 322,000
OTHER LONG-TERM LIABILITIES............. 1,142,343 1,171,710 1,133,988
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Class A convertible common stock,
$.01 par value, 1,500,000 shares
authorized, 1,362,190 issued and
outstanding in 1996 and 1997..... -- 13,621 13,621
Class B common stock, $.01 par
value, 3,000,000 shares
authorized, 979,845 issued and
outstanding in 1996; 1,048,345
issued and outstanding in 1997... -- 9,798 10,483
Common stock, no par value,
10,000,000 shares authorized,
1,116,300 issued and outstanding
in 1995.......................... 254,804 -- --
Additional paid-in capital......... -- 6,140,982 6,618,948
Retained earnings (accumulated
deficit)......................... (323,291) 383,081 828,918
-------------- -------------- --------------
Total stockholders'
equity (deficit)...... (68,487) 6,547,482 7,471,970
-------------- -------------- --------------
Total liabilities and
stockholders' equity
(deficit)............. $ 10,752,944 $ 18,062,479 $ 23,786,402
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
<PAGE>
TRIAD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------------------------- ------------------------------
1994 1995 1996 1996 1997
-------------- -------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES................................ $ 22,667,209 $ 29,673,818 $ 36,257,683 $ 26,167,703 $ 36,387,356
COST OF REVENUES........................ 16,751,215 22,485,390 27,492,002 20,175,059 27,142,668
-------------- -------------- -------------- -------------- --------------
Gross profit.................. 5,915,994 7,188,428 8,765,681 5,992,644 9,244,688
SELLING EXPENSES........................ 2,391,062 2,939,858 3,395,801 2,397,533 3,476,813
GENERAL AND ADMINISTRATIVE EXPENSES..... 1,813,184 2,146,309 3,017,319 1,898,138 3,543,152
DEPRECIATION AND
AMORTIZATION.......................... 530,562 561,428 763,071 502,095 1,053,849
-------------- -------------- -------------- -------------- --------------
Total operating expenses........... 4,734,808 5,647,595 7,176,191 4,797,766 8,073,814
-------------- -------------- -------------- -------------- --------------
Income from operations.................. 1,181,186 1,540,833 1,589,490 1,194,878 1,170,874
OTHER INCOME (EXPENSE):
Interest income.................... 27,682 30,164 64,588 48,188 30,950
Interest expense................... (496,184) (538,915) (368,831) (248,140) (428,107)
Other income (expense), net........ (21,705) 15,476 (113,990) (83,406) (51,328)
-------------- -------------- -------------- -------------- --------------
INCOME BEFORE PROVISION FOR INCOME
TAXES................................. 690,979 1,047,558 1,171,257 911,520 722,389
PROVISION FOR INCOME TAXES.............. 102,700 420,600 464,885 357,436 276,552
-------------- -------------- -------------- -------------- --------------
NET INCOME.............................. $ 588,279 $ 626,958 $ 706,372 $ 554,084 $ 445,837
============== ============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-23
<PAGE>
TRIAD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TRIAD HOLDINGS, INC. COMMON STOCK
-----------------------------------------
TRIAD MEDICAL, INC.
CLASS A CLASS B COMMON STOCK ADDITIONAL
------------------- ------------------- --------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ------- --------- ------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993........... -- $ -- -- $ -- 1,094,500 $ 222,883 $ --
Common stock sold for cash....... -- -- -- -- 5,000 5,500 --
Common stock issued for
services....................... -- -- -- -- 2,500 8,661 --
Net income....................... -- -- -- -- -- -- --
--------- ------- --------- ------- --------- --------- ----------
BALANCE, December 31, 1994........... -- -- -- -- 1,102,000 237,044 --
Common stock sold for cash....... -- -- -- -- 14,300 17,760 --
Net income....................... -- -- -- -- -- -- --
--------- ------- --------- ------- --------- --------- ----------
BALANCE, December 31, 1995........... -- -- -- -- 1,116,300 254,804 --
Class A common stock sold for
cash........................... 1,362,190 13,621 -- -- -- -- 6,770,827
Repurchase and conversion of TMI
common stock to Class B common
stock.......................... -- -- 889,269 8,893 (1,116,300) (254,804) (1,004,089)
Stock options exercised.......... -- -- 30,576 305 -- -- 44,844
Issuance of common stock in
connection with acquisition of
PCI............................ -- -- 60,000 600 -- -- 329,400
Net income....................... -- -- -- -- -- -- --
--------- ------- --------- ------- --------- --------- ----------
BALANCE, December 31, 1996........... 1,362,190 13,621 979,845 9,798 -- -- 6,140,982
Issuance of common stock in
connection with acquisition of
Medrep Medical, Inc.
(unaudited).................... -- -- 22,000 220 -- -- 149,780
Issuance of common stock in
connection with acquisition of
Eclipse, Inc. (unaudited)...... -- -- 31,000 310 -- -- 224,690
Common stock sold for cash
(unaudited).................... -- -- 15,500 155 -- -- 103,496
Net income (unaudited)........... -- -- -- -- -- -- --
--------- ------- --------- ------- --------- --------- ----------
BALANCE, September 30, 1997
(unaudited)........................ 1,362,190 $13,621 1,048,345 $10,483 -- $ -- $6,618,948
========= ======= ========= ======= ========= ========= ==========
</TABLE>
RETAINED
EARNINGS TOTAL
(ACCUMULATED STOCKHOLDERS'
DEFICIT) EQUITY (DEFICIT)
------------- -----------------
BALANCE, December 31, 1993........... $(1,538,528) $(1,315,645)
Common stock sold for cash....... -- 5,500
Common stock issued for
services....................... -- 8,661
Net income....................... 588,279 588,279
------------- -----------------
BALANCE, December 31, 1994........... (950,249) (713,205)
Common stock sold for cash....... -- 17,760
Net income....................... 626,958 626,958
------------- -----------------
BALANCE, December 31, 1995........... (323,291) (68,487)
Class A common stock sold for
cash........................... -- 6,784,448
Repurchase and conversion of TMI
common stock to Class B common
stock.......................... -- (1,250,000)
Stock options exercised.......... -- 45,149
Issuance of common stock in
connection with acquisition of
PCI............................ -- 330,000
Net income....................... 706,372 706,372
------------- -----------------
BALANCE, December 31, 1996........... 383,081 6,547,482
Issuance of common stock in
connection with acquisition of
Medrep Medical, Inc.
(unaudited).................... -- 150,000
Issuance of common stock in
connection with acquisition of
Eclipse, Inc. (unaudited)...... -- 225,000
Common stock sold for cash
(unaudited).................... -- 103,651
Net income (unaudited)........... 445,837 445,837
------------- -----------------
BALANCE, September 30, 1997
(unaudited)........................ $ 828,918 $ 7,471,970
============= =================
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
<PAGE>
TRIAD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------------------- --------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C> <C>
Net income............................ $ 588,279 $ 626,958 $ 706,372 $ 554,084 $ 445,837
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities --
Depreciation and amortization..... 530,562 561,428 763,071 502,095 1,053,849
(Gain) loss on disposal of fixed
assets......................... 7,256 (37,813) (8,001) (13,595) (54,193)
Provision for doubtful accounts... 129,610 164,900 48,041 56,400 --
Deferred rent..................... 17,831 4,609 12,117 16,778 (37,722)
Common stock issued for
services....................... 8,661 -- -- -- --
Deferred income tax provision
(benefit)...................... (47,300) 25,300 (91,000) (51,000) 90,000
Increase (decrease) in operating
cash flows resulting from --
Accounts receivable.......... (1,142,133) (1,106,238) (141,526) (1,565,706) (3,068,370)
Inventories.................. (1,095,248) (620,791) (360,786) 29,400 (163,511)
Prepaids and other current
assets..................... (356,973) 333,138 (115,765) 484,155 300,990
Other noncurrent assets...... 42,876 70,766 38,682 74,302 37,522
Accounts payable and accrued
expenses................... 1,978,329 575,027 (1,921,743) (1,195,533) 3,787,311
------------ ------------ ------------ ------------ ------------
Net cash provided by (used
in) operating
activities............... 661,750 597,284 (1,070,538) (1,108,620) 2,391,713
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of
cash acquired..................... -- -- (3,814,651) -- (1,963,794)
Additions to property and
equipment......................... (109,947) (155,456) (436,394) (245,899) (1,380,660)
Proceeds from disposals of property
and equipment..................... 19,285 134,453 49,457 54,749 130,626
------------ ------------ ------------ ------------ ------------
Net cash used in investing
activities............... (90,662) (21,003) (4,201,588) (191,150) (3,213,828)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on long-term debt and
capital leases.................... -- -- 3,890,000 -- 1,400,000
Principal payments on long-term debt
and capital leases................ (993,697) (1,003,763) (799,879) (403,088) (1,244,758)
Line of credit, net................. 440,485 451,639 (2,490,664) (2,490,664) 100,000
Payments on notes payable to
stockholders...................... (39,352) (35,608) (97,641) (97,641) --
Proceeds from sale of common
stock............................. 5,500 17,760 6,829,597 6,791,160 103,651
Repurchase of common shares......... -- -- (1,250,000) (1,250,000) --
------------ ------------ ------------ ------------ ------------
Net cash provided by (used
in) financing
activities............... (587,064) (569,972) 6,081,413 2,549,767 358,893
------------ ------------ ------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................... (15,976) 6,309 809,287 1,249,997 (463,222)
CASH AND CASH EQUIVALENTS, at beginning
of period............................. 16,940 964 7,273 7,273 816,560
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, at end of
period................................ $ 964 $ 7,273 $ 816,560 $ 1,257,270 $ 353,338
============ ============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest....................... $ 496,000 $ 360,000 $ 539,000 $ 200,000 $ 397,000
============ ============ ============ ============ ============
Income taxes................... $ 110,000 $ 829,000 $ 746,000 $ 603,000 $ 402,000
============ ============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITIES:
Common stock and notes payable
issued for acquisitions........... $ -- $ -- $ 1,032,343 $ -- $ 375,000
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-25
<PAGE>
TRIAD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
TRIAD Holdings, Inc. (the Company), is primarily engaged in the contract
sale and distribution of medical supplies, devices, drugs and durable equipment
to home infusion health care providers throughout the United States.
The Company conducts business through its operating subsidiaries,
principally TRIAD Medical Inc. (TMI), which was incorporated in June 1980. On
April 22, 1996, the Company was incorporated and TMI became its wholly owned
subsidiary.
In October 1996, the Company acquired the assets and assumed certain
liabilities of PCI Medical, Inc. (PCI) for cash consideration of $3,814,651 (net
of cash acquired), notes payable of $702,343 and 60,000 Class B common shares of
the Company valued at $330,000. The acquisition was accounted for as a purchase
and, accordingly, the purchase price has been allocated to the assets purchased
and the liabilities assumed based upon the fair values at the date of
acquisition as follows:
Accounts receivable.................. $ 1,242,751
Inventory............................ 743,649
Prepaids............................. 38,863
Property and equipment............... 194,598
Rental equipment..................... 111,407
Goodwill............................. 2,829,938
Other assets......................... 4,595
Accounts payable and accrued
expenses............................. (306,432)
Capital leases....................... (12,375)
------------
$ 4,846,994
============
The excess purchase price over the fair values of the net assets acquired
has been recorded as goodwill to be amortized on a straight-line based over 40
years. Operating results of PCI from October 4, 1996, through December 31, 1996,
have been included in the accompanying consolidated financial statements. See
the financial statements of PCI included elsewhere herein.
The Company and its stockholders intend to enter into a definitive merger
agreement with TRIAD Medical Inc. (TRIAD) pursuant to which the Company will be
acquired by TRIAD for consideration consisting of $8,696,559 in cash and
1,451,322 shares of TRIAD common stock, concurrently with the closing of the
initial public offering by TRIAD of its common stock (the Offering).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared on
the accrual basis of accounting and include the accounts of the Company and its
subsidiaries. All significant intercompany amounts and transactions have been
eliminated in consolidation.
INTERIM FINANCIAL INFORMATION
The interim consolidated financial statements as of September 30, 1997, and
for the nine months ended September 30, 1996 and 1997, are unaudited, and
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary to fairly present the
consolidated financial position, results of operations and cash flows with
respect to the interim consolidated financial statements have been included. The
results of operations for the interim periods are not necessarily indicative of
the results for the entire fiscal year.
F-26
<PAGE>
TRIAD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Specifically, the Company has accrued an estimate for certain tax expenses,
which are under evaluation. Accordingly, such accrual may require revision.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, cash
equivalents, trade receivables, trade payables and debt instruments. The
carrying amounts of those instruments reported in the balance sheets are
considered to estimate their respective fair values due to the short-term nature
of such financial instruments and the current interest rate environment. The
fair value of the Company's long-term debt and capital lease obligations was
determined using valuation techniques that considered cash flows discounted at
current market rates and management's best estimates for instruments without
quoted market prices. The carrying amounts of those long-term instruments
reported in the balance sheets are considered to approximate their respective
fair values as the Company's long-term debt and capital lease obligations
interest rates approximate market rates at December 31, 1996.
CASH AND CASH EQUIVALENTS
For the purposes of the balance sheets and statements of cash flows, the
Company considers all investments with original maturities of three months or
less to be cash equivalents.
CONCENTRATIONS OF CREDIT RISK
In the normal course of business, the Company extends credit to its
customers, which are primarily alternate-site health care providers. The Company
regularly reviews its accounts receivable and makes provision for potentially
uncollectible balances. At December 31, 1995 and 1996, and at September 30,
1997, management believes the Company had incurred no material impairments in
the carrying values of its accounts receivable other than uncollectible amounts
for which provision has been made.
INVENTORIES
Inventories consist primarily of medical supplies and equipment.
Inventories, net of allowances, are valued at the lower of cost or market. Cost
is determined using the first-in, first-out (FIFO) method. At December 31, 1996,
and at September 30, 1997, management believes the Company had incurred no
material impairments in the carrying values of its inventories, other than
impairments for which provision has been made.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the applicable lease or the estimated useful life of the applicable asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments that extend the useful
lives of existing equipment are capitalized and depreciated. On retirement or
disposition of property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized in the statement of operations.
F-27
<PAGE>
TRIAD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTANGIBLE ASSETS
The intangible assets recorded by the Company in connection with the
acquisition of PCI (see Note 1) are amortized on a straight-line basis. As of
September 30, 1997, accumulated amortization of intangibles amounted to
$173,178. The applicable intangible amortization periods are as follows:
Goodwill................................ 40 years
Patents................................. 17 years
DEFERRED RENT
Certain of the Company's facilities leases include scheduled rent increases
and free rent periods. For financial reporting purposes, rent expense is
recognized on a straight-line basis over the lease term. The difference between
rents paid pursuant to the lease agreements and rent expense for financial
reporting purposes has been reported as deferred rent.
REVENUES AND EXPENSES
The Company's revenues are primarily derived from sales of medical products
and supplies under distribution agreements with various manufacturers. Cost of
revenues consists primarily of product costs, net of rebates, and freight
charges. Selling expenses consist primarily of sales commissions, salaries of
sales managers, travel and entertainment expenses, trade show expenses and
automobile allowances. General and administrative expenses consist primarily of
executive compensation and related benefits, administrative salaries and
benefits, office rent and utilities, communication expenses and professional
fees.
REVENUE RECOGNITION
Revenues are recorded at the time of shipment of products or performance of
services. Revenues from the rental of infusion pumps and other equipment under
cancellable and noncancellable operating leases are recognized as earned.
Biomedical, commission and installation revenues are recognized as the services
are provided. The Company also provides financing for equipment sales under
sales-type lease arrangements.
INCOME TAXES
The Company applies the liability method of accounting for income taxes.
Under this method, deferred income taxes are recorded based on differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are received or settled.
STOCK-BASED COMPENSATION
In 1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation." In accordance with
SFAS No. 123, the Company accounts for stock option grants in accordance with
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and has adopted the "disclosure only" alternative described in
SFAS No. 123.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued SFAS No.
129, "Disclosure of Information About Capital Structure." SFAS No. 129
requires nonpublic entities to disclose certain information about an entity's
capital structure, including the pertinent rights and privileges of the various
securities outstanding. The Company will be required to adopt SFAS No. 129 in
1997 and, in the opinion of management, SFAS No. 129 will not significantly
change the existing financial statement disclosures.
F-28
<PAGE>
TRIAD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACQUISITIONS (UNAUDITED):
On January 17, 1997, the Company purchased certain assets and assumed
certain liabilities of Medrep Medical, Inc. in exchange for 22,000 shares of its
Class B common stock valued at $150,000 and cash of $435,085. The purchase price
was allocated as follows:
Accounts receivable..................... $ 61,024
Rental equipment........................ 372,971
Goodwill................................ 352,102
Covenant not to compete................. 50,000
Other assets............................ 2,282
Accounts payable and accrued expenses... (154,672)
Capital leases.......................... (98,622)
----------
$ 585,085
==========
On May 1, 1997, the Company purchased certain assets and assumed certain
liabilities of Eclipse, Inc. in exchange for 31,000 shares of its Class B common
stock valued at $225,000 and cash of $1,528,709. The purchase price was
allocated as follows:
Accounts receivable..................... $ 193,218
Inventory............................... 118,465
Rental equipment........................ 514,732
Goodwill................................ 1,250,000
Accounts payable and accrued expenses... (70,409)
Capital leases.......................... (252,297)
------------
$ 1,753,709
============
On October 1, 1997 the Company purchased certain assets and assumed certain
liabilities of The Economic Alliance Corporation in exchange for approximately
$900,000. It is anticipated that the transaction will result in approximately
$700,000 in goodwill beingrecorded in the fourth quarter of 1997.
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES ------------------------ SEPTEMBER 30,
IN YEARS 1995 1996 1997
------------ ---------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Office equipment..................... 5 $ 179,121 $ 362,549 $ 487,552
Computers and software............... 5 141,603 193,146 207,818
Furniture and fixtures............... 5-7 98,502 139,398 156,711
Warehouse equipment.................. 5 91,773 146,299 178,887
Test equipment....................... 5 -- 116,594 161,960
Leasehold improvements............... 10 49,606 108,763 129,890
---------- ------------ -------------
560,605 1,066,749 1,322,818
Less -- Accumulated depreciation and
amortization....................... (308,624) (440,340) (678,069)
---------- ------------ -------------
Property and equipment, net.......... $ 251,981 $ 626,409 $ 644,749
========== ============ =============
</TABLE>
F-29
<PAGE>
TRIAD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Equipment financed under capital lease obligations amounted to $3,817,880
and $4,978,194 at December 31, 1995 and 1996, respectively, and $7,001,079 at
September 30, 1997. Related accumulated depreciation for those assets totaled
$1,973,827 and $2,512,969 at December 31, 1995 and 1996, respectively, and
$3,100,233 at September 30, 1997.
INTANGIBLE ASSETS
Intangible assets consist of the following:
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
Goodwill................................ $2,812,577 $ 4,434,766
Covenant not to compete................. -- 50,000
Patents................................. 36,338 40,674
------------ -------------
2,848,915 4,525,440
Less -- Accumulated amortization........ (36,479) (173,178)
------------ -------------
$2,812,436 $ 4,352,262
============ =============
Amortization expense amounted to $17,502 in 1996 and is included in
depreciation and amortization.
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Accounts payable, trade................. $ 5,832,875 $ 4,307,181 $ 8,244,984
Accrued compensation and benefits....... 32,942 134,718 153,945
Accrued commissions..................... 71,671 11,147 114,768
Accrued income taxes.................... 250,791 60,612 --
Other payable and accrued expenses...... 38,755 80,815 93,168
------------ ------------ -------------
$ 6,227,034 $ 4,594,473 $ 8,606,865
============ ============ =============
</TABLE>
6. DEBT:
In May 1996, the Company used the proceeds from a sale of its common stock
to repay the outstanding borrowings under a line of credit and incurred a
related charge of $77,854, included in other income (expense), net in the
accompanying consolidated statements of operations (see Note 12).
In September 1996, TMI entered into a new credit agreement with a bank. The
agreement, which expires on May 31, 1998, provides a revolving line-of-credit
facility of up to $1,000,000. Borrowings under the credit agreement bear
interest at the bank's prime rate plus 0.25 percent or, at the Company's option,
a LIBOR rate plus 3.25 percent. The credit agreement is collateralized by all of
the Company's assets and includes certain restrictive covenants.
In October 1996, the Company entered into an agreement with a bank for an
acquisition line of credit. The agreement expires in September 2001 and provides
a facility of up to $5,000,000. Borrowings under the agreement bear interest at
the bank's prime rate plus 0.625 percent. The agreement includes certain
restrictive covenants. The Company was in compliance with respect to all its
covenants at December 31, 1996 and September 30, 1997. The agreement provides
that all borrowings thereunder are collateralized by
F-30
<PAGE>
TRIAD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
all the Company's assets. The outstanding borrowings under the agreement at
December 31, 1996 and September 30, 1997 were $3,695,500 and $4,505,003,
respectively.
The aggregate maturities of long-term debt and capital lease obligations as
of December 31, 1996, are as follows:
LONG-TERM CAPITAL
DEBT LEASES
------------ ------------
Year ending December 31 --
1997............................... $ 778,000 $ 656,013
1998............................... 778,000 431,370
1999............................... 778,000 84,321
2000............................... 778,000 --
2001............................... 583,500 --
------------ ------------
$ 3,695,500 1,171,704
============
Less: amount representing interest...... (127,733)
------------
$ 1,043,971
============
NOTES PAYABLE TO STOCKHOLDERS
Notes payable to stockholders consist of the following:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1995 1996 1997
---------- ------------ -------------
(UNAUDITED)
Subordinated note payable to
stockholder, principal and interest of
$220,000 payable annually, maturing
October 1999, bearing interest at
6.53%................................. $ -- $ 582,343 $ 582,343
Notes payable to stockholders, due in
various amounts through October 1999,
interest at rates ranging from 10% to
12%................................... 97,641 120,000 120,000
---------- ------------ -------------
97,641 702,343 702,343
Less -- Current portion................. (27,094) (234,114) (234,114)
---------- ------------ -------------
$ 70,547 $ 468,229 $ 468,229
========== ============ =============
</TABLE>
7. LEASES:
The Company leases space for its warehouses and corporate office from third
parties. Rent expense under these arrangements totaled approximately $390,000,
$309,000 and $371,000 for the years ended December 31, 1994, 1995 and 1996,
respectively, and was $264,000 and $610,000 for the nine months ended September
30, 1996 and 1997, respectively. The leases require the Company to pay taxes,
maintenance, insurance and certain other operating costs of the leased property.
The Company acquired rental equipment totaling $443,402 and $1,040,226
under capital lease obligations in 1995 and 1996, respectively.
F-31
<PAGE>
TRIAD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments required under noncancellable operating
leases that have initial or remaining noncancellable lease terms in excess of
one year at December 31, 1996, are as follows:
Year ending December 31 --
1997............................... $ 772,872
1998............................... 656,460
1999............................... 570,435
2000............................... 415,034
2001............................... 341,943
------------
$ 2,756,744
============
Total rent expense was $415,711 and $571,839 in 1995 and 1996,
respectively.
As discussed in Note 2, the Company rents certain equipment under
noncancellable operating leases. Aggregate future minimum rentals to be received
under noncancellable leases in effect at December 31, 1996, are as follows:
Year ending December 31 --
1997............................... $ 177,200
1998............................... 128,500
1999............................... 76,000
2000............................... 67,200
2001............................... 28,525
----------
$ 477,425
==========
8. INCOME TAXES:
The provision for federal and state income taxes follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
Federal --
<S> <C> <C> <C> <C> <C>
Current............................ $ 142,400 $ 306,000 $ 435,885 $ 344,111 $ 160,069
Deferred........................... (55,160) 31,300 (79,000) (40,000) 75,000
State --
Current............................ 25,200 89,300 120,000 64,325 26,483
Deferred........................... (9,740) (6,000) (12,000) (11,000) 15,000
---------- ---------- ---------- ---------- ----------
$ 102,700 $ 420,600 $ 464,885 $ 357,436 $ 276,552
========== ========== ========== ========== ==========
</TABLE>
F-32
<PAGE>
TRIAD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income taxes as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ ----------------------
1994 1995 1996 1996 1997
------------ ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Provision at the statutory rate......... $ 234,933 $ 356,170 $ 398,227 $ 309,917 $ 245,612
Increase (decrease) resulting from --
State income tax, net of federal
benefit.......................... 34,549 52,378 58,563 45,576 36,119
Net operating loss carryforwards... (160,000) -- -- -- --
Meals and entertainment............ 5,587 7,312 12,236 9,177 11,568
Other.............................. (12,369) 4,740 (4,141) (7,234) (16,747)
------------ ---------- ---------- ---------- ----------
$ 102,700 $ 420,600 $ 464,885 $ 357,436 $ 276,552
============ ========== ========== ========== ==========
The tax effects of temporary differences representing deferred tax assets and
liabilities result principally from the following:
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
(UNAUDITED)
Depreciation and amortization........... $ (267,000) $ (307,000) $(322,000)
Accruals and reserves................... 289,000 420,000 345,000
------------ ------------ -------------
Net deferred income tax assets..... $ 22,000 $ 113,000 $ 23,000
============ ============ =============
</TABLE>
9. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is a party to certain legal proceedings arising in the ordinary
course of business. Management believes the outcome of such legal proceedings
will not have a material adverse effect on the Company's consolidated financial
position or consolidated results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses under any of its insurance policies.
The sale, distribution, rental and repair of medical products involve a
risk of product liability claims. The Company maintains product liability
insurance coverage in amounts that it considers adequate.
SALES TAX CONSIDERATIONS
Various states are increasingly seeking to impose sales or use taxes on
interstate sales made into their state by out-of-state companies. Complex legal
issues arise in these areas relating to, among other things, the required nexus
of a business with a particular state, which may permit the state to require a
business to collect such taxes. Although the Company believes that it has
adequately provided for sales taxes on its sales, there can be no assurance as
to the effect of actions state tax authorities may take on the Company's
financial condition or the results of its operations.
F-33
<PAGE>
TRIAD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. SIGNIFICANT SUPPLIERS:
Purchases from two vendors accounted for 34 percent and 25 percent of total
purchases in 1995 and 1996, respectively. Although there are a limited number of
suppliers, management believes that other suppliers could provide similar
products on comparable terms. A change in suppliers, however, could cause a
delay in product sales and a possible loss in revenues, which could affect
operating results adversely.
The Company's other significant agreements with its vendors are generally
for terms of one to three years but can be terminated if the Company fails to
meet certain negotiated sales volumes. The loss of one or more of the Company's
relationships with its significant vendors could have a material adverse effect
on the Company's consolidated financial condition and consolidated results of
operations.
11. STOCKHOLDERS' EQUITY:
In May 1996, the Company sold 1,362,190 shares of its Class A convertible
common stock (Class A Common Stock) for net cash consideration of $6,784,448
(net of offering costs of $715,552). Concurrently with that sale, the Company
repurchased 227,031 shares of TMI common stock for $1,250,000, and 889,269
shares of TMI common stock were converted into shares of the Company's Class B
common stock (Class B Common Stock) on a share-for-share basis.
Holders of shares of Class A Common Stock may convert their shares into
Class B Common Stock on a share-for-share basis at any time. The Class A Common
Stock will be automatically converted into shares of Class B Common Stock upon
the consummation of a qualified public offering that occurs before May 2000, or
after May 2000 but only if the current holder of shares of Class A Common Stock
shall have previously distributed its Class A Common Stock to certain third
parties. Should the Company meet certain profitability objectives or if the
Company's acquisition by TRIAD (referred to in Note 1) is completed, the holder
of shares of Class A Common Stock will be required to return 106,465 of the
previously issued shares back to the Company.
Holders of shares of Class A Common Stock vote as a class with the holders
of shares of Class B Common Stock on the basis of one vote per share. Holders of
shares of Class A Common Stock are entitled to dividends or other distributions
declared or paid on each share of Class A Common Stock when and in the same
amount as any dividend or other distribution is declared or paid on each share
of Class B Common Stock.
STOCKHOLDERS' AGREEMENT
Under an agreement between the Company and the holders of Class B Common
Stock, (i) the Company's prior written consent is required for certain transfers
and assignments of shares of Class B Common Stock, (ii) the Company has a right
of first refusal on any sales of Class B Common Stock and (iii) if a holder of
shares of Class B Common Stock dies, the Company is obligated to repurchase the
deceased holder's shares of Class B Common Stock for the greater of the
estimated fair value of the shares, as determined annually by the Company's
board of directors, or the insurance proceeds received by the Company on the
death of the holder. Based on the board of directors' determination of fair
value, the aggregate obligation would be $7,103,876 at December 31, 1996. The
Company maintains insurance on the lives of these stockholders, aggregating
$5,310,000 at December 31, 1995 and 1996, respectively. The agreement will be
terminated upon completion of the acquisition of the Company by TRIAD.
STOCK OPTIONS
A 1992 Company stock option plan (the Plan) provides for the grant of
options to purchase shares of the Company's common stock to employees, officers,
consultants and directors of the Company. The timing of exercise for individual
option grants is at the discretion of the Plan's administrator. Each option
expires no later than 10 years after the date the option is granted (five years
if the option is granted to a 10 percent
F-34
<PAGE>
TRIAD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stockholder) and generally vest over a three-year period. An option granted to
an employee will expire (i) one year after the employee's employment by the
Company terminates because of death or a permanent disability or (ii) 90 days
after the employee's termination of employment for any other reason.
Stock option activity under the Plan is as follows:
WEIGHTED
SHARES AVERAGE
SUBJECT TO EXERCISE EXERCISE
OPTIONS PRICE PRICE
---------- ------------ ---------
Balance at December 31, 1994......... 62,500 $1.20-$1.80 $1.48
Exercised....................... (14,300) 1.30- 1.50 1.24
----------
Balance at December 31, 1995......... 48,200 1.30- 1.80 1.54
Granted......................... 87,500 4.68- 5.51 5.32
Exercised....................... (30,576) 1.30- 1.60 1.48
---------- ------------ ---------
Balance at December 31, 1996......... 105,124 $1.40-$5.51 $4.67
========== ============ =========
At December 31, 1996, options to purchase 17,624 shares of common stock at
a weighted average price of $1.47 per share were exercisable. The weighted
average remaining contractual life for all options outstanding at December 31,
1996, is 2.73 years.
The board of directors authorized the granting of options to purchase
30,000 shares of common stock, which have not been issued as of December 31,
1996.
As discussed in Note 2, the Company has elected to follow APB Opinion No.
25 in accounting for its employee stock options because the alternative fair
value accounting provided for under SFAS No. 123, "Accounting for Stock-Based
Compensation," requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB Opinion No. 25, when the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized in the consolidated financial statements.
The impact of adopting SFAS No. 123 was not material to the accompanying
consolidated statements of operations.
12. SUBSEQUENT EVENT (UNAUDITED):
MERGER
On September 9, 1997, the Company and its stockholders entered into a
definitive merger agreement with TRIAD, providing for the acquisition of the
Company by TRIAD.
F-35
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Healthcare Technology Delivery, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Healthcare
Technology Delivery, Inc. (a Delaware corporation) and subsidiaries as of
December 31, 1995 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years 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 audits.
We conducted our audits 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 audits provide 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 Technology Delivery, Inc. and subsidiaries as of
December 31, 1995 and 1996, and the results of their consolidated operations and
their consolidated cash flows for the years then ended, in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Houston, Texas
April 18, 1997
F-36
<PAGE>
HEALTHCARE TECHNOLOGY DELIVERY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
<S> <C> <C> <C>
Cash and cash equivalents....... $ 158 $ 1,810 $ 82,101
Accounts receivable, net of
allowance of $18,621, $27,715
and $57,367, respectively..... 1,909,862 1,618,990 2,157,884
Inventories, net................ 1,189,939 1,097,803 2,462,720
Prepaid expenses and other
current assets................ 31,399 28,740 11,965
Deferred income taxes........... 14,025 23,774 36,306
------------ ------------ -------------
Total current assets....... 3,145,383 2,771,117 4,750,976
PROPERTY AND EQUIPMENT, net.......... 165,045 190,346 313,541
INTANGIBLE ASSETS, net............... -- -- 1,665,592
OTHER NON-CURRENT ASSETS............. 164,791 234,205 35,669
------------ ------------ -------------
Total assets............... $ 3,475,219 $ 3,195,668 $ 6,765,778
============ ============ =============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current obligations under
capital leases................ $ 33,422 $ 23,575 $ 32,403
Notes payable to stockholders... -- -- 169,136
Short-term debt................. 466,532 745,632 703,396
Accounts payable and accrued
expenses........................ 1,929,008 1,498,411 3,079,047
------------ ------------ -------------
Total current
liabilities................ 2,428,962 2,267,618 3,983,982
------------ ------------ -------------
CAPITAL LEASE OBLIGATIONS, net of
current maturities................. 76,217 22,111 63,670
NOTES PAYABLE TO STOCKHOLDERS........ 315,005 169,136 --
DEFERRED INCOME TAXES................ 12,233 10,932 10,824
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value;
5,000 shares authorized, 1,000
shares issued and 751 shares
outstanding at December 31,
1995 and 1996; and $.01 par
value, 100,000 shares
authorized, and 90,000 shares
issued and outstanding at
September 30, 1997............ 1,000 1,000 900
Additional paid-in capital...... -- -- 1,611,800
Retained earnings............... 697,544 780,613 1,094,602
Treasury stock, 249 shares (at
cost) at December 31, 1995 and
1996; and no shares at
September 30, 1997............ (55,742) (55,742) --
------------ ------------ -------------
Total stockholders'
equity..................... 642,802 725,871 2,707,302
------------ ------------ -------------
Total liabilities and
stockholders' equity.... $ 3,475,219 $ 3,195,668 $ 6,765,778
============ ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-37
<PAGE>
HEALTHCARE TECHNOLOGY DELIVERY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ ------------------------------
1995 1996 1996 1997
-------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES............................. $ 17,148,917 $ 16,475,288 $ 12,202,645 $ 14,492,286
COST OF REVENUES..................... 11,522,891 11,042,497 8,217,283 9,823,034
-------------- -------------- -------------- --------------
Gross profit............... 5,626,026 5,432,791 3,985,362 4,669,252
-------------- -------------- -------------- --------------
SELLING EXPENSES..................... 2,808,499 2,724,858 1,986,077 2,278,747
GENERAL AND ADMINISTRATIVE
EXPENSES............................. 2,121,913 2,353,122 1,787,624 1,562,044
DEPRECIATION AND AMORTIZATION........ 100,741 120,445 89,159 166,344
-------------- -------------- -------------- --------------
Total operating expenses........ 5,031,153 5,198,425 3,862,860 4,007,135
-------------- -------------- -------------- --------------
Income from operations..... 594,873 234,366 122,502 662,117
OTHER INCOME (EXPENSE):
Interest income................. 7,330 11,525 263 7,068
Interest expense................ (72,313) (44,425) (30,349) (41,391)
Other income (expense), net..... 1,575 (63,615) (908) (18,193)
-------------- -------------- -------------- --------------
INCOME BEFORE PROVISION FOR INCOME
TAXES.............................. 531,465 137,851 91,508 609,601
PROVISION FOR INCOME TAXES........... 211,923 54,782 36,365 240,330
-------------- -------------- -------------- --------------
NET INCOME........................... $ 319,542 $ 83,069 $ 55,143 $ 369,271
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-38
<PAGE>
HEALTHCARE TECHNOLOGY DELIVERY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK TOTAL
--------------- PAID-IN RETAINED ----------------- STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT EQUITY
------ ------ ---------- ---------- ------ -------- -------------
BALANCE, December 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1994................... 1,000 $1,000 $ -- $ 378,002 249 $(55,742) $ 323,260
Net income.......... -- -- -- 319,542 -- -- 319,542
------ ------ ---------- ---------- ------ -------- -------------
BALANCE, December 31,
1995................... 1,000 1,000 -- 697,544 249 (55,742) 642,802
Net income.......... -- -- -- 83,069 -- -- 83,069
------ ------ ---------- ---------- ------ -------- -------------
BALANCE, December 31,
1996................... 1,000 1,000 -- 780,613 249 (55,742) 725,871
Retirement of
treasury stock of
Futuretech
(unaudited)....... (249) (249) -- (55,493) (249 ) 55,742 --
Reorganization of
Futuretech
(unaudited):
Retirement of
Futuretech
common
stock....... (751) (751) -- 751 -- -- --
Issuance of HTD
common
stock....... 54,000 540 -- (540) -- -- --
Issuance of common
stock (unaudited):
Acquisition of
MCA......... 27,000 270 1,561,890 -- -- -- 1,562,160
Sale to related
party....... 9,000 90 49,910 -- -- -- 50,000
Net income
(unaudited)....... -- -- -- 369,271 -- -- 369,271
------ ------ ---------- ---------- ------ -------- -------------
BALANCE September 30,
1997 (unaudited)....... 90,000 $ 900 $1,611,800 $1,094,602 -- $ -- $ 2,707,302
====== ====== ========== ========== ====== ======== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-39
<PAGE>
HEALTHCARE TECHNOLOGY DELIVERY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- --------------------------
1995 1996 1996 1997
------------ ------------ ------------ ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net income......................... $ 319,542 $ 83,069 $ 55,143 $ 369,271
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities --
Depreciation and amortization.... 100,741 120,445 89,159 166,344
Loss on disposal of fixed
assets........................ -- 62,342 -- --
Provision for doubtful
accounts...................... 18,621 23,576 12,468 29,652
Deferred income tax provision
(credit)...................... (2,840) (11,050) 15,301 (12,640)
Increase (decrease) in operating
cash flows resulting from
changes in:
Accounts receivable........... (84,111) 267,296 182,422 (418,390)
Inventories................... (92,726) 92,136 (117,833) (1,336,429)
Prepaid expenses and other
current assets............. (543) 2,659 12,002 22,405
Other noncurrent assets....... (46,764) (69,414) (7,854) 171,902
Accounts payable and accrued
expenses................... 178,641 (430,597) (495,015) 1,422,215
------------ ------------ ------------ ------------
Net cash provided by
(used in) operating
activities............ 390,561 140,462 (254,207) 414,330
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and
equipment........................ (148,341) (208,088) (81,306) (105,364)
Payment on capital leases.......... -- -- (45,438) (24,929)
------------ ------------ ------------ ------------
Net cash used in
investing activities.. (148,341) (208,088) (126,744) (130,293)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term
debt............................. 155,655 81,313 -- --
Principal payments on long-term
debt............................. (30,416) (291,135) -- --
Net borrowings on short-term
debt............................. (367,680) 279,100 335,472 (253,746)
Proceeds from issuance of preferred
stock............................ -- -- -- 450,000
Redemption of preferred stock...... -- -- -- (450,000)
Proceeds from issuance of common
stock............................ -- -- 47,681 50,000
------------ ------------ ------------ ------------
Net cash provided by
(used in) financing
activities............ (242,441) 69,278 383,153 (203,746)
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................... (221) 1,652 2,202 80,291
CASH AND CASH EQUIVALENTS, beginning of
period................................ 379 158 158 1,810
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of
period................................ $ 158 $ 1,810 $ 2,360 $ 82,101
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest...................... $ 75,008 $ 44,425 $ 15,543 $ 23,287
============ ============ ============ ============
Income taxes.................. $ 60,091 $ 182,295 $ 140,943 $ 177,152
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-40
<PAGE>
HEALTHCARE TECHNOLOGY DELIVERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Effective March 1, 1997, the stockholders of Futuretech, Inc. (Futuretech)
exchanged all their shares of Futuretech common stock for shares of common stock
of Healthcare Technology Delivery, Inc. (the Company or HTD), a company formed
in November 1996 by the stockholders of Futuretech. The exchange was accounted
for as a reorganization of Futuretech. Accordingly, no adjustments to the
recorded values of assets or liabilities were made. Also effective March 1,
1997, HTD acquired Medical Companies Alliance, Inc. (MCA) in a purchase
transaction in which all the shares of MCA stock were exchanged for shares of
HTD common stock (see Note 3).
HTD, a Delaware corporation, operates from its facilities in Park City,
Utah and Bessemer, Alabama. The Company primarily markets and sells specialty
medical products on a contract basis with manufacturers.
The Company and its stockholders intend to enter into a definitive merger
agreement with TRIAD Medical Inc. (TRIAD) pursuant to which the Company will be
acquired for consideration consisting of $2,475,000 in cash and 530,357 shares
of TRIAD common stock, concurrently with the closing of the initial public
offering by TRIAD of its common stock (the Offering).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared on
the accrual basis of accounting and include the accounts of the Company and its
subsidiaries. All significant intercompany amounts and transactions have been
eliminated in consolidation. In 1996, the Company changed its fiscal year end
from October 31 to December 31. Fiscal years presented and referred to in these
financial statements and notes thereto are on a December 31 fiscal-year basis.
INTERIM FINANCIAL INFORMATION
The interim consolidated financial statements as of September 30, 1997, and
for the nine months ended September 30, 1996 and 1997, are unaudited, and
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary to fairly present the financial
position, results of operations and cash flows with respect to the interim
consolidated financial statements, have been included. The results of operations
for the interim periods are not necessarily indicative of the results for the
entire fiscal year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, cash
equivalents, trade receivables, trade payables and debt instruments. The
carrying amounts of those instruments reported in the balance sheets are
considered to estimate their respective fair values due to the short-term nature
of such financial instruments and the current interest rate environment. The
fair value of the Company's long-term debt and capital lease obligations was
determined using valuation techniques that considered cash flows discounted at
current market rates and management's best estimates for instruments without
quoted market prices. The
F-41
<PAGE>
HEALTHCARE TECHNOLOGY DELIVERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
carrying amounts of those long-term instruments reported in the balance sheets
are considered to approximate their respective fair values as the Company's
long-term debt and capital lease obligations interest rates approximate market
rates at December 31, 1996.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated balance sheets and consolidated statements
of cash flows, the Company considers all investments with original maturities of
three months or less to be cash equivalents.
CONCENTRATIONS OF CREDIT RISK
In the normal course of business, the Company extends credit to its
customers, which are primarily hospitals. The Company regularly reviews accounts
receivable and makes provision for potentially uncollectible balances. At
December 31, 1995 and 1996, and at September 30, 1997, management believes the
Company had incurred no material impairments in the carrying values of its
accounts receivable, other than uncollectible amounts for which provision has
been made.
INVENTORIES
Inventories consist primarily of medical supplies and equipment.
Inventories, net of allowances, are valued at the lower of cost or market with
cost being determined on the first-in, first-out (FIFO) method. Included in
inventories at December 31, 1995 and 1996, and at September 30, 1997, are
approximately $172,703, $192,594 and $178,326, respectively, in net book value
of demonstration equipment used by the Company's sales force.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the applicable lease or the estimated useful life of the applicable asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments that extend the useful
lives of existing equipment are capitalized and depreciated. On retirement or
disposition of property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized in the statements of operations.
INTANGIBLE ASSETS
The intangible assets recorded by the Company in connection with the
acquisition of MCA (see Note 3) are amortized on a straight-line basis. As of
September 30, 1997, accumulated amortization of intangibles amounted to $36,533.
The applicable intangible amortization periods are as follows:
Goodwill............................. 40 years
Patents.............................. 12 years
COLLATERAL INTEREST IN INSURANCE POLICIES
The Company has entered into an agreement with certain of its stockholders
for the sole purpose of financing life insurance premiums on whole-life policies
covering key officers of the Company. The advances are collateralized by the
cash surrender value of and the death benefits payable under the policies. The
Company recorded the advances in other non-current assets in the accompanying
consolidated balance sheets totaling approximately $164,791 and $231,205 at
December 31, 1995 and 1996, respectively, and $30,365 at September 30, 1997.
F-42
<PAGE>
HEALTHCARE TECHNOLOGY DELIVERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUES AND EXPENSES
The Company's revenues are primarily derived from sales of specialty
medical products under agreements and arrangements with various manufacturers.
Cost of revenues consists primarily of product costs, net of rebates, and
freight charges. Selling expenses consist primarily of sales commissions,
salaries of sales managers, travel and entertainment expenses, trade show
expenses and automobile allowances. General and administrative expenses consist
primarily of executive compensation and related benefits, administrative
salaries and benefits, office rent and utilities, communication expenses and
professional fees.
REVENUE RECOGNITION
Revenues are recorded at the time of shipment of products or performance of
services. Revenues from commissions are recognized as the related products are
sold.
INCOME TAXES
The Company applies the liability method of accounting for income taxes.
Under this method, deferred income taxes are recorded based on differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are received or settled.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 129, "Disclosure of Information
About Capital Structure." SFAS No. 129 requires entities to disclose certain
information about their capital structure, including the pertinent rights and
privileges of the various securities outstanding. The Company will be required
to adopt SFAS No. 129 in 1997 and, in the opinion of management, SFAS No. 129
will not significantly change the existing financial statement disclosures.
3. ACQUISITION (UNAUDITED):
On March 1, 1997, HTD acquired all the outstanding stock of MCA in exchange
for 27,000 shares of HTD common stock. The acquisition was accounted for as a
purchase, and MCA's results of operation have been included in the accompanying
unaudited September 30, 1997 consolidated financial statements since the
acquisition date. MCA is also a contract seller of specialty medical products.
The purchase price was allocated as follows:
Current assets..................... $ 174,456
Property and equipment............. 165,610
Patent............................. 395,551
Goodwill........................... 1,186,655
Current liabilities................ (360,112)
------------
Purchase price..................... $ 1,562,160
============
F-43
<PAGE>
HEALTHCARE TECHNOLOGY DELIVERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL DECEMBER 31,
LIVES -------------------------- SEPTEMBER 30,
IN YEARS 1995 1996 1997
--------- ------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Furniture and fixtures............... 5-7 $ 80,314 $ 80,314 $ 126,881
Machinery and equipment.............. 7 84,154 74,265 125,879
Office equipment..................... 5 209,360 200,302 227,210
Rental equipment..................... 5 -- -- 74,245
Leasehold improvements............... 10 23,275 -- --
------------ ------------ -------------
397,103 354,881 554,215
Less -- accumulated depreciation and
amortization....................... (232,058) (164,535) (240,674)
------------ ------------ -------------
Property and equipment, net.......... $ 165,045 $ 190,346 $ 313,541
============ ============ =============
</TABLE>
Equipment financed under capital lease obligations amounted to $144,133 and
$86,836 at December 31, 1995 and 1996, respectively, and $146,868 at September
30, 1997. Related accumulated depreciation for those assets totaled $45,524 and
$41,634, at December 31, 1995 and 1996, respectively, and $56,368 at September
30, 1997.
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Trade receivables....................... $ 1,810,467 $ 1,486,413 $ 1,955,588
Commissions receivable.................. 100,586 98,491 139,878
Receivables from related party (Note
7).................................... 9,257 17,249 --
Receivables from employees.............. 6,623 27,887 28,260
Other................................... 1,550 16,665 91,525
------------ ------------ -------------
1,928,483 1,646,705 2,215,251
Less -- allowance for doubtful
accounts.............................. (18,621) (27,715) (57,367)
------------ ------------ -------------
$ 1,909,862 $ 1,618,990 $ 2,157,884
============ ============ =============
Accounts payable and accrued expenses consist of the following:
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
(UNAUDITED)
Accounts payable, trade................. $ 1,364,397 $ 1,079,398 $ 2,496,448
Accrued compensation and benefits....... 117,598 54,085 41,177
Accrued commissions..................... 226,605 178,689 235,134
Accrued income taxes.................... 198,095 79,431 155,249
Other payables and accrued expenses..... 22,313 106,808 151,039
------------ ------------ -------------
$ 1,929,008 $ 1,498,411 $ 3,079,047
============ ============ =============
</TABLE>
F-44
<PAGE>
HEALTHCARE TECHNOLOGY DELIVERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. DEBT:
Short-term debt consists of a $1,500,000 revolving credit line payable on
demand with interest due monthly at the bank's prime rate plus 0.75 percent (9
percent at December 31, 1996). This credit line is secured by accounts
receivable, inventories and personal guarantees of the Company's principal
stockholders and contains various restrictive covenants, including provisions
relating to the maintenance of working capital, net worth and current ratios.
The Company was not in compliance with its minimum working capital and current
ratio debt covenants at December 31, 1996. The line of credit issuer has waived
compliance with these requirements at December 31, 1996. The Company was in
compliance with respect to all of its covenants at September 30, 1997.
Stockholders' notes payable represent amounts advanced to the Company by
certain of its stockholders for working capital purposes. The notes are due
October 31, 1998 and bear interest at 8% payable upon maturity; however, the
Company repaid the notes during October 1997.
The aggregate maturities of long-term debt and capital lease obligations as
of December 31, 1996, are as follows:
Year ending December 31 --
1997....................... $ 23,575
1998....................... 176,355
1999....................... 7,940
2000....................... 3,631
2001....................... 3,321
----------
$ 214,822
==========
Capital lease obligations are shown net of interest and executory costs,
which total approximately $15,000 through 2001.
7. LEASES:
Prior to January, 1997, the Company leased its warehouse facilities from
Saralou Associates, a partnership owned by two of its stockholders
("Saralou"). Rent expense under this arrangement totaled approximately $84,000
and $77,400 for the years ended December 31, 1995 and 1996, respectively, and
was $63,000 and $0 for the nine months ended September 30, 1996 and 1997,
respectively. The Company also previously leased space for its corporate office
from a third party. Rent expense under this arrangement totaled approximately
$55,853 for each of the years ended December 31, 1995 and 1996, and $41,890 and
$6,982 for the nine months ended September 30, 1996 and 1997, respectively. The
leases required or require the Company to pay taxes, maintenance, insurance and
certain other operating costs of the leased property.
During December 1996, the Company relocated its corporate office and
warehouse into combined new facilities that are owned by Saralou. The Company
provided a guaranty of this related party's $1,500,000 loan on the new
facilities, and the Company advanced funds to Saralou for construction and other
purposes. The amount due relating to these advances totaled $9,257 and $17,249
for the years ending December 31, 1995 and 1996, respectively, and $0 at
September 30, 1997. In January 1997, the $1,500,000 loan was renegotiated
pursuant to which, among other things, Saralou granted a lien against the
facilities to collateralize its loan, and the Company was released from its
guaranty. Total rent expense under the lease for the new facilities amounted to
$116,100 for the nine months ended September 30, 1997.
In connection with the relocation, the Company recorded a $62,342 charge in
1996 associated with the termination of certain equipment leases, which is
reflected as other expense, net in the accompanying consolidated statement of
operations for the year ended December 31, 1996.
F-45
<PAGE>
HEALTHCARE TECHNOLOGY DELIVERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments (payable to related parties) required under
noncancellable operating leases that have initial or remaining noncancellable
lease terms in excess of one year at December 31, 1996 are as follows:
Year ending December 31 --
1997............................... $ 154,800
1998............................... 154,800
1999............................... 154,800
2000............................... 154,800
2001............................... 154,800
Thereafter......................... 774,000
------------
$ 1,548,000
============
8. INCOME TAXES:
The provision for federal and state income taxes follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------- ---------------------
1995 1996 1996 1997
---------- --------- --------- ----------
(UNAUDITED)
Federal --
<S> <C> <C> <C> <C>
Current......................... $ 194,395 $ 58,276 $ 18,363 $ 220,538
Deferred........................ (2,476) (9,633) 13,340 (11,019)
State --
Current......................... 20,368 7,556 2,701 32,432
Deferred........................ (364) (1,417) 1,961 (1,621)
---------- --------- --------- ----------
$ 211,923 $ 54,782 $ 36,365 $ 240,330
========== ========= ========= ==========
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income taxes as follows:
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ---------------------
1995 1996 1996 1997
---------- --------- --------- ----------
(UNAUDITED)
Provision at the statutory rate...... $ 180,698 $ 46,870 $ 31,112 $ 207,264
Increase (decrease) resulting from --
State income tax, net of federal
benefit....................... 13,203 4,052 2,690 7,276
Officers' life insurance
expense....................... 13,845 4,991 3,313 3,743
Meals and entertainment......... 9,913 11,513 7,644 8,635
Other........................... (5,736) (12,644) (8,394) 13,412
---------- --------- --------- ----------
$ 211,923 $ 54,782 $ 36,365 $ 240,330
========== ========= ========= ==========
</TABLE>
F-46
<PAGE>
HEALTHCARE TECHNOLOGY DELIVERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences representing deferred tax assets
and liabilities result principally from the following:
DECEMBER 31,
---------------------- SEPTEMBER 30,
1995 1996 1997
---------- ---------- -------------
(UNAUDITED)
Depreciation and amortization........ $ (12,233) $ (10,932) $ (10,824)
Accruals and reserves................ 14,025 23,774 36,306
---------- ---------- -------------
Net deferred income tax assets....... $ 1,792 $ 12,842 $ 25,482
========== ========== =============
Certain fiscal years of the Company are currently under examination by the
Internal Revenue Service. While the outcome of the audit is not determinable at
this time, the Company does not expect the audit findings will have a material
adverse impact on the financial position of the Company.
9. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is a party to certain legal proceedings arising in the ordinary
course of business. Management believes the outcome of such legal proceedings
will not have a material adverse effect on the Company's consolidated financial
position or consolidated results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses under any of its insurance policies.
The sale and distribution of medical products involve a risk of product
liability claims. The Company maintains product liability insurance coverage in
amounts that it considers adequate.
10. SIGNIFICANT SUPPLIERS:
Sales of specialty medical products under distribution agreements and
agency arrangements with manufacturers represented approximately 89.2 percent
and 7.8 percent, respectively, of the Company's revenues in 1996. Sales of
products under arrangements with the Company's four largest suppliers accounted
for approximately 62.8 percent and 67.0 percent of sales revenues for 1995 and
1996, respectively.
The Company's significant distribution agreements and agency arrangements
are generally for terms of one to three years, but can be terminated if the
Company fails to meet certain negotiated sales volumes. The loss of one or more
of the Company's relationships with its significant manufacturers could have a
material adverse effect on the Company's consolidated financial condition and
consolidated results of operations.
11. EMPLOYEE BENEFIT PLAN:
The Company sponsors a defined contribution 401(k) profit-sharing plan for
employees meeting certain requirements. The Company's contributions during the
years ended December 31, 1995 and 1996, were $33,058 and $20,000, respectively,
and during the nine months ended September 30, 1996 and 1997, were $15,000 and
$0, respectively.
12. INCENTIVE BONUS PLAN:
The Company maintains operational-and profit-based bonus plans for certain
sales-related employees. The Company also may approve discretionary bonuses to
certain officers and employees. Amounts expensed under such incentive agreements
totaled $199,190 and $309,400 for the years ended
F-47
<PAGE>
HEALTHCARE TECHNOLOGY DELIVERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1995 and 1996, respectively, and $286,125 and $100,302 for the nine
months ended September 30, 1996 and 1997, respectively.
13. ISSUANCE OF PREFERRED AND COMMON STOCK (UNAUDITED):
In April 1997, HTD issued and sold 9,000 shares of its common stock and
4,500 shares of its Series A preferred stock (the "HTD Preferred Stock") to
Equus II Incorporated, an investor in TRIAD, for $50,000 and $450,000,
respectively. The HTD preferred stock bears cumulative, preferential dividends
at the rate of $10 per share per annum, payable quarterly, and is mandatorily
redeemable at $100 per share, plus accrued and unpaid dividends, on the
occurence of certain events, including a change of control. HTD redeemed the
preferred stock in September 1997. If TRIAD acquires HTD and consummates the
Offering, certain holders of HTD common stock have agreed not to exercise and
will terminate options to purchase an aggregate of 10,000 shares of HTD common
stock.
14. EMPLOYMENT AGREEMENTS:
On March 1, 1997 the Company entered into employment agreements with
certain key employees which provide for a three-year employment period at a base
salary plus various incentives.
15. SUPPLEMENTAL CASH FLOW INFORMATION:
During the nine months ended September 30, 1997 the Company had the
following non-cash financing and investing activities:
Acquisition of MCA:
Fair value of assets acquired... $ 1,922,272
Liabilities assumed............. (360,112)
------------
Fair value of stock issued...... $ 1,562,160
============
Treasury stock retired in
reorganization..................... $ 55,742
Common stock retired in
reorganization..................... $ 211
Capital lease transactions........... $ 84,237
16. SUBSEQUENT EVENTS (UNAUDITED):
MERGER
On September 9, 1997, the Company and its stockholders entered into a
definitive merger agreement with TRIAD, providing for the acquisition of the
Company by TRIAD.
Concurrently with the closing of the transactions under the merger
agreement, the Company will enter into agreements with a related party owned by
certain of its stockholders to lease land and buildings used in the Company's
operations for a negotiated amount and term.
F-48
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Sun Medical, Inc.:
We have audited the accompanying balance sheets of Sun Medical, Inc. (a
Texas corporation) as of December 31, 1995 and 1996, and the related statements
of operations, stockholder's equity and cash flows for each of the three years
in the period ended December 31, 1996. 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 audits.
We conducted our audits 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 audits provide 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 Sun Medical, Inc. as of
December 31, 1995 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Houston, Texas
April 18, 1997
F-49
<PAGE>
SUN MEDICAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER
------------------------------ 30,
1995 1996 1997
-------------- -------------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
<S> <C> <C> <C>
Cash and cash equivalents....... $ 1,154,647 $ 803,458 $ 608,211
Accounts receivable, net of
allowance of $4,913, $0
and $0, respectively.......... 1,630,865 1,313,822 2,543,067
Notes receivable -- current
portion....................... 80,804 -- --
Inventories, net................ 1,635,144 1,544,614 1,178,641
Prepaid expenses and other
current assets................ 34,191 35,997 62,633
Deferred income taxes........... 64,015 128,122 126,941
-------------- -------------- -----------
Total current assets....... 4,599,666 3,826,013 4,519,493
PROPERTY AND EQUIPMENT, net.......... 176,925 123,834 79,383
OTHER NON-CURRENT ASSETS:
Notes receivable, net of current
portion....................... -- 440,000 690,000
Other........................... 29,099 29,899 29,899
-------------- -------------- -----------
Total assets............... $ 4,805,690 $ 4,419,746 $ 5,318,775
============== ============== ===========
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term
debt and notes payable to
former stockholder............ $ 850,000 $ 450,000 $ 450,000
Accounts payable and accrued
expenses...................... 1,754,773 3,283,662 3,546,281
-------------- -------------- -----------
Total current
liabilities................ 2,604,773 3,733,662 3,996,281
LONG-TERM DEBT, net of current
maturities........................... 200,000 150,000 400,000
NOTES PAYABLE TO FORMER STOCKHOLDER,
net of current maturities............ 1,900,000 1,500,000 1,500,000
DEFERRED INCOME TAXES................ 3,509 7,024 6,959
OTHER LONG-TERM LIABILITIES.......... 1,537,969 231,300 259,983
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S DEFICIT:
Common stock, no par value;
500,000 shares authorized,
166,887 shares issued and
outstanding..................... 2,673,357 2,673,357 2,673,357
Additional paid-in capital...... (144,728) (222,789) (222,789)
Unearned ESOP shares............ (4,097,046) (3,779,885) (4,159,885)
Retained earnings............... 127,856 127,077 864,869
-------------- -------------- -----------
Total stockholder's
deficit............... (1,440,561) (1,202,240) (844,448)
-------------- -------------- -----------
Total liabilities and
stockholder's
deficit............ $ 4,805,690 $ 4,419,746 $ 5,318,775
============== ============== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE>
SUN MEDICAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------------------------- ------------------------------
1994 1995 1996 1996 1997
-------------- -------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES............................. $ 12,383,488 $ 13,917,975 $ 13,037,884 $ 9,780,791 $ 10,613,669
COST OF REVENUES..................... 8,438,440 9,341,268 8,595,560 6,792,836 7,039,412
-------------- -------------- -------------- -------------- --------------
Gross profit............... 3,945,048 4,576,707 4,442,324 2,987,955 3,574,257
-------------- -------------- -------------- -------------- --------------
SELLING EXPENSES..................... 1,770,087 1,877,520 1,820,170 941,440 1,226,358
GENERAL AND ADMINISTRATIVE
EXPENSES........................... 1,876,597 2,064,811 2,121,559 1,378,739 1,024,132
DEPRECIATION AND
AMORTIZATION....................... 73,277 66,407 60,544 45,000 45,000
-------------- -------------- -------------- -------------- --------------
Total operating expenses........ 3,719,961 4,008,738 4,002,273 2,365,179 2,295,490
-------------- -------------- -------------- -------------- --------------
Income from operations..... 225,087 567,969 440,051 622,776 1,278,767
OTHER INCOME (EXPENSE):
Interest income................. 22,468 42,027 48,308 27,949 84,771
Interest expense................ (395,654) (356,033) (246,549) (176,195) (176,778)
-------------- -------------- -------------- -------------- --------------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES....................... (148,099) 253,963 241,810 474,530 1,186,760
PROVISION FOR INCOME TAXES........... 76,515 247,727 242,589 199,014 448,968
-------------- -------------- -------------- -------------- --------------
NET INCOME (LOSS).................... $ (224,614) $ 6,236 $ (779) $ 275,516 $ 737,792
============== ============== ============== ============== ==============
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE>
SUN MEDICAL, INC.
STATEMENTS OF STOCKHOLDER'S DEFICIT
COMMON STOCK ADDITIONAL UNEARNED TOTAL
--------------------- PAID-IN ESOP RETAINED STOCKHOLDER'S
SHARES AMOUNT CAPITAL SHARES EARNINGS DEFICIT
------- ---------- ---------- ----------- ---------- -------------
BALANCE, December 31, 1993.............. 166,887 $2,673,357 $ (436) $(4,990,545) $ 346,234 $ (1,971,390)
8,622 shares released to ESOP
participants..................... -- -- (45,266) 426,789 -- 381,523
Shares purchased by ESOP from ESOP
participants..................... -- -- (50,000) -- (50,000)
Net loss........................... -- -- (224,614) (224,614)
------- ---------- ---------- ----------- ---------- -------------
BALANCE, December 31, 1994.............. 166,887 2,673,357 (45,702) (4,613,756) 121,620 (1,864,481)
10,479 shares released to ESOP
participants..................... -- -- (99,026) 518,710 -- 419,684
Shares purchased by ESOP from ESOP
participants..................... -- -- (2,000) -- (2,000)
Net income......................... -- -- 6,236 6,236
------- ---------- ---------- ----------- ---------- -------------
BALANCE, December 31, 1995.............. 166,887 2,673,357 (144,728) (4,097,046) 127,856 (1,440,561)
10,478 shares released to ESOP
participants..................... -- -- (78,061) 518,661 -- 440,600
Shares purchased by ESOP from ESOP
participants..................... -- -- (201,500) -- (201,500)
Net loss........................... -- -- (779) (779)
------- ---------- ---------- ----------- ---------- -------------
BALANCE, December 31, 1996.............. 166,887 2,673,357 (222,789) (3,779,885) 127,077 (1,202,240)
Shares purchased by ESOP from ESOP
participants (unaudited)......... -- -- -- (380,000) -- (380,000)
Net income (unaudited)............. -- -- 737,792 737,792
------- ---------- ---------- ----------- ---------- -------------
BALANCE, September 30, 1997
(unaudited)........................... 166,877 $2,673,357 $ (222,789) $(4,159,885) $ 864,869 $ (844,448)
======= ========== ========== =========== ========== =============
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE>
SUN MEDICAL, INC.
STATEMENTS OF CASH FLOWS
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------------------- --------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ (224,614) $ 6,236 $ (779) $ 275,516 $ 737,792
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities --
Depreciation and amortization.... 73,277 66,407 60,544 45,000 45,000
Provision for doubtful accounts
receivable.................... (145,680) (593) 4,913 4,913 --
Deferred income taxes, net....... (21,426) (20,358) (60,592) (59,765) 1,116
Shares released to the ESOP...... 381,523 419,684 440,600 124,884 --
Increase (decrease) in operating
cash flows resulting from:
Accounts receivable........... 273,718 (58,084) 392,934 557,669 (1,119,245)
Inventories................... 399,660 44,413 90,530 299,689 365,973
Prepaid expenses and other
current assets............. -- (9,191) (1,806) 20,172 (26,636)
Other noncurrent assets....... 14,913 58,062 (800) -- --
Accounts payable and accrued
expenses................... (201,213) 1,007,336 (1,504,314) (677,283) 152,619
Other long-term liabilities... -- 43,500 1,726,534 572,537 28,683
Loss on sale of property and
equipment.................. -- -- -- -- (6,600)
------------ ------------ ------------ ------------ ------------
Net cash provided by
operating
activities............ 550,158 1,557,412 1,147,764 1,163,332 178,702
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances to investees.............. -- -- (440,000) (40,000) (250,000)
Proceeds from sale of property and
equipment........................ 17,448 11,171 2,547 -- 6,600
Purchases of property and
equipment........................ (4,867) (153,581) (10,000) (2,060) (549)
------------ ------------ ------------ ------------ ------------
Net cash provided by
(used in) investing
activities............ 12,581 (142,410) (447,453) (42,060) (243,949)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term
debt............................. (523,000) (352,000) (850,000) (450,000) (75,000)
Proceeds of long-term debt......... -- -- -- -- 325,000
Shares purchased from ESOP
Participants..................... (50,000) (2,000) (201,500) (201,500) (380,000)
------------ ------------ ------------ ------------ ------------
Net cash used in
financing activities..X (573,000) (354,000) (1,051,500) (651,500) (130,000)
------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................... (10,261) 1,061,002 (351,189) 469,772 (195,247)
CASH AND CASH EQUIVALENTS, beginning of
period................................ 103,906 93,645 1,154,647 1,154,647 803,458
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of
period................................ $ 93,645 $ 1,154,647 $ 803,458 $ 1,624,419 $ 608,211
============ ============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
INFORMATION:
Cash paid for --
Interest...................... $ 352,000 $ 299,000 $ 247,000 $ 11,200 $ 30,500
============ ============ ============ ============ ============
Income taxes.................. $ 15,000 $ 12,000 $ 377,000 $ 132,000 $ 189,400
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE>
SUN MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Sun Medical, Inc. (the Company or Sun) was founded in 1978 and maintains
its headquarters in Arlington, Texas. The Company is a contract seller and
distributor and limited manufacturer of specialty medical products and
represents over 15 manufacturers.
The Company intends to enter into a definitive merger agreement with TRIAD
Medical Inc. (TRIAD) pursuant to which the Company will be acquired by TRIAD for
consideration consisting of $2,050,000 in cash and 571,429 shares of TRIAD
common stock, concurrently with the closing of the initial public offering by
TRIAD of its common stock (the Offering).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The accompanying financial statements have been prepared on the accrual
basis of accounting.
INTERIM FINANCIAL INFORMATION
The interim financial statements as of September 30, 1997, and for the nine
months ended September 30, 1996 and 1997, are unaudited, and certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, cash
equivalents, trade receivables, trade payables and debt instruments. The
carrying amounts of those instruments reported in the balance sheets are
considered to estimate their respective fair values due to the short-term nature
of such financial instruments and the current interest rate environment. The
fair value of the Company's long-term debt was determined using valuation
techniques that considered cash flows discounted at current market rates and
management's best estimates for instruments without quoted market prices. The
carrying amounts of long-term debt reported in the balance sheets are considered
to approximate the respective fair value as the Company's long-term debt
interest rates approximate market rates at December 31, 1996.
CASH AND CASH EQUIVALENTS
For purposes of the balance sheets and statements of cash flows, the
Company considers all investments with original maturities of three months or
less to be cash equivalents. At December 31, 1995 and 1996 and at September 30,
1997, the Company maintained cash balances in various financial institutions in
excess of federally insured limits.
F-54
<PAGE>
SUN MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
In the normal course of business, the Company extends credit to its
customers, which are primarily hospitals. The Company regularly reviews accounts
receivable and makes provision for potentially uncollectible balances. At
December 31, 1995 and 1996, and at September 30, 1997, management believes the
Company had incurred no material impairments in the carrying values of its
accounts receivable, other than uncollectible amounts for which provision has
been made.
INVENTORIES
Inventories consist primarily of medical products and supplies.
Inventories, net of allowances, are valued at the lower of cost or market. Cost
is determined on the average/first-in, first-out (FIFO) method. At December 31,
1995 and 1996, and at September 30, 1997, management believes the Company had
incurred no material impairments in the carrying values of its inventories,
other than impairments for which provision has been made.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the applicable lease or the estimated useful life of the applicable asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments that extend the useful
lives of existing equipment are capitalized and depreciated. Upon retirement or
disposition of property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized in the statements of operations.
REVENUES AND EXPENSES
The Company's revenues are primarily derived from sales of specialty
medical products under distribution agreements and agency arrangements with
various manufacturers. Cost of revenues consists primarily of product costs, net
of rebates, and freight charges. Selling expenses consist primarily of sales
commissions, salaries of sales managers, travel and entertainment expenses,
trade show expenses and automobile allowances. General and administrative
expenses consist primarily of executive compensation and related benefits,
administrative salaries and benefits, office rent and utilities, communication
expenses and professional fees.
REVENUE RECOGNITION
Revenues are recognized when services and rentals are provided and when
products and supplies are shipped.
INCOME TAXES
The Company applies the liability method of accounting for income taxes.
Under this method, deferred income taxes are recorded based on differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are received or settled.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 129, "Disclosure of Information
About Capital Structure." SFAS No. 129 requires nonpublic entities to disclose
certain information about an entity's capital structure, including the pertinent
rights and privileges of the various securities outstanding. The Company will be
required to adopt SFAS
F-55
<PAGE>
SUN MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
No. 129 in 1997 and, in the opinion of management, SFAS No. 129 will not
significantly change the existing financial statement disclosures.
3. INVESTMENTS AND NOTES RECEIVABLE:
On October 26, 1996, the Company issued a $650,000 line of credit to a
developmental stage enterprise (Rejuvena). The credit line carries an interest
rate based on the prevailing prime rate plus 3 percent, with interest payable on
a quarterly basis until October 1999, when the principal balance, plus accrued
interest, is due. At December 31, 1996 and September 30, 1997, the principal
balance outstanding under the credit line was $400,000 and $650,000,
respectively, which is reflected as notes receivable in the accompanying balance
sheets. In exchange for the credit line, the Company received the right to
convert the principal balance of the line of credit to shares of common stock of
Rejuvena at a rate of one share for each $.21 of debt at any time after the
first anniversary date of the agreement. The Company also received two stock
options. In November 1996, the Company exercised the first option to purchase
500,000 shares of Rejuvena common stock at a cost of $.001 per share.
Subsequently, Rejuvena effected a reverse-split of its Common Stock on a
1-for-10 basis, resulting in the Company's owning 50,000 shares of Rejuvena
common stock, or 30.2 percent and 3 percent of all the outstanding equity
interests in Rejuvena at December 31, 1996 and September 30, 1997, respectively.
The second option, which the Company has not yet exercised, allows the Company
to purchase shares of Rejuvena at a cost of $2.10 per share determined by the
highest principal amount of the line of credit.
On February 15, 1997, the Company entered into a note agreement with Cysco
Enterprises, Inc. (Cysco), a company owned by the chief executive officer of the
Company. Cysco and the Company agreed to share equally the receivable
outstanding from Rejuvena. In conjunction with the agreement, Cysco loaned the
Company $325,000. The Company will repay Cysco principal and interest in amounts
equal to one-half of the Company's collections on the Rejuvena loan. In exchange
for the loan, the Company granted to Cysco options to purchase one-half of the
common stock of Rejuvena that the Company acquired in connection with the
Rejuvena loan. At September 30, 1997, the Company owed Cysco $325,000.
During 1996, the Company loaned a corporation (Foundation Surgery
Affiliates) $40,000. The note carries an interest rate based on the prevailing
prime rate plus one percent, with interest payable monthly until September 1997,
when principal payments began to amortize over a three year period. In exchange
for the loan, the Company received common stock in the corporation, which was
recorded as an investment under the cost method.
Concurrent with the Offering, the chief executive officer of the Company
intends to repay the then outstanding principal balances of the Rejuvena line of
credit and of the Foundation Surgery Affiliates note in exchange for the
Company's stock ownership, options and conversion rights in these companies.
The Company owns approximately 78 percent of the common stock of PreemiCare
Corporation (PreemiCare), a company which specialized in providing infant care
systems and baby warmers to premature babies. Two of the Company's officers
received management fees from PreemiCare of $6,000 in each of the three years
ended December 31, 1996, respectively. In 1992, PreemiCare sold all its assets
to an unrelated third party in exchange for an agreement to receive royalty
payments on related revenues. This investment was written off in 1993 and has
been recorded on the cost method since then. The Company has received no
dividends or other income from PreemiCare since 1993. At December 31, 1996, the
royalty agreement expired and PreemiCare had no operations.
F-56
<PAGE>
SUN MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES ------------------------------ SEPTEMBER 30,
IN YEARS 1995 1996 1997
------------ -------------- -------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Transportation equipment................ 5 $ 38,336 $ 38,336 $ 38,336
Furniture and fixtures.................. 5-7 196,589 196,589 197,139
Machinery and equipment................. 7 379,420 379,420 379,420
Rental equipment........................ 5-7 748,152 737,057 708,865
Leasehold improvements.................. 10 122,266 122,266 122,266
-------------- -------------- -------------
1,484,763 1,473,668 1,446,026
Less -- accumulated depreciation and
amortization.......................... (1,307,838) (1,349,834) (1,366,643)
-------------- -------------- -------------
Property and equipment, net............. $ 176,925 $ 123,834 $ 79,383
============== ============== =============
</TABLE>
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Trade receivables....................... $ 1,643,772 $ 1,302,327 $ 2,536,618
Other................................... (7,994) 11,495 6,449
------------ ------------ -------------
1,635,778 1,313,822 2,543,067
Less -- allowance for doubtful
accounts.............................. (4,913) -- --
------------ ------------ -------------
$ 1,630,865 $ 1,313,822 $ 2,543,067
============ ============ =============
Inventories are comprised of the following:
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
(UNAUDITED)
Finished goods.......................... $ 1,479,888 $ 1,426,353 $ 1,017,156
Raw materials........................... 155,256 118,261 161,485
------------ ------------ -------------
$ 1,635,144 $ 1,544,614 $ 1,178,641
============ ============ =============
Accounts payable and accrued expenses consist of the following:
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
(UNAUDITED)
Accounts payable, trade................. $ 1,197,302 $ 1,035,952 $ 801,435
Accrued compensation and benefits....... 157,161 173,381 145,407
Accrued income taxes.................... 281,424 1,890,708 2,035,422
Refunds payable......................... 72,899 166,524 168,000
Other payables and accrued expenses..... 45,987 17,097 396,017
------------ ------------ -------------
$ 1,754,773 $ 3,283,662 $ 3,546,281
============ ============ =============
F-57
<PAGE>
SUN MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. DEBT:
Long-term debt consists of the following:
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
(UNAUDITED)
Notes payable to former stockholder,
payments due annually ending
December 31, 2001, bearing interest
at 10%............................. $ 2,750,000 $ 1,950,000 $ 1,950,000
Note payable to a bank, due
semi-annually ending July 1999,
bearing interest at the prevailing
prime interest rate (8.25% at
December 31, 1996)................. 200,000 150,000 75,000
Note payable to Cysco Enterprises,
due in October 1999 bearing
interest at the prevailing prime
interest rate plus 3% (11.25% at
December 31, 1996)................. -- -- 325,000
------------ ------------ -------------
2,950,000 2,100,000 2,350,000
Less: Amounts due within one
year.......................... (850,000) (450,000) (450,000)
------------ ------------ -------------
$ 2,100,000 $ 1,650,000 $ 1,900,000
============ ============ =============
</TABLE>
The Company also has a line of credit from a bank with available borrowings
of $1,500,000 at December 31, 1995 and 1996. There were no amounts outstanding
under the line of credit at December 31, 1995 or 1996 or at September 30, 1997.
The aggregate maturities of long-term debt are as follows:
Year ending December 31 -
1997....................... $ 450,000
1998....................... 425,000
1999....................... 400,000
2000....................... 400,000
2001....................... 350,000
------------
Total................. $ 2,025,000
============
7. LEASES:
The Company leases its facilities from a partnership of which one of the
partners is the chief executive officer of the Company. Included in general and
administrative expenses for the years ended December 31, 1994, 1995 and 1996,
respectively, is approximately $242,805, $244,525 and $253,406 and for the nine
months ended September 30, 1997 and 1996 is $189,900 of rent paid to this
partnership under the facilities lease. The lease provides for the lessor to pay
taxes, maintenance and insurance for the leased property. The Company pays
certain operating costs of the leased property
The Company leases vehicles for certain key members of management. The
lease payments under those vehicle leases were approximately $15,770 in the
aggregate for the year ended December 31, 1996.
The Company believes the terms of the related-party leases are at least as
favorable as the terms that would have been obtained from an unaffiliated third
party in a similar transaction.
F-58
<PAGE>
SUN MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments required under noncancellable operating
leases that have initial or remaining noncancelable lease terms in excess of one
year at December 31, 1996 are as follows:
Year ending December 31 -
1997....................... $ 290,185
1998....................... 273,135
1999....................... 247,772
2000....................... 242,805
2001....................... 222,572
Thereafter................. --
------------
$ 1,276,469
============
8. INCOME TAXES:
Federal and state income taxes are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
Federal --
<S> <C> <C> <C> <C> <C>
Current......................... $ 26,961 $ 237,590 $ 252,941 $ 211,496 $ 373,638
Deferred........................ 33,053 (16,052) (50,552) (45,461) 931
State --
Current......................... 9,936 29,378 50,241 42,009 74,214
Deferred........................ 6,565 (3,189) (10,041) (9,030) 185
---------- ---------- ---------- ---------- ----------
$ 76,515 $ 247,727 $ 242,589 $ 199,014 $ 448,968
========== ========== ========== ========== ==========
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 35 percent to income
before provision for income taxes as follows:
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
Provision (benefit) at the statutory
rate................................. $ (51,835) $ 88,887 $ 84,634 $ 166,086 $ 415,366
Increase (decrease) resulting from --
Nondeductible ESOP
expenses...................... 92,012 96,149 116,502 11,493 11,493
State income tax................ 10,726 17,023 26,130 21,435 22,109
Nondeductible expenses.......... 29,426 38,900 15,323 -- --
Other........................... (3,814) 6,768 -- -- --
---------- ---------- ---------- ---------- ----------
$ 76,515 $ 247,727 $ 242,589 $ 199,014 $ 448,968
========== ========== ========== ========== ==========
</TABLE>
F-59
<PAGE>
SUN MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------------------- --------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Inventory............................ $ -- $ -- $ 53,950 $ 53,950 $ 53,950
Loss on Investment................... 256,216 280,250 280,250 280,250 280,250
Other................................ 41,264 60,506 67,148 61,046 66,032
Valuation allowance.................. (256,216) (280,250) (280,250) (280,250) (280,250)
------------ ------------ ------------ ------------ ------------
Total deferred income tax assets..... $ 41,264 $ 60,506 $ 121,098 $ 114,996 $ 119,982
============ ============ ============ ============ ============
</TABLE>
9. RELATED-PARTY TRANSACTIONS:
At December 31, 1995, the Company had a note receivable from its chief
executive officer in the amount of $80,804. The note was secured and carried an
interest rate of 8 percent per annum. The note was paid in June 1996. Included
in other income for the years ended December 31, 1994, 1995 and 1996 is $11,690,
$6,464 and $3,188, respectively, of interest income earned on this note. For a
discussion of certain loan transactions and lease arrangements involving related
parties, see Notes 3, 7 and 12.
At December 31, 1996 and September 30, 1997, the Company guaranteed a note
payable to a bank in the amount of $514,000, by the Company's chief executive
officer. Such note payable relates to a note payable of equal amount from the
Company's Employee Stock Ownership Plan to the chief executive officer, which is
recorded in the accompanying balance sheet, see Note 12. Accordingly, if
pursuant to its guarantee the Company were required to settle the note payable
to the bank, it would also be released from the liability recorded in the
accompanying balance sheet.
10. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is a party to certain legal proceedings arising in the ordinary
course of business. Management believes the outcome of such legal proceedings
will not have a material adverse effect on the Company's financial position or
results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses under any of its insurance policies.
The manufacture, sale, distribution and repair of medical products involve
a risk of product liability claims. The Company maintains product liability
insurance coverage in amounts that it considers adequate.
SALES TAX CONSIDERATIONS
Various states are increasingly seeking to impose sales or use taxes on
interstate sales made into their state by out-of-state companies. Complex legal
issues arise in these areas relating to, among other things, the required nexus
of a business with a particular state, which may permit the state to require a
business to collect such taxes. Although the Company believes that it has
adequately provided for sales taxes on its
F-60
<PAGE>
SUN MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
sales, there can be no assurance as to the effect of actions state tax
authorities may take on the Company's financial condition or the results of its
operations.
11. SIGNIFICANT SUPPLIERS:
The Company has three significant suppliers, together whose products
accounted for approximately 57 percent, 65 percent and 63 percent of the
Company's 1994, 1995 and 1996 revenues, respectively. The Company's arrangement
with Quest Medical, Inc., its largest supplier and whose products accounted for
approximately 18 percent, 31 percent and 28 percent of the Company's 1994, 1995
and 1996 revenues, respectively, is for a term of three years and terminates on
December 31, 1999. The Company's arrangement with Sharplan Lasers, Inc., whose
products (surgical lasers and ultrasonic aspirators and accessories) accounted
for approximately 18 percent, 19 percent and 22 percent of the Company's 1994,
1995 and 1996 revenues, respectively, is for a term of two years and terminates
on December 31, 1997. The Company's arrangement with Baxter Healthcare
Corporation, whose products (infusion pumps and associated disposals) accounted
for approximately 21 percent, 15 percent and 13 percent of the Company's 1994,
1995 and 1996 revenues, respectively, expired on March 31, 1997. The Company is
currently renegotiating this distribution agreement and expects this
relationship to continue in the foreseeable future. The Company's other material
distribution agreements and agency arrangements are generally for terms of one
to two years, and are terminable if the Company fails to meet certain negotiated
sales volumes or on prior notice ranging from 30 to 90 days. A loss of the
Company's distribution or agency relationships with one or more of its
significant manufacturers could have a material adverse effect on the Company's
financial condition and results of operation.
12. EMPLOYEE STOCK OWNERSHIP PLAN:
The Company has established an Employee Stock Ownership Plan ("ESOP")
that owns all the outstanding stock of the Company. The stock was purchased by
the ESOP from the former stockholders of the Company in 1992 for $49.50 per
share. The purchase price was paid in the form of notes payable, which were
collateralized by the common stock of the Company. The Company has contributed
funds to the ESOP to fund its debt service payments to the former stockholders
and the Company has paid the interest on the notes. The ESOP obligations were
recorded as a liability on the Company's balance sheet due to the ESOP's
inability to satisfy the debt from sources other than dividends on the Company's
common stock, contributions from the Company or the sale of the Company's
securities. A corresponding reduction in stockholder's equity for unearned ESOP
shares was also recorded. As the Company makes contributions to the ESOP to make
payments on the loans, shares are allocated to ESOP participants and both the
liability and unearned ESOP shares (reflected as a reduction of stockholder's
equity) are reduced. Any difference in the fair value of the allocated shares
compared to the original stock purchase price is recorded as an increase or
decrease in additional paid-in capital. At December 31, 1996 116,382 shares had
been allocated to the ESOP participants. Interest paid by the Company on behalf
of the ESOP was approximately $327,000, $282,000 and $235,000 for the years
ended December 31, 1994, 1995 and 1996, respectively. The plan provides for
contributions equal to 25% of the wages of eligible employees. Included in
general and administrative expenses for the years ended December 31, 1994, 1995
and 1996, respectively, is approximately $381,500, $419,700 and $440,600 of
contributions to the ESOP.
The Company has identified potential violations of the Internal Revenue
Code of 1986 and the Employee Retirement Income Security Act of 1974 with
respect to the ESOP. The potential violations primarily involve amounts
contributed to the ESOP which the Internal Revenue Service may attempt to
reclassify as excess contributions but which the Company considered to be loans
to the ESOP. These amounts enabled the ESOP to repurchase Company stock from the
ESOP accounts of former employees who elected cash distributions upon
termination of employment. The Company has since forgiven the
F-61
<PAGE>
SUN MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
amounts related to these loans. The Company has voluntarily notified the
Internal Revenue Service regarding these potential violations and will seek
appropriate remedial action. The Company has accrued approximately $1.7 million
and $2.0 million as of December 31, 1996 and September 30, 1997, respectively,
for any taxes or other amounts and professional fees incurred to address and
resolve these potential violations to the satisfaction of the appropriate
governmental entities. Although the Company believes that it has adequately
provided for such exposure, there can be no assurance as to the ultimate
resolution.
13. SUBSEQUENT EVENTS (UNAUDITED):
On September 9, 1997, the Company and the ESOP entered into a definitive
merger agreement with TRIAD, providing for the acquisition of the Company by
TRIAD. Among the conditions to TRIAD's obligation to acquire the Company are
that the Company shall have collected all amounts owed to it by Rejuvena in
exchange for its equity interests in Rejuvena and all amounts owed to it by
Foundation Surgery Affiliates and shall have also repaid all amounts owed by it
to Cysco.
If the acquisition of the Company by TRIAD is completed, the Company will
owe its CEO $139,000 under the provisions of a supplemental executive retirement
plan, which would be expensed at that date, and the Company concurrently will
enter into a new agreement with its existing lessor to lease the space used in
the Company's operations for a negotiated amount and term.
Also upon consummation of the Offering and TRIAD's acquisition of the
Company, all the outstanding long-term debt of the Company is expected to be
repaid.
F-62
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Custom Medical Specialties, Inc.:
We have audited the accompanying balance sheets of Custom Medical
Specialties, Inc. (an Indiana corporation) as of December 31, 1995 and 1996, and
the related statements of operations, stockholder's equity and cash flows for
each of the three years in the period ended December 31, 1996. 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 audits.
We conducted our audits 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 audits provide 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 Custom Medical Specialties,
Inc. as of December 31, 1995 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Houston, Texas
April 18, 1997
F-63
<PAGE>
CUSTOM MEDICAL SPECIALTIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
<S> <C> <C> <C>
Cash and cash equivalents.......... $ 1,471,219 $ 933,213 $ 1,329,864
Custodial cash..................... -- 225,431 --
Short-term investments............. 200,000 180,000 --
Accounts receivable, net of
allowance of $28,529............. 1,159,172 1,413,757 1,118,468
Inventories, net................... 960,401 866,489 875,662
Prepaid expenses and other current
assets........................... 66,921 79,150 62,723
------------ ------------ -------------
Total current assets.......... 3,857,713 3,698,040 3,386,717
PROPERTY AND EQUIPMENT, net............. 40,281 21,921 51,138
OTHER NON-CURRENT ASSETS................ 4,187 3,986 3,685
------------ ------------ -------------
Total assets.................. $ 3,902,181 $ 3,723,947 $ 3,441,540
============ ============ =============
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
expenses......................... $ 1,157,024 $ 1,538,800 $ 790,083
Short-term debt.................... -- -- 1,100,000
------------ ------------ -------------
Total current liabilities..... 1,157,024 1,538,800 1,890,083
------------ ------------ -------------
NOTE PAYABLE TO STOCKHOLDER............. 9,500 9,500 9,500
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, no par value; 1,000
shares authorized, 100 shares
issued and 75 shares
outstanding...................... 1,000 1,000 1,000
Treasury stock, 25 shares at
cost............................. (212,000) (212,000) (212,000)
Retained earnings.................. 2,946,657 2,386,647 1,752,957
------------ ------------ -------------
Total stockholder's equity.... 2,735,657 2,175,647 1,541,957
------------ ------------ -------------
Total liabilities and
stockholder's equity....... $ 3,902,181 $ 3,723,947 $ 3,441,540
============ ============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-64
<PAGE>
CUSTOM MEDICAL SPECIALTIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------- --------------------------
1994 1995 1996 1996 1997
-------------- -------------- -------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES............................. $ 14,205,135 $ 10,767,804 $ 9,599,162 $ 7,029,495 $ 6,848,143
COST OF REVENUES..................... 10,501,998 7,771,724 7,022,412 5,123,931 5,060,636
-------------- -------------- -------------- ------------ ------------
Gross profit............... 3,703,137 2,996,080 2,576,750 1,905,564 1,787,507
-------------- -------------- -------------- ------------ ------------
SELLING EXPENSES..................... 1,021,352 832,346 674,321 527,849 487,855
GENERAL AND ADMINISTRATIVE
EXPENSES........................... 811,535 784,680 781,362 590,468 596,930
DEPRECIATION AND
AMORTIZATION....................... 25,228 23,371 20,933 16,177 19,710
-------------- -------------- -------------- ------------ ------------
Total operating expenses........ 1,858,115 1,640,397 1,476,616 1,134,494 1,104,495
-------------- -------------- -------------- ------------ ------------
Income from operations..... 1,845,022 1,355,683 1,100,134 771,070 683,012
OTHER INCOME (EXPENSE):
Interest income................. 39,635 51,070 35,010 15,612 10,752
Interest expense................ (1,346) (955) (950) (475) (1,109)
Other income, net............... -- -- 7,025 (475) 20,995
-------------- -------------- -------------- ------------ ------------
NET INCOME........................... $ 1,883,311 $ 1,405,798 $ 1,141,219 $ 785,732 $ 713,650
============== ============== ============== ============ ============
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE>
CUSTOM MEDICAL SPECIALTIES, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
COMMON STOCK TOTAL
------------------ TREASURY RETAINED STOCKHOLDER'S
SHARES AMOUNT STOCK EARNINGS EQUITY
------- ------- --------- ----------- -------------
BALANCE, December 31, 1993........... 75 $1,000 $(212,000) $ 2,589,900 $ 2,378,900
Net income...................... -- -- -- 1,883,311 1,883,311
Distributions................... -- -- -- (1,987,352) (1,987,352)
------- ------- --------- ----------- -------------
BALANCE, December 31, 1994........... 75 1,000 (212,000) 2,485,859 2,274,859
Net income...................... -- -- -- 1,405,798 1,405,798
Distributions................... -- -- -- (945,000) (945,000)
------- ------- --------- ----------- -------------
BALANCE, December 31, 1995........... 75 1,000 (212,000) 2,946,657 2,735,657
Net income...................... -- -- -- 1,141,219 1,141,219
Distributions................... -- -- -- (1,701,229) (1,701,229)
------- ------- --------- ----------- -------------
BALANCE, December 31, 1996........... 75 1,000 (212,000) 2,386,647 2,175,647
Net income (unaudited).......... -- -- -- 713,650 713,650
Distributions (unaudited)....... -- -- -- (1,347,340) (1,347,340)
------- ------- --------- ----------- -------------
BALANCE, September 30, 1997
(unaudited)........................ 75 $1,000 $(212,000) $ 1,752,957 $ 1,541,957
======= ======= ========= =========== =============
The accompanying notes are an integral part of these financial statements.
F-66
<PAGE>
CUSTOM MEDICAL SPECIALTIES, INC.
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------- ------------------------------
1994 1995 1996 1996 1997
-------------- ------------ -------------- -------------- --------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 1,883,311 $ 1,405,798 $ 1,141,219 $ 785,732 $ 713,650
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities --
Depreciation and
amortization............... 25,228 23,371 20,933 16,177 19,710
Gain on sale of equipment..... -- -- (7,025) -- (12,299)
Increase (decrease) in operating
cash flows resulting from:
Receivables, net of servicing
activities................. 399,766 (68,042) (480,016) 226,363 91,170
Inventories................... 345,728 129,305 93,912 222,887 (9,173)
Prepaid expenses and other
current assets............. (6,373) (42,605) (12,229) (6,302) 16,427
Accounts payable, net of
servicing activities, and
accrued expenses........... (611,117) 182,543 381,776 (349,361) (345,053)
Other......................... 1,201 599 201 328 302
-------------- ------------ -------------- -------------- --------------
Net cash provided by operating
activities....................... 2,037,744 1,630,969 1,138,771 895,824 474,734
-------------- ------------ -------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds of sale of property and
equipment........................ -- -- 7,025 -- 12,299
Proceeds from short-term
investments...................... 100,000 -- 20,000 -- 180,000
Purchases of short-term
investments...................... -- (100,000) -- -- --
Purchases of property and
equipment........................ (33,993) (7,408) (2,573) (2,570) (48,928)
-------------- ------------ -------------- -------------- --------------
Net cash provided by (used in)
investing activities............. 66,007 (107,408) 24,452 (2,570) 143,371
-------------- ------------ -------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term debt...... -- -- -- -- 1,100,000
Proceeds from issuance of long-term
debt............................. -- -- -- -- 25,886
Distributions to stockholder....... (1,987,352) (945,000) (1,701,229) (1,386,229) (1,347,340)
-------------- ------------ -------------- -------------- --------------
Net cash used in financing
activities....................... (1,987,352) (945,000) (1,701,229) (1,386,229) (221,454)
-------------- ------------ -------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................... 116,399 578,561 (538,006) (492,975) 396,651
CASH AND CASH EQUIVALENTS, beginning of
period................................ 776,259 892,658 1,471,219 1,471,219 933,213
-------------- ------------ -------------- -------------- --------------
CASH AND CASH EQUIVALENTS, end of
period................................ $ 892,658 $ 1,471,219 $ 933,213 $ 978,244 $ 1,329,864
============== ============ ============== ============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest...................... $ 950 $ 950 $ 950 $ 950 $ 1,109
============== ============ ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE>
CUSTOM MEDICAL SPECIALTIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Custom Medical Specialties, Inc., an Indiana corporation (the Company or
CMS), was founded in 1989 and maintains its headquarters in Indianapolis,
Indiana. The Company is a contract seller and distributor of specialty medical
products.
The Company and its stockholder intend to enter into a definitive merger
agreement with TRIAD Medical Inc. (TRIAD) pursuant to which the Company will be
acquired by TRIAD for consideration consisting of $1,600,000 in cash and 350,000
shares of TRIAD common stock, concurrently with the closing of the initial
public offering by TRIAD of its common stock (the Offering).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
These financial statements have been prepared on the accrual basis of
accounting.
INTERIM FINANCIAL INFORMATION
The interim financial statements as of September 30, 1997, and for the nine
months ended September 30, 1996 and 1997, are unaudited, and certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, cash
equivalents, trade receivables, trade payables and debt instruments. The
carrying amounts of those instruments reported in the balance sheets are
considered to estimate their respective fair values due to the short-term nature
of such financial instruments and the current interest rate environment.The fair
value of the Company's long-term debt was determined using valuation techniques
that considered cash flows discounted at current market rates and management's
best estimates for instruments without quoted market prices. The carrying
amounts of long-term debt reported in the balance sheets are considered to
approximate the respective fair value as the Company's long-term debt interest
rates approximate market rates as December 31, 1996.
CASH AND CASH EQUIVALENTS
For purposes of the balance sheets and statements of cash flows, the
Company considers all investments with original maturities of three months or
less to be cash equivalents. At September 30, 1997, the Company maintained cash
balances in various financial institutions in excess of federally insured
limits.
SHORT-TERM INVESTMENTS
Short-term investments are non-taxable fixed maturity securities which the
Company has the ability and intent to hold until maturity. Accordingly, such
securities are considered held-to-maturity and are carried at amortized cost.
(See Note 4).
F-68
<PAGE>
CUSTOM MEDICAL SPECIALTIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
CONCENTRATION OF CREDIT RISK
In the normal course of business, the Company extends credit to its
customers, which are primarily hospitals. The Company regularly reviews its
accounts receivable and makes provision for potentially uncollectible balances.
At December 31, 1995, 1996 and September 30, 1997, management believes the
Company had incurred no material impairments in the carrying values of its
accounts receivable, other than uncollectible amounts for which provision has
been made.
INVENTORIES
Inventories consist primarily of medical supplies and equipment.
Inventories, net of allowances, are valued at the lower of cost or market. Cost
is determined on the average cost method. At December 31, 1995 and 1996, and at
September 30, 1997, management believes the Company had incurred no material
impairments in the carrying values of its inventories, other than impairments
for which provision has been made.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the applicable lease or the estimated useful life of the applicable asset.
for additional shares which would trigger the piggyback rights.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments that extend the useful
lives of existing equipment are capitalized and depreciated. On retirement or
disposition of property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized in the statements of operations.
REVENUES AND EXPENSES
The Company's revenues are primarily derived from sales of specialty
medical products under agreements with various manufacturers. Cost of revenues
consists primarily of product costs, net of rebates, and freight charges.
Selling expenses consist primarily of sales commissions, salaries of sales
managers, travel and entertainment expenses, trade show expenses and automobile
allowances. General and administrative expenses consist primarily of executive
compensation and related benefits, administrative salaries and benefits, office
rent and utilities, communication expenses and professional fees.
REVENUE RECOGNITION
Revenues are recognized when products and supplies are shipped.
INCOME TAXES
The Company has elected S corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under the Internal Revenue Code provisions applicable to S corporation
status, the stockholder reports the Company's taxable earnings or losses in his
personal federal income tax returns. Accordingly, no provision for federal
income taxes has been made in the accompanying financial statements.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 129, "Disclosure of Information
About Capital Structure." SFAS No. 129 requires nonpublic entities to disclose
certain information about an entity's capital structure including the pertinent
rights and privileges of the various securities outstanding. The Company will be
required to adopt SFAS No. 129 in 1997 and, in the opinion of management, SFAS
No. 129 will not significantly change the existing financial statement
disclosures.
F-69
<PAGE>
CUSTOM MEDICAL SPECIALTIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. SERVICING ACTIVITIES:
During 1996, the Company began serving as an agent for certain distributors
of specialty medical products. In this capacity, the Company processes orders
from the distributors' customers and places those orders with the distributors.
The distributor then ships the goods directly to the customer. Additionally, the
Company bills and collects payments from the distributors' customer and remits
such payments to the distributor. The Company generally charges a
per-transaction processing fee for this service. Included in "Revenues" in the
accompanying Statement of Operations for the year ended December 31, 1996 is
$64,465 of such fees earned during the year. During that year, the Company
collected $1,671,369 from the distributors' customers and remitted $1,445,938 to
the distributors under these agreements. Included in "Accounts payable" in the
accompanying financial statements at December 31, 1996 is $429,550 which the
Company owed to such distributors. "Custodial Cash" of $225,431 at December
31, 1996 represents cash collected by the Company under these arrangements, but
not yet remitted to the distributors. Additionally, included in "Accounts
receivable" at December 31, 1996 is $204,119 of amounts due from the
distributors' customers.
4. SHORT-TERM INVESTMENTS:
Information for held-to-maturity securities follows:
AMORTIZED UNREALIZED
SECURITY TYPE COST GAINS FAIR VALUE
- ---------------------------------------- --------- ---------- ----------
State and municipal bonds
At December 31, 1995............... $ 200,000 $7,310 $ 207,310
At December 31, 1996............... $ 180,000 $5,820 $ 185,820
Contractual maturities at December 31, 1996 were as follows:
AMORTIZED
MATURITY COST FAIR VALUE
- ---------------------------------------- -------------- ----------
Due within one year..................... $ 90,000 $ 90,630
Due within one to five years............ 15,000 15,000
Due within five to ten years............ 40,000 42,545
Due within ten years and after.......... 35,000 37,645
-------------- ----------
Totals.................................. $180,000 $ 185,820
============== ==========
5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL DECEMBER 31,
LIVES -------------------------- SEPTEMBER 30
IN YEARS 1995 1996 1997
--------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Transportation equipment................ 5 $ 46,406 $ 32,556 $ 57,333
Machinery and equipment................. 7 34,373 33,995 24,598
Office equipment........................ 5 115,151 116,241 126,539
Leasehold improvements.................. 10 4,783 4,784 4,785
------------ ------------ ------------
200,713 187,576 213,255
Less -- accumulated depreciation and
amortization.......................... (160,432) (165,655) (162,117)
------------ ------------ ------------
Property and equipment, net............. $ 40,281 $ 21,921 $ 51,138
============ ============ ============
</TABLE>
F-70
<PAGE>
CUSTOM MEDICAL SPECIALTIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Trade receivables....................... $ 1,126,643 $ 1,136,652 $ 1,039,038
Receivables from suppliers.............. 61,058 101,515 107,959
Receivables from servicing activities
(see Note 3).......................... -- 204,119 --
------------ ------------ -------------
1,187,701 1,442,286 1,146,997
Less -- allowance for doubtful
accounts.............................. (28,529) (28,529) (28,529)
------------ ------------ -------------
$ 1,159,172 $ 1,413,757 $ 1,118,468
============ ============ =============
Accounts payable and accrued expenses consist of the following:
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
(UNAUDITED)
Accounts payable, trade.............. $ 987,296 $ 926,511 $ 569,671
Payables from servicing activities
(see Note 3)....................... -- 429,550 --
Accrued compensation and benefits.... 98,037 76,254 82,109
Other................................ 71,691 106,485 138,303
------------ ------------ -------------
$ 1,157,024 $ 1,538,800 $ 790,083
============ ============ =============
</TABLE>
7. NOTE PAYABLE TO STOCKHOLDER:
Long-term debt at December 31, 1995, 1996 and September 30, 1997 consists
of an unsecured note payable to the Company's sole stockholder with an interest
rate of 10 percent, with interest paid semi-annually. The original maturity date
of that note was April 1, 1991. However, the stockholder has informally extended
such note indefinitely. The stockholder has advised the Company that he has no
intention of requesting payment on the note during the next 12 months.
8. LEASES:
The Company leases building and warehouse space from a third party. The
rent expense under this lease was $58,764 for the year ended December 31, 1996.
The lease requires the Company to pay taxes, maintenance, insurance and certain
other operating costs of the leased property.
Future minimum lease payments required under noncancellable operating
leases that have initial or remaining noncancellable lease terms in excess of
one year at December 31, 1996 are as follows:
Year ending December 31 --
1997............................ $ 53,424
1998............................ 35,616
---------
$ 89,040
=========
9. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is a party to certain legal proceedings arising in the ordinary
course of business. Management believes the outcome of such legal proceedings
will not have a material adverse effect on the Company's financial position or
results of operations.
F-71
<PAGE>
CUSTOM MEDICAL SPECIALTIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses under any of its insurance policies.
The sale and distribution of medical products involve a risk of product
liability claims. The Company maintains product liability insurance coverage in
amounts that it considers adequate.
10. SIGNIFICANT SUPPLIERS/CUSTOMERS:
A substantial portion of the Company's revenues is derived from sales of
Pall Biomedical, Inc. (Pall) products. For the years ended December 31, 1994,
1995 and 1996, Pall's products accounted for approximately 36 percent, 41
percent and 38 percent, respectively, of the Company's total revenues. The
agreement with Pall may be terminated with 30 days' notice by either the Company
or Pall. While management believes that, following the acquisition referred to
in Note 12, the Company will continue to represent Pall and other manufacturers
with which it has entered into similar arrangements, a loss of any of its
significant vendor relationships could have a material adverse effect on the
Company's financial condition and results of operations.
During 1994, the Company lost a significant customer, which accounted for
approximately $3.0 million, or approximately 21 percent, of fiscal 1994
revenues. For the year ended December 31, 1996, no individual customer accounted
for more than 10 percent of revenues.
11. EMPLOYEE BENEFIT PLAN:
In 1994, the Company established a defined contribution 401(k) plan for
employees who are at least 21 years old and have completed one year of service.
Contributions to the plan by the employer are made on a discretionary basis. No
employer contributions were made to the plan in 1994, 1995 or 1996.
12. SUBSEQUENT EVENTS (UNAUDITED):
On September 9, 1997, the Company and its sole shareholder entered into a
definitive merger agreement with TRIAD, providing for the acquisition of the
Company by TRIAD.
On September 11, 1997, the Company entered into a note agreement with a
bank which established a $1.5 million line of credit available to the Company
for the purpose of working capital and stockholder distributions. The note is
payable on demand and advances under the note are extended at the bank's
discretion in accordance with a borrowing base requirement. The borrowing base
is equal to the sum of 85 percent of the Company's eligible accounts receivable
plus 45 percent of eligible inventory, plus cash assigned as collateral equal to
any advance in excess of the borrowing base. The note bears interest according
to an interest rate index which sets forth rates ranging from the LIBOR plus
2.25 percent to the bank's prime rate plus 1.0 percent, depending upon the
stockholder's equity in the Company, as adjusted per the terms of the note
agreement. At September 30, 1997, the interest rate was 8.2 percent. The note is
secured by the assets of the Company. At September 30, 1997, $1.1 million was
outstanding on the note.
The Company will make a cash distribution of approximately $1.7 million
prior to the closing of the transactions under the merger agreement which
represents the Company's estimated S corporation accumulated adjustment account.
Had these transactions been recorded at September 30, 1997, the effect on the
accompanying balance sheet would have been a decrease in assets of $1.3 million,
an increase in liabilities of $0.4 million and a decrease in shareholders'
equity of $1.7 million
F-72
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Kentec Medical, Inc.:
We have audited the accompanying balance sheet of Kentec Medical, Inc. (a
California corporation) as of June 30, 1997, and the related statements of
operations, stockholder's equity and cash flows for the year 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 Kentec Medical, Inc. as of
June 30, 1997, and the results of its operations and its cash flows for the year
then ended, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Houston, Texas
August 6, 1997
F-73
<PAGE>
KENTEC MEDICAL, INC.
BALANCE SHEETS
JUNE 30, SEPTEMBER 30,
1997 1997
------------ -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 719,508 $ 618,464
Short-term investments............. 111,331 112,481
Accounts receivable, net of
allowance of $77,039.............. 1,704,433 1,407,069
Inventories, net................... 1,857,915 1,647,056
Deferred income taxes.............. 24,590 23,370
------------ -------------
Total current assets..... 4,417,777 3,808,440
PROPERTY AND EQUIPMENT, net............. 152,359 132,269
OTHER NON-CURRENT ASSETS................ 235,575 217,955
------------ -------------
Total assets............. $ 4,805,711 $ 4,158,664
============ =============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable................... $ 1,344,957 $ 843,164
Accrued expenses and other current
liabilities....................... 354,683 229,739
------------ -------------
Total current
liabilities.......... 1,699,640 1,072,903
------------ -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, no par value; 75,000
shares authorized, 46,000 shares
issued and outstanding............ 46,000 46,000
Retained earnings.................. 3,060,071 3,039,761
------------ -------------
Total stockholder's
equity............... 3,106,071 3,085,761
------------ -------------
Total liabilities and
stockholder's
equity............... $ 4,805,711 $ 4,158,664
============ =============
The accompanying notes are an integral part of these financial statements.
F-74
<PAGE>
KENTEC MEDICAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
JUNE 30, ------------------------------
1997 1996 1997
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES................................ $ 13,646,041 $ 3,558,198 $ 3,005,416
COST OF REVENUES........................ 9,440,908 2,457,797 2,107,897
-------------- -------------- --------------
Gross profit.................. 4,205,133 1,100,401 897,519
-------------- -------------- --------------
SELLING EXPENSES........................ 1,709,445 454,322 342,091
GENERAL AND ADMINISTRATIVE EXPENSES..... 2,446,230 569,548 565,808
DEPRECIATION AND AMORTIZATION........... 83,101 18,315 16,150
-------------- -------------- --------------
Total operating expenses........... 4,238,776 1,042,185 924,049
-------------- -------------- --------------
Income (loss) from
operations................. (33,643) 58,216 (26,530)
OTHER INCOME (EXPENSE):
Interest income.................... 32,065 6,847 8,600
Other expense, net................. (6,164) (3,276) (6,078)
-------------- -------------- --------------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES...................... (7,742) 61,787 (24,008)
PROVISION (BENEFIT) FOR INCOME TAXES.... 12,396 15,717 (3,698)
-------------- -------------- --------------
NET INCOME (LOSS)....................... $ (20,138) $ 46,070 $ (20,310)
============== ============== ==============
The accompanying notes are an integral part of these financial statements.
F-75
<PAGE>
KENTEC MEDICAL, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
COMMON STOCK TOTAL
------------------ RETAINED STOCKHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
------- ------- ---------- --------------
BALANCE, June 30, 1996............... 46,000 $46,000 $3,080,669 $3,126,669
Net loss........................ -- -- (20,138) (20,138)
Dividends....................... -- -- (460) (460)
------- ------- ---------- --------------
BALANCE, June 30, 1997............... 46,000 46,000 3,060,071 3,106,071
Net loss (unaudited)............ -- -- (20,310) (20,310)
------- ------- ---------- --------------
BALANCE, September 30, 1997
(unaudited).......................... 46,000 $46,000 $3,039,761 $3,085,761
======= ======= ========== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-76
<PAGE>
KENTEC MEDICAL, INC.
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
JUNE 30, --------------------------
1997 1996 1997
------------ ------------ ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)............... $ (20,138) $ 46,070 $ (20,310)
Adjustments to reconcile net
income (loss) to net cash used
in operating activities --
Depreciation and
amortization............ 83,101 18,315 16,150
Provision for doubtful
accounts
receivable.............. 7,788 -- --
Deferred income taxes,
net..................... 5,487 (248) 1,220
Loss on disposal of
property and
equipment............... 6,424 3,276 6,078
Increase (decrease) in
operating cash flows
resulting from:
Accounts receivable... 63,595 (83,772) 297,364
Inventories........... 87,300 68,157 208,721
Prepaid expenses and
other current
assets............. 7,102 7,102 --
Other non-current
assets............. (22,620) (16,010) 17,620
Accounts payable,
accrued expenses
and other current
liabilities........ (225,840) (618,357) (626,737)
------------ ------------ ------------
Net cash used in
operating
activities.... (7,801) (575,467) (99,894)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term
investments................... (219,632) -- (112,481)
Proceeds from short-term
investments................... 216,468 -- 111,331
Purchases of property and
equipment..................... (58,687) -- --
------------ ------------ ------------
Net cash used in
investing
activities.... (61,851) -- (1,150)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends....................... (460) (460) --
------------ ------------ ------------
Net cash used in
financing
activities.... (460) (460) --
------------ ------------ ------------
NET DECREASE IN CASH AND CASH
EQUIVALENTS........................ (70,112) (575,927) (101,044)
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 789,620 789,620 719,508
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 719,508 $ 213,693 $ 618,464
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-77
<PAGE>
KENTEC MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Kentec Medical, Inc., a California corporation (the Company or Kentec), was
founded in 1970 and maintains its headquarters in Irvine, California. The
Company is a contract seller and distributor and limited manufacturer of
specialty medical products.
The Company and its stockholder intend to enter into a definitive merger
agreement with TRIAD Medical Inc. (TRIAD) pursuant to which the Company will be
acquired for consideration consisting of $3,240,000 in cash and 232,857 shares
of TRIAD common stock, concurrently with the closing of the initial public
offering by TRIAD of its common stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
These financial statements have been prepared on the accrual basis of
accounting.
INTERIM FINANCIAL INFORMATION
The interim financial information as of September 30, 1997 and for the
three months ended September 30, 1996 and 1997, are unaudited and certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to fairly present the financial
position, results of operations and cash flows with respect to the interim
financial statements, have been included. The results of operations for the
interim periods are not necessarily indicative of the results for the entire
fiscal year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, cash
equivalents, trade receivables and trade payables. The carrying amounts of those
instruments reported in the balance sheet are considered to estimate their
respective fair values due to the short-term nature of such financial
instruments and the current interest rate environment.
CASH AND CASH EQUIVALENTS
For purposes of the balance sheet and statement of cash flows, the Company
considers all investments with original maturities of three months or less to be
cash equivalents. As of June 30, 1997 and as of September 30, 1997 and at
various times during the periods then ended, the Company maintained cash
balances in various financial institutions in excess of federally insured
limits.
SHORT-TERM INVESTMENTS
The Company's short-term investments consist of certificates of deposit
that are all considered held-to-maturity securities. Held-to-maturity
securities, which are fixed maturity securities that the Company has the ability
and intent to hold until maturity, are carried at amortized cost.
CONCENTRATIONS OF CREDIT RISK
In the normal course of business, the Company extends credit to its
customers, which are primarily hospitals and medical centers. The Company
regularly reviews accounts receivable and makes provision for
F-78
<PAGE>
KENTEC MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
potentially uncollectible balances. At June 30, 1997 and September 30, 1997,
management believes the Company had incurred no material impairments in the
carrying values of its accounts receivable, other than uncollectible amounts for
which provision has been made.
INVENTORIES
Inventories consist of medical supplies and equipment. Inventories, net of
allowances, are valued at the lower of cost or market. Cost is determined on the
first-in, first-out (FIFO) method. At June 30, 1997 and September 30, 1997,
management believes the Company had incurred no material impairments in the
carrying values of its inventories, other than impairments for which provision
has been made.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciation is computed
using an accelerated method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized using the straight-line
method over the lesser of the life of the applicable lease or the estimated
useful life of the applicable asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments that extend the useful
lives of existing equipment are capitalized and depreciated. On retirement or
disposition of property and equipment, the cost and related accumulated
depreciation or amortization are removed from the accounts and any resulting
gain or loss is recognized in the statement of operations.
COLLATERAL INTEREST IN INSURANCE AGREEMENT
The Company has entered into an agreement with its stockholder for the sole
purpose of financing life insurance premiums on a whole-life policy covering the
president of the Company. The advances are collateralized by the cash surrender
value of and the death benefit payable under the policy. The Company has
recorded the advances in other non-current assets in the accompanying balance
sheets totaling approximately $152,700 as of June 30, 1997 and September 30,
1997.
REVENUES AND EXPENSES
The Company's revenues are primarily derived from sales of specialty
medical products under agreements with various manufacturers. Cost of revenues
consists primarily of product costs, net of rebates, and freight charges.
Selling expenses consist primarily of sales commissions, salaries of sales
managers, travel and entertainment expenses, trade show expenses and automobile
allowances. General and administrative expenses consist primarily of executive
compensation and related benefits, administrative salaries and benefits, office
rent and utilities, communication expenses and professional fees.
REVENUE RECOGNITION
Revenues are recognized when products and supplies are shipped.
INCOME TAXES
The Company applies the liability method of accounting for income taxes.
Under this method, deferred income taxes are recorded based on differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are received or settled.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 129, "Disclosure of Information
About Capital Structure." SFAS No. 129 requires nonpublic entities to disclose
certain information about an entity's capital structure, including the pertinent
F-79
<PAGE>
KENTEC MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
rights and privileges of the various securities outstanding. The Company will be
required to adopt SFAS No. 129 in 1997 and, in the opinion of management, SFAS
No. 129 will not significantly change the existing financial statement
disclosures.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
ESTIMATED
USEFUL
LIVES IN JUNE 30, SEPTEMBER 30,
YEARS 1997 1997
---------- ------------ -------------
(UNAUDITED)
Furniture and fixtures.......... 5-7 $ 412,745 $ 412,745
Rental equipment................ 5-7 150,978 130,437
Transportation equipment........ 5-7 119,753 119,753
Leasehold improvements.......... 7-15 88,227 88,227
Machinery and equipment......... 5-10 50,733 50,733
------------ -------------
822,436 801,895
Less -- accumulated depreciation
and amortization.............. (670,077) (669,626)
------------ -------------
Property and equipment, net..... $ 152,359 $ 132,269
============ =============
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following:
JUNE 30, SEPTEMBER 30,
1997 1997
------------ -------------
(UNAUDITED)
Trade receivables....................... $ 1,466,303 $ 1,247,911
Receivables from suppliers.............. 315,169 236,197
------------ -------------
1,781,472 1,484,108
Less -- allowance for doubtful
accounts.............................. (77,039) (77,039)
------------ -------------
$ 1,704,433 $ 1,407,069
============ =============
Accounts payable, accrued expenses and other current liabilities consist of
the following:
JUNE 30, SEPTEMBER 30,
1997 1997
---------- -------------
(UNAUDITED)
Accounts payable, trade.............. $1,344,957 $ 843,164
Accrued compensation and benefits.... 315,144 186,230
Other payables and accrued
expenses........................... 39,539 43,509
---------- -------------
$1,699,640 $ 1,072,903
========== =============
5. LEASES:
The Company leases its two operating facilities from a trustee of its
stockholder (a family trust) under two long-term noncancellable operating lease
agreements. The leases expire in 2009 and provide for rents increasing subject
to the Consumer Price Index. The total annual rent paid under these
related-party leases was approximately $229,600 for the year ended June 30, 1997
and was approximately $57,400 and $62,200 for the three months ended September
30, 1996 and 1997, respectively. The leases require the Company to pay taxes,
maintenance, insurance and certain other operating costs of the leased property.
The Company believes the terms of the related-party leases are at least as
favorable as the terms that could have been obtained from an unaffiliated third
party in similar transactions. The Company also leases certain office equipment
under long-term noncancellable operating lease agreements which expire in 1999
and 2000. The total rent paid under these leases was approximately $4,600 for
the year ended June 30, 1997 and was approximately $3,400 and $2,400 for the
three months ended September 30, 1996 and 1997, respectively.
F-80
<PAGE>
KENTEC MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments required under noncancellable operating
leases (including the related-party leases) that have initial or remaining
noncancellable lease terms in excess of one year at June 30, 1997 are as
follows:
Year ending June 30 --
1998............................... $ 234,183
1999............................... 234,183
2000............................... 232,887
2001............................... 230,773
2002............................... 229,572
Thereafter......................... 1,492,218
------------
$ 2,653,816
============
The Company has entered into an agreement to sublease its excess facilities
through March 1998. The future minimum sublease payments due to the Company
under this sublease as of June 30, 1997 are $60,281.
Rent income received for the year ended June 30, 1997 was approximately
$61,900 and was approximately $14,800 and $20,600 for the three months ended
September 30, 1996 and 1997, respectively.
6. INCOME TAXES:
Federal and state income taxes are as follows:
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
JUNE 30, --------------------
1997 1996 1997
----------- --------- ---------
(UNAUDITED)
Federal --
Current............................ $ 3,611 $ 9,915 $ (2,606)
Deferred........................... 4,094 (159) 917
State --
Current............................ 3,298 6,050 (2,312)
Deferred........................... 1,393 (89) 303
----------- --------- ---------
$12,396 $ 15,717 $ (3,698)
=========== ========= =========
Actual income tax provision (benefit) differs from income tax provision
(benefit) computed by applying the U.S. federal statutory corporate tax rate of
15 percent to income before income taxes as follows:
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
JUNE 30, --------------------
1997 1996 1997
---------- --------- ---------
(UNAUDITED)
Provision (benefit) at the statutory
rate.................................. $ (1,161) $ 9,268 $ (3,601)
State income taxes...................... 3,227 4,887 (1,899)
Non-deductible items.................... 10,330 1,562 1,802
---------- --------- ---------
$ 12,396 $ 15,717 $ (3,698)
========== ========= =========
Deferred income taxes result from temporary differences in the recognition
of income and expenses for financial reporting purposes and for tax reporting
purposes. The tax effects of these temporary differences representing current
deferred income tax assets of $24,590 and $23,370 at June 30, 1997 and September
30, 1997, respectively, result principally from accruals and reserves not
currently deductible for income tax reporting purposes.
F-81
<PAGE>
KENTEC MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is a party to certain legal proceedings arising in the ordinary
course of business. Management believes the outcome of such legal proceedings
will not have a material adverse effect on the Company's financial position or
results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses under any of its insurance policies.
The sale, manufacture and distribution of medical products involve a risk
of product liability claims. The Company maintains product liability insurance
coverage in amounts that it considers adequate.
8. SIGNIFICANT SUPPLIER:
During the year ended June 30, 1997 and during the three months ended
September 30, 1996 and 1997, the Company purchased approximately 62 percent, 69
percent, and 62 percent, respectively of its products from Pall Biomedical, Inc.
(Pall). Revenues generated from the sales of these products accounted for 56
percent, 60 percent, and 54 percent of the Company's distribution revenues for
the year ended June 30, 1997 and for the three months ended September 30, 1996
and 1997, respectively. Under a distribution agreement with Pall, the Company
has agreed to keep a 30-day supply of inventory on hand. The agreement may be
terminated by either party, with or without cause, at any time after giving not
less than 30 days' notice. The loss of this supplier would have a material
adverse effect on the Company's business and operating results.
9. EMPLOYEE BENEFIT PLANS:
The Company has a money purchase pension plan, a profit sharing plan and a
401(k) plan for employees meeting certain requirements (substantially all
employees). The Company's contributions to these plans vest over a period of six
to seven years. The money purchase pension plan requires the Company to annually
contribute 5 percent of participating employees' salaries, subject to certain
limitations. The Company's contribution to the money purchase pension plan
during the year ended June 30, 1997 and for the three months ended September 30,
1996 and 1997, was approximately $97,800, $28,600 and $27,600, respectively.
Company contributions to the profit sharing plan and to the 401(k) plan may be
made at the discretion of the Company. No Company contributions were made to the
profit sharing plan or to the 401(k) plan for the year ended June 30, 1997 or
for the three months ended September 30, 1996 and 1997.
10. SUBSEQUENT EVENTS (UNAUDITED):
On September 9, 1997, the Company and its stockholder entered into a
definitive merger agreement with TRIAD, providing for the acquisition of the
Company by TRIAD.
Concurrently with the closing of the transactions under the merger
agreement, the Company will enter into agreements with a trustee of its
stockholder to lease certain office and warehouse space used in the Company's
operations for a negotiated amount and term.
F-82
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Products for Surgery, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Products for
Surgery, Inc. (a Texas corporation) and subsidiaries as of June 30, 1997, and
the related consolidated statements of operations, stockholders' 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
Products for Surgery, Inc. and subsidiaries as of June 30, 1997, and the results
of their consolidated operations and their consolidated cash flows for the year
then ended, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Houston, Texas
August 15, 1997
F-83
<PAGE>
PRODUCTS FOR SURGERY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, SEPTEMBER 30,
1997 1997
------------ -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 42,994 $ 115,253
Accounts receivable, net of
allowance of $586................. 725,119 870,677
Notes receivable, current
portion........................... 17,274 17,274
Inventories, net................... 1,461,078 1,474,985
Prepaid expenses................... 45,712 40,115
Deferred income taxes.............. 124,668 119,266
------------ -------------
Total current assets..... 2,416,845 2,637,570
PROPERTY AND EQUIPMENT, net............. 191,233 184,413
OTHER NON-CURRENT ASSETS:
Cash surrender value of life
insurance policies................ 197,448 197,448
Notes receivable from
stockholders...................... 116,540 112,464
Intangible assets.................. 95,960 95,350
Other non-current assets........... 47,375 35,310
------------ -------------
Total assets............. $ 3,065,401 $ 3,262,555
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt.................... $ 195,722 $ 292,473
Accounts payable and accrued
expenses.......................... 1,200,167 1,293,111
------------ -------------
Total current
liabilities.......... 1,395,889 1,585,584
LONG-TERM DEBT.......................... 164,817 142,914
DEFERRED INCOME TAXES................... 45,164 44,766
OTHER LONG-TERM LIABILITIES............. 500,000 500,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value;
300,000 shares authorized, 105,880
shares issued and outstanding,
respectively...................... 10,588 10,588
Additional paid-in capital......... 355,892 355,892
Retained earnings.................. 593,051 622,811
------------ -------------
Total stockholders'
equity............... 959,531 989,291
------------ -------------
Total liabilities and
stockholders'
equity............... $ 3,065,401 $ 3,262,555
============ =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-84
<PAGE>
PRODUCTS FOR SURGERY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
JUNE 30, --------------------------
1997 1996 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES................................ $ 7,761,235 $ 1,880,663 $ 2,138,756
COST OF REVENUES........................ 4,447,229 1,070,718 1,276,998
------------ ------------ ------------
Gross profit.................. 3,314,006 809,945 861,758
SELLING EXPENSES........................ 1,197,857 276,069 327,393
GENERAL AND ADMINISTRATIVE EXPENSES..... 2,101,413 429,557 456,046
DEPRECIATION AND AMORTIZATION........... 66,280 11,532 19,224
------------ ------------ ------------
Total operating expenses........... 3,365,550 717,158 802,663
------------ ------------ ------------
Income (loss) from
operations................. (51,554) 92,787 59,095
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income.................... 22,899 -- 3,063
Interest expense................... (58,983) (20,930) (9,363)
Other income, net.................. 448,048 -- --
------------ ------------ ------------
INCOME BEFORE PROVISION FOR INCOME
TAXES................................. 360,420 71,857 52,795
PROVISION FOR INCOME TAXES.............. 150,011 27,183 23,035
------------ ------------ ------------
NET INCOME.............................. $ 210,409 $ 44,674 $ 29,760
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-85
<PAGE>
PRODUCTS FOR SURGERY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
-------------------- ADDITIONAL RETAINED STOCKHOLDERS'
SHARES AMOUNT PAID-IN CAPITAL EARNINGS EQUITY
--------- --------- --------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, June 30, 1996..... 90,000 $ 9,000 $ -- $ 382,642 $ 391,642
Issuance of common
stock............... 15,880 1,588 355,892 -- 357,480
Net income............ -- -- -- 210,409 210,409
--------- --------- --------------- ---------- -------------
BALANCE, June 30, 1997..... 105,880 10,588 355,892 593,051 959,531
Net income
(unaudited)......... -- -- -- 29,760 29,760
--------- --------- --------------- ---------- -------------
BALANCE, September 30, 1997
(unaudited).............. 105,880 $ 10,588 $ 355,892 $ 622,811 $ 989,291
========= ========= =============== ========== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-86
<PAGE>
PRODUCTS FOR SURGERY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
JUNE 30, --------------------------
1997 1996 1997
------------ ------------ ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income......................... $ 210,409 $ 44,674 $ 29,760
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities --
Depreciation and
amortization............... 66,280 11,532 19,224
Provision for doubtful
accounts receivable........ (5,014) (1,004) 1,357
Deferred income taxes, net.... 28,856 7,214 5,004
Increase (decrease) in operating
cash flows resulting from:
Accounts receivable........... 957,347 327,133 (146,915)
Inventories................... 256,454 597,148 (13,907)
Prepaid expenses and other
current assets............. 49,111 3,368 5,597
Other noncurrent assets....... (106,908) 5,335 16,141
Accounts payable and accrued
expenses................... (769,931) (778,216) 92,944
------------ ------------ ------------
Net cash provided by operating
activities....................... 686,604 217,184 9,205
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and
equipment........................ (82,248) (12,781) (11,794)
------------ ------------ ------------
Net cash used in investing
activities....................... (82,248) (12,781) (11,794)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term
debt............................. 17,740 40,215 --
Principal payments on long-term
debt............................. -- -- (21,903)
Borrowings (repayments) on
short-term debt, net............. (632,567) (171,289) 96,751
------------ ------------ ------------
Net cash provided by (used in)
financing activities............. (614,827) (131,074) 74,848
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................... (10,471) 73,329 72,259
CASH AND CASH EQUIVALENTS, beginning of
period................................ 53,465 53,465 42,994
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of
period................................ $ 42,994 $ 126,794 $ 115,253
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest...................... $ 57,036 $ 20,930 $ 9,363
============ ============ ============
Income taxes.................. $ 124,380 $ 62,615 $ --
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-87
<PAGE>
PRODUCTS FOR SURGERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Products for Surgery, Inc., a Texas corporation (PSI), was founded in 1979.
PSI, together with its subsidiaries, PSI Service Corporation and Sierra Surgical
Products, Inc. (SSP) (collectively, the Company or Products for Surgery),
maintains its headquarters in Forest Hills, Texas. The Company is a contract
seller and distributor of specialty medical products.
The Company and its stockholders intend to enter into a definitive merger
agreement with TRIAD Medical Inc. (TRIAD) pursuant to which the Company will be
acquired by TRIAD for consideration consisting of $2,250,000 in cash and 203,571
shares of TRIAD common stock, concurrently with the closing of the initial
public offering by TRIAD of its common stock (the Offering).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared on
the accrual basis of accounting and include the accounts of the Company and its
subsidiaries. All significant intercompany amounts and transactions have been
eliminated in consolidation.
INTERIM FINANCIAL INFORMATION
The interim financial statements as of September 30, 1997 and for the three
months ended September 30, 1996 and 1997, are unaudited, and certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, cash
equivalents, trade receivables, trade payables and debt instruments. The
carrying amounts of those instruments reported in the balance sheet are
considered to estimate their respective fair values due to the short-term nature
of such financial instruments and the current interest rate environment. The
fair value of the Company's long-term debt was determined using valuation
techniques that considered cash flows discounted at current market rates and
management's best estimates for instruments without quoted market prices. The
carrying amounts of long-term debt reported in the balance sheets are considered
to approximate the respective fair value as the Company's long-term debt
interest rates approximate market rates at December 31, 1996.
CASH AND CASH EQUIVALENTS
For purposes of the balance sheet and statement of cash flows, the Company
considers all investments with original maturities of three months or less to be
cash equivalents. At June 30, and September 30, 1997 the Company maintained cash
balances in various financial institutions in excess of federally insured
limits.
F-88
<PAGE>
PRODUCTS FOR SURGERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
In the normal course of business, the Company extends credit to its
customers, which are primarily hospitals and surgical centers. The Company
regularly reviews accounts receivable and makes provision for potentially
uncollectible balances. At June 30, 1997 and September 30, 1997, management
believes the Company had incurred no impairments in the carrying values of its
accounts receivable, other than uncollectible amounts for which provision has
been made.
INVENTORIES
Inventories consist of medical supplies and equipment. Inventories are
valued at the lower of cost or market. Cost is determined on the first-in,
first-out (FIFO) method. At June 30, 1997 and September 30, 1997, management
believes the Company had incurred no material impairments in the carrying values
of its inventories, other than impairments for which provision has been made.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the applicable lease or the estimated useful life of the applicable asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments that extend the useful
lives of existing equipment are capitalized and depreciated. On retirement or
disposition of property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized in the statements of operations.
INTANGIBLE ASSETS
The goodwill recorded by the Company in connection with the acquisition of
SSP (see Note 3) is amortized over 40 years on a straight line basis. As of June
30, 1997 and September 30, 1997, accumulated amortization of goodwill amounted
to $1,835 and $2,445, respectively.
REVENUES AND EXPENSES
The Company's revenues are primarily derived from sales of specialty
medical products under agreements with various manufacturers. Cost of revenues
consists primarily of product costs, net of rebates, and freight charges.
Selling expenses consist primarily of sales commissions, salaries of sales
managers, travel and entertainment expenses, trade show expenses and automobile
allowances. General and administrative expenses consist primarily of executive
compensation and related benefits, administrative salaries and benefits, office
rent and utilities, communication expenses and professional fees.
REVENUE RECOGNITION
Revenues are recognized when products are shipped. Service contract
revenues are recorded over the term of the service contract, and the unearned
portion of the service contract is recorded as a liability.
INCOME TAXES
The Company applies the liability method of accounting for income taxes.
Under this method, deferred income taxes are recorded based on differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are received or settled.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 129, "Disclosure of Information
About Capital Structure." SFAS No. 129 requires
F-89
<PAGE>
PRODUCTS FOR SURGERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
nonpublic entities to disclose certain information about an entity's capital
structure, including the pertinent rights and privileges of the various
securities outstanding. The Company will be required to adopt SFAS No. 129 in
1997 and, in the opinion of management, SFAS No. 129 will not significantly
change the existing financial statement disclosures.
3. ACQUISITION:
On October 1, 1996, PSI acquired all the outstanding stock of SSP in
exchange for 15,880 shares of PSI common stock. The acquisition was accounted
for as a purchase, and SSP's results of operations have been included in the
accompanying consolidated financial statements since the acquisition date. SSP
is also a contract seller of specialty medical products.
The purchase price was allocated as follows:
Current assets....................... $ 705,621
Property and equipment............... 20,386
Goodwill............................. 97,795
Current liabilities.................. (466,322)
----------
Purchase price....................... $ 357,480
==========
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
ESTIMATED
USEFUL LIVES JUNE 30, SEPTEMBER 30,
IN YEARS 1997 1997
------------ --------- -------------
(UNAUDITED)
Office equipment........... 5 $ 377,099 $ 268,870
Machinery and equipment.... 7 15,624 15,624
Furniture and fixtures..... 5-7 58,817 13,614
Rental equipment........... 5 50,825 50,825
Leasehold improvements..... 10 37,693 37,693
Transportation equipment... 5 9,035 9,035
--------- -------------
549,093 395,661
Less -- accumulated
depreciation and
amortization............. (357,860) (211,248)
--------- -------------
Property and equipment,
net...................... $ 191,233 $ 184,413
========= =============
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following:
JUNE 30, SEPTEMBER 30,
1997 1997
--------- -------------
(UNAUDITED)
Trade receivables.................... $ 692,275 $ 863,436
Receivables from suppliers........... 10,955 --
Other receivables.................... 22,475 9,184
--------- -------------
725,705 872,620
Less -- allowance for doubtful
accounts........................... (586) (1,943)
--------- -------------
$ 725,119 $ 870,677
========= =============
F-90
<PAGE>
PRODUCTS FOR SURGERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Prepaid expenses consist of the following:
JUNE 30, SEPTEMBER 30,
1997 1997
--------- -------------
(UNAUDITED)
Prepaid insurance....................... $ 26,496 $ 9,025
Prepaid property taxes.................. 3,453 2,514
Prepaid advertising..................... 3,704 1,524
Prepaid sales meeting................... -- 21,322
Other prepaid expenses.................. 12,059 5,730
--------- -------------
$ 45,712 $ 40,115
========= =============
Accounts payable and accrued expenses consist of the following:
JUNE 30, SEPTEMBER 30,
1997 1997
---------- -------------
(UNAUDITED)
Accounts payable, trade................. $ 685,948 $ 826,330
Accrued compensation and benefits....... 70,941 8,391
Accrued income taxes.................... 232,114 324,583
Accrued commissions..................... 70,554 99,217
Other accrued expenses.................. 140,610 34,590
---------- -------------
$1,200,167 $ 1,293,111
========== =============
6. CASH SURRENDER VALUE OF OFFICERS' LIFE INSURANCE:
The Company maintains life insurance policies on its executive officers.
The company pays the premium and receives, on termination of the policy or death
of the insured, the cash surrender value of the policy and the balance of
benefits paid for the purposes of funding the buy-sell agreement described in
Note 15 and/or to provide key-man insurance.
7. SHORT-TERM DEBT:
The Company has a $500,000 credit line with a bank that expires October 31,
1997, with interest payable monthly at prime plus 0.75 percent. (9.25 percent at
June 30, 1997). Management intends to renew the credit line before it expires.
As of June 30, 1997 and September 30, 1997, $195,722 and $292,473 was
outstanding, respectively.
The Company also finances its insurance premiums. The amount outstanding as
of June 30, 1997 and September 30, 1997 was $6,400 and $2,500, respectively.
8. LONG-TERM DEBT:
The Company has policy loans outstanding taken against the cash surrender
value of life insurance. The loan agreements are dated April 22, 1996, with
interest due annually at rates ranging from 5 1/2 percent to 8 percent. No
principal payments are required and the loans are payable from policy proceeds.
The amount outstanding as of June 30, 1997 and September 30, 1997 was $164,817
and $142,914, respectively.
9. LEASES:
The Company leases its office facilities from a partnership comprised of
certain stockholders of the Company. The lease was renewed on September 1, 1996
and expires on August 31, 2003. Rent paid under this related-party lease was
approximately $129,200 for the year ended June 30, 1997 and $22,500 for the
three months ended September 30, 1997. The Company also leases furniture and
equipment from the same partnership. The leases are cancellable and expire at
various dates through 1998. The rents charged are
F-91
<PAGE>
PRODUCTS FOR SURGERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
based on the fair rental value of similar equipment. Total rent paid under this
lease for the year ended June 30, 1997 was $63,400 and $14,340 for the three
months ended September 30, 1997.
The Company believes the terms of the related-party leases are at least as
favorable as the terms that could have been obtained from an unaffiliated third
party in similar transactions.
Future minimum lease payments required under noncancellable operating
leases (including related party leases) with initial or remaining noncancellable
terms in excess of one year at June 30, 1997 are as follows:
Year ending June 30 -
1998....................... $ 223,173
1999....................... 168,372
2000....................... 147,300
2001....................... 147,300
2002....................... 147,300
Thereafter................. 173,850
------------
$ 1,007,295
============
10. INCOME TAXES:
Federal and state income taxes are as follows:
THREE MONTHS ENDED
SEPTEMBER 30,
YEAR ENDED --------------------
JUNE 30, 1997 1996 1997
------------- --------- ---------
(UNAUDITED)
Federal --
Current......................... $ 106,779 $ 17,600 $ 15,891
Deferred........................ 25,432 6,358 4,411
State --
Current......................... 14,376 2,369 2,139
Deferred........................ 3,424 856 594
------------- --------- ---------
$ 150,011 $ 27,183 $ 23,035
============= ========= =========
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 35 percent to income
before income taxes as follows:
THREE MONTHS ENDED
SEPTEMBER 30,
YEAR ENDED --------------------
JUNE 30, 1997 1996 1997
------------- --------- ---------
(UNAUDITED)
Provision at the statutory rate...... $ 126,147 $ 22,013 $ 18,478
Increase resulting from --
State income tax, net of benefit
for federal deductions........ 11,570 2,096 1,777
Nondeductible expenses.......... 12,294 3,074 2,780
------------- --------- ---------
$ 150,011 27,183 23,035
============= ========= =========
F-92
<PAGE>
PRODUCTS FOR SURGERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:
JUNE 30, SEPTEMBER 30,
1997 1997
---------- -------------
(UNAUDITED)
Depreciation and amortization........... $ (41,862) $ (41,672)
Inventory............................... 124,419 119,017
State income tax........................ (3,302) (3,094)
Cash to accrual adjustment.............. 249 249
---------- -------------
Net deferred income tax assets.......... $ 79,504 $ 74,500
========== =============
11. RELATED-PARTY TRANSACTIONS:
The Company has notes receivable from its stockholders in the amount
$133,814 and $129,738 as of June 30, 1997 and September 30, 1997, respectively.
The notes bear interest at 9.25 percent per annum. Unpaid principal and accrued
interest is payable monthly through September 18, 2003, at which time the
remaining unpaid principal and interest is due in full.
12. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is a party to certain legal proceedings arising in the ordinary
course of business. Management believes the outcome of such legal proceedings
will not have a material adverse effect on the Company's consolidated financial
position or consolidated results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
The sale and distribution of medical products involve a risk of product
liability claims. The Company maintains product liability insurance coverage in
amounts that it considers adequate.
SALES TAX CONSIDERATIONS
Various states are increasingly seeking to impose sales or use taxes on
interstate sales made into their state by out-of-state companies. Complex legal
issues arise in these areas relating to, among other things, the required nexus
of a business with a particular state, which may permit the state to require a
business to collect such taxes. Although the Company believes that it has
adequately provided for sales taxes on its sales, there can be no assurance as
to the effect of actions state tax authorities may take on the Company's
consolidated financial condition or the consolidated results of its operations.
13. SIGNIFICANT SUPPLIERS:
The Company has four significant suppliers, whose products together
accounted for 75.7 percent of the Company's revenues during fiscal 1997. The
Company's agreement with Meadox Medical, Inc. (Meadox), terminated October 1,
1996, when Meadox began direct distribution of its product lines. Subsequent to
the termination of the agreement, the Company and Meadox entered into a
non-compete agreement pursuant to which Meadox agreed to make monetary
concessions to the Company. These payments totaled approximately $440,000 in
fiscal 1997. The Company's agreement with MedComp, Inc. (a manufacturer of
vascular access catheters), its largest supplier and whose products accounted
for approximately 16.2 percent of revenues during fiscal 1997, is for a term of
five years and expires in June 1999. The Company's arrangement with Scalan
International (a manufacturer of cardiovascular instruments), accounted for
F-93
<PAGE>
PRODUCTS FOR SURGERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approximately 14.3 percent of revenues during fiscal 1997, is for a term of one
year and expires in January 1998. The Company's arrangement with Luxtec
Corporation (a manufacturer of fiber-optic light sources and headlights), whose
products accounted for approximately 12.1 percent of revenues during fiscal
1997, is for a term of three years and expires October 31, 1998.
The Company's other distribution agreements and agency arrangements are
generally for terms of 2 to 3 years, and are terminable if the Company fails to
meet certain negotiated sales volumes or on prior notice ranging from 30 to 90
days. A loss of the Company's distribution or agency relationships with one or
more of its significant manufacturers could have a material adverse effect on
the Company's financial condition and results of operations.
14. EMPLOYEE BENEFIT PLAN:
The Company has a qualified 401(k) profit sharing plan available to
full-time employees who meet the plan's eligibility requirements. The plan also
contains a profit sharing component with contributions being made at the
Company's discretion. Under the 401(k) plan, the Company matches 50 percent of
the employees' contributions to the plan, up to six percent of their annual
salary. The 401(k) plan expense for fiscal 1997 was $34,852 and $8,036 for the
three months ended September 30, 1997.
15. BUY-SELL AGREEMENT:
The stockholders of the Company have entered into a buy-sell agreement
among themselves and the Company. Under that agreement: (i) if a stockholder
dies, the Company would have an option to purchase the shares owned by the
deceased stockholder; and (ii) if a stockholder desires to sell his interest in
the Company, then the Company and other stockholders would have a right of first
refusal under the agreement to purchase the shares owned by the selling
stockholder.
16. SUPPLEMENTAL CASH FLOW INFORMATION:
During the year ended June 30, 1997 the Company had the following non-cash
financing and investing activities:
Acquisition of SSP:
Fair value of assets acquired... $ 823,802
Liabilities assumed............. (466,322)
----------
Fair value of stock issued...... $ 357,480
==========
17. SUBSEQUENT EVENTS (UNAUDITED):
On September 9, 1997, the Company and its shareholders entered into a
definitive merger agreement with TRIAD, providing for the acquisition of the
Company by TRIAD.
In connection with the closing of the transactions under the merger
agreement, the Company will enter into agreements with certain shareholders to
lease land and buildings used in the Company's operations for a negotiated
amount and term.
F-94
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MegaTech Medical, Inc.:
We have audited the accompanying balance sheet of MegaTech Medical, Inc. (a
Maryland corporation) as of December 31, 1996 and the related statements of
operations, stockholders' equity and cash flows for the year 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 MegaTech Medical, Inc. as of
December 31, 1996, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Houston, Texas
April 18, 1997
F-95
<PAGE>
MEGATECH MEDICAL, INC.
BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------- --------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ -- $ 67,143
Accounts receivable, net of
allowance of $0................... 927,893 988,334
Inventories, net................... 873,955 683,347
Prepaid expenses and other current
assets............................ 6,693 18,085
------------- --------------
Total current assets.......... 1,808,541 1,756,909
PROPERTY AND EQUIPMENT, net............. 84,221 59,158
OTHER NON-CURRENT ASSETS................ 45,951 37,925
------------- --------------
Total assets.................. $ 1,938,713 $1,853,992
============= ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term debt.................... $ 250,000 $ 30,000
Accounts payable and accrued
expenses.......................... 175,215 75,525
------------- --------------
Total current liabilities..... 425,215 105,525
COMMITMENTS AND CONTINGENCIES........... 42,800 42,800
STOCKHOLDERS' EQUITY:
Class A common stock, $1 par value,
50,000 shares authorized, 2,000
issued and outstanding in 1996 and
1997.............................. 2,000 2,000
Class B common stock, $1 par value,
50,000 shares authorized, 2,000
issued in 1996 and 1997........... 2,000 2,000
Additional paid-in capital......... 31,000 31,000
Retained earnings.................. 1,435,698 1,723,667
Treasury stock, 200 shares of Class
B common stock at cost............ -- (53,000)
------------- --------------
Total stockholders' equity.... 1,470,698 1,705,667
------------- --------------
Total liabilities and
stockholders' equity...... $ 1,938,713 $1,853,992
============= ==============
The accompanying notes are an integral part of these financial statements.
F-96
<PAGE>
MEGATECH MEDICAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, --------------------------
1996 1996 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES................................ $6,820,737 $ 5,072,584 $ 4,986,669
COST OF REVENUES........................ 4,214,729 2,815,612 2,933,428
------------ ------------ ------------
Gross profit.................. 2,606,008 2,256,972 2,053,241
------------ ------------ ------------
SELLING EXPENSES........................ 1,327,796 876,883 828,569
GENERAL AND ADMINISTRATIVE EXPENSES..... 932,104 777,487 688,404
DEPRECIATION AND AMORTIZATION........... 17,657 10,293 26,264
------------ ------------ ------------
Total operating expenses........... 2,277,557 1,664,663 1,543,237
------------ ------------ ------------
Income from operations........ 328,451 592,309 510,004
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income.................... 901 62 --
Interest expense................... (18,212) -- (8,333)
Other income, net.................. 135,000 -- 60,000
------------ ------------ ------------
NET INCOME.............................. $ 446,140 $ 592,371 $ 561,671
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-97
<PAGE>
MEGATECH MEDICAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------- ADDITIONAL RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT PAID-IN CAPITAL EARNINGS STOCK EQUITY
------ ------ --------------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995.... 4,000 $4,000 $31,000 $ 1,109,696 $ -- $ 1,144,696
Net income............... -- -- -- 446,140 -- 446,140
Dividends................ -- -- -- (120,138) -- (120,138)
------ ------ --------------- ------------ -------- -------------
BALANCE, December 31, 1996.... 4,000 4,000 31,000 1,435,698 -- 1,470,698
------ ------ --------------- ------------ -------- -------------
Purchase of 200 shares of
Class B common stock
(unaudited)............ -- -- -- -- (53,000) (53,000)
Net income (unaudited)... 561,671 561,671
Dividends (unaudited).... (273,702) (273,702)
------ ------ --------------- ------------ -------- -------------
BALANCE, September 30, 1997
(unaudited)................. 4,000 $4,000 $31,000 $ 1,723,667 $(53,000) $ 1,705,667
====== ====== =============== ============ ======== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-98
<PAGE>
MEGATECH MEDICAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, --------------------------
1996 1996 1997
------------ ------------ ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income......................... $ 446,140 $ 592,371 $ 561,671
Adjustments to reconcile net income
to net cash
(used in) operating activities --
Depreciation and amortization.... 17,657 10,293 26,264
Increase (decrease) in operating
cash flow resulting from:
Accounts receivable........... (141,595) (219,452) (60,441)
Inventories................... 19,714 38,095 190,608
Prepaid expenses and other
current assets............. (2,266) -- (11,392)
Other noncurrent assets....... (10,280) (4,659) 8,026
Accounts payable and accrued
expenses................... (242,854) (252,032) (99,690)
------------ ------------ ------------
Net cash provided by
operating
activities............ 86,516 164,616 615,046
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and
equipment........................ (21,378) (9,478) (1,201)
------------ ------------ ------------
Net cash used in
investing
activities............ (21,378) (9,478) (1,201)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid..................... (120,138) (120,138) (273,702)
Proceeds (reductions of) short-term
debt............................. 55,000 (35,000) (220,000)
Purchase of treasury stock......... -- -- (53,000)
------------ ------------ ------------
Net cash used in
financing
activities............ (65,138) (155,138) (546,702)
------------ ------------ ------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................... -- -- 67,143
CASH AND CASH EQUIVALENTS, beginning of
period................................ -- -- --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of
period................................ $ -- $ -- $ 67,143
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for --
Interest...................... $ 17,677 $ 16,776 $ 8,333
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-99
<PAGE>
MEGATECH MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
MegaTech Medical, Inc., a Maryland corporation (the Company or MegaTech)
was founded in 1976 and maintains its headquarters in Baltimore, Maryland. The
Company is a contract seller and distributor of specialty medical products.
The Company and its stockholders intend to enter into a definitive merger
agreement with TRIAD Medical Inc. (TRIAD), pursuant to which the Company will be
acquired by TRIAD for consideration consisting of 300,000 shares of TRIAD common
stock, concurrently with the closing of the initial public offering by TRIAD of
its common stock (the Offering).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
These financial statements have been prepared on the accrual basis of
accounting.
INTERIM FINANCIAL INFORMATION
The interim financial statements as of September 30, 1997, and for the nine
months ended September 30, 1996 and 1997, are unaudited, and certain information
and footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, cash
equivalents, trade receivables, trade payables and debt instruments. The
carrying amounts of those instruments reported in the balance sheets are
considered to estimate their respective fair values due to the short-term nature
of such financial instruments and the current interest rate environment.
CASH AND CASH EQUIVALENTS
For purposes of the balance sheets and statements of cash flows, the
Company considers all investments with original maturities of three months or
less to be cash equivalents.
CONCENTRATIONS OF CREDIT RISKS
In the normal course of business, the Company extends credit to its
customers, which are primarily hospitals. The Company regularly reviews its
accounts receivable and makes provision for potentially uncollectible balances.
At December 31, 1996, and September 30, 1997, management believes the Company
had incurred no material impairments in the carrying values of its accounts
receivable.
INVENTORIES
Inventories consist primarily of medical supplies and equipment.
Inventories, net of allowances, are valued at the lower of cost or market. Cost
is determined using the average cost method. At December 31,
F-100
<PAGE>
MEGATECH MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1996, and at September 30, 1997, management believes the Company has incurred no
material impairments in the carrying values of its inventories, other than
impairments for which provision has been made.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments that extend the useful
lives of existing equipment are capitalized and depreciated. Upon retirement or
disposition of property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized in the statements of operations.
COLLATERAL INTEREST IN INSURANCE POLICY
The Company has entered into an agreement with its controlling stockholder
for the sole purpose of financing life insurance premiums on a whole-life policy
covering the president of the Company. The advances are collateralized by the
cash surrender value of and the death benefit payable under the policy. The
Company has recorded the advances in other non-current assets in the
accompanying balance sheets totaling approximately $45,951 and $37,925 at
December 31, 1996, and September 30, 1997, respectively.
REVENUES AND EXPENSES
The Company's revenues are primarily derived from sales of specialty
medical products under agreements and arrangements with various manufacturers.
Cost of revenues consists primarily of product costs, net of rebates, and
freight charges. Selling expenses consist primarily of sales commissions,
salaries of sales managers, travel and entertainment expenses, trade show
expenses, and automobile allowances. General and administrative expenses consist
primarily of executive compensation and related benefits, administrative
salaries and benefits, office rent and utilities, communication expenses and
professional fees.
REVENUE RECOGNITION
Revenues are recognized when products and supplies are shipped.
INCOME TAXES
The Company has elected S corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under the Internal Revenue Code provisions applicable to S
corporations, the stockholders report the Company's taxable earnings or losses
in their personal federal income tax returns. Accordingly, no provision for
federal income taxes has been made in the accompanying financial statements.
Upon completion of the transaction with TRIAD, the Company will become a C
corporation and accrue a previously unrecognized deferred tax asset, which if
accrued on December 31, 1996 and September 30, 1997, would have been
approximately $12,200 and $12,200, respectively.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 129, "Disclosure of Information
About Capital Structure." SFAS No. 129 requires nonpublic entities to disclose
certain information about an entity's capital structure including the pertinent
rights and privileges of the various securities outstanding. The Company will be
required to adopt SFAS No. 129 in 1997 and, in the opinion of management, SFAS
No. 129 will not significantly change the existing financial statement
disclosures.
F-101
<PAGE>
MEGATECH MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED SEPTEMBER
USEFUL LIVES DECEMBER 31, 30,
IN YEARS 1996 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Transportation equipment................ 5 $ 75,572 $ 75,572
Machinery and equipment................. 7 15,128 15,128
Furniture and fixtures.................. 5-7 122,929 124,129
Leasehold improvements.................. 10 37,926 37,926
------------ ------------
251,555 252,755
Less -- accumulated depreciation and
amortization.......................... (167,334) (193,597)
------------ ------------
Property and equipment, net............. $ 84,221 $ 59,158
============ ============
</TABLE>
4. SHORT-TERM DEBT:
Short-term debt consisted of a demand line of credit obtained from a bank,
with interest due monthly at the bank's prime rate plus one percent (9.25
percent at December 31, 1996). This credit facility is secured by accounts
receivable and inventory. The amount outstanding under the credit facility as of
December 31, 1996 was $250,000. At September 30, 1997 there was a balance of
$30,000 outstanding.
Management estimates that the fair value of its debt obligations
approximates an aggregate carrying value of $250,000 at December 31, 1996.
5. LEASES:
The Company leases office and warehouse facilities from third parties. The
lease agreements extend through May 31, 1998. The rent paid under these leases
was approximately $38,000, $28,200 and $28,200 for the year ended December 31,
1996 and the nine months ended September 30, 1996 and September 30, 1997,
respectively. The Company is required to pay taxes, maintenance, insurance and
certain other operating costs of the leased property.
Future minimum lease payments required under noncancellable operating
leases that have initial or remaining noncancellable lease terms in excess of
one year at December 31, 1996 are as follows:
Year ending December 31 --
1997............................... $ 37,548
1998............................... 15,645
---------
$ 53,193
=========
6. RELATED PARTY TRANSACTIONS:
The controlling stockholder of the Company also owns another company, JAJ
Enterprises, Ltd., d/b/a S.O.S. Technologies (S.O.S.), which is engaged in
renting emergency oxygen units and organizing training for their usage. MegaTech
provides S.O.S. with office and warehouse space and administrative, accounting
and managerial services and personnel. S.O.S. reimburses MegaTech for these
services. Included in other income, net, is approximately $135,000, $75,000 and
$60,000 received from S.O.S. for the year ended December 31, 1996 and for the
nine months ended September 30, 1996 and 1997, respectively.
F-102
<PAGE>
MEGATECH MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is a party to certain legal proceedings arising in the ordinary
course of business. Management believes the outcome of such legal proceedings
will not have a material adverse effect on the Company's financial position or
results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims under
losses on any of its insurance policies.
The sale and distribution of medical products involve a risk of product
liability claims. The Company maintains product liability insurance coverage in
amounts that it considers adequate.
SALES TAX CONSIDERATIONS
Various states are increasingly seeking to impose sales or use taxes on
interstate sales made into their state by out-of-state companies. Complex legal
issues arise in these areas, relating to, among other things, the required nexus
of a business with a particular state, which may permit the state to require a
business to collect such taxes. Although the Company believes that each of the
Founding Companies has adequately provided for sales taxes on its sales, there
can be no assurance as to the effect of actions state tax authorities may take
on the Company's financial condition or the results of its operations.
8. SIGNIFICANT SUPPLIERS:
The Company has three significant suppliers, together whose products
collectively accounted for 61 percent and 38.4 percent of the Company's revenues
for the year ended December 31, 1996 and the nine months ended September 30,
1997, respectively. The Company has no arrangement with Smith & Nephew, its
largest supplier and whose products accounted for approximately 30 percent and
23 percent of the Company's revenues for the year ended December 31, 1996 and
the nine months ended September 30, 1997, respectively. The Company's
arrangement with Level One, whose products accounted for 16 percent of the
Company's revenues for the year ended December 31, 1996 expired March 31, 1997.
However, the Company partially offset such lost revenues by acquiring new
product lines and placing increased emphasis on new technology products. The
Company's material distribution agreements and agency arrangements are generally
for terms of 1 to 5 years and are terminable if the Company fails to meet
certain negotiated sales volumes or on prior notice ranging from 30 to 90 days.
A loss of the Company's distribution or agency relationships with one or more of
its significant manufacturers could have a material adverse effect on the
Company's financial condition and results of operations.
9. SUBSEQUENT EVENTS (UNAUDITED):
On September 9, 1997, the Company and its shareholders entered into a
definitive merger agreement with TRIAD, providing for the acquisition of the
Company by TRIAD.
In connection with the closing of the transactions under the merger
agreement, the Company will distribute certain assets to the shareholders,
consisting of cash surrender value of life insurance and automobiles, with a
total carrying value of $0.2 million as of December 31, 1996. In addition, the
Company will make a cash distribution of approximately $1.4 million prior to the
merger, which represents the Company's estimated S corporation accumulated
adjustment account. Had these transactions been recorded at September 30, 1997,
the effect on the accompanying balance sheet would have been an increase in
liabilities of $1.6 million and a decrease in stockholders' equity of $1.6
million.
F-103
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Omni Medical, Inc.:
We have audited the accompanying balance sheet of Omni Medical, Inc. (a
Washington corporation) as of December 31, 1996 and the related statements of
operations, stockholders' equity (deficit) and cash flows for the year 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 Omni Medical, Inc. as of
December 31, 1996, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Houston, Texas
September 30, 1997
F-104
<PAGE>
OMNI MEDICAL, INC.
BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash............................... $ 399,286 $ 53,426
Accounts receivable................ 436,703 762,954
Inventories, net................... 529,253 1,977,070
------------ -------------
Total current assets.......... 1,365,242 2,793,450
PROPERTY AND EQUIPMENT, net............. 13,592 8,586
OTHER NON-CURRENT ASSETS................ -- 113,750
------------ -------------
Total assets.................. $1,378,834 $ 2,915,786
============ =============
LIABILITIES AND STOCKHOLDER'S EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Notes payable...................... $ -- $ 1,450,000
Accounts payable and accrued
expenses.......................... 359,095 1,567,401
------------ -------------
Total current liabilities..... 359,095 3,017,401
------------ -------------
COMMITMENTS AND CONTINGENCIES...........
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $1 par value, 50,000
shares authorized, 1,700 issued
and outstanding................... 1,700 1,700
Additional paid-in capital......... 83,300 83,300
Retained earnings (accumulated
deficit).......................... 934,739 (186,615)
------------ -------------
Total stockholders' equity
(deficit)................. 1,019,739 (101,615)
------------ -------------
Total liabilities and
stockholders' equity
(deficit)................. $1,378,834 $ 2,915,786
============ =============
The accompanying notes are an integral part of these financial statements.
F-105
<PAGE>
OMNI MEDICAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, --------------------------
1996 1996 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES................................ $6,081,614 $ 4,702,781 $ 4,759,774
COST OF REVENUES........................ 4,266,448 3,255,092 3,573,528
------------ ------------ ------------
Gross profit.................. 1,815,166 1,447,689 1,186,246
------------ ------------ ------------
SELLING EXPENSES........................ 617,375 389,479 437,129
GENERAL AND ADMINISTRATIVE EXPENSES..... 827,166 676,327 567,818
DEPRECIATION AND AMORTIZATION........... 7,602 5,921 73,256
------------ ------------ ------------
Total operating expenses........... 1,452,143 1,071,727 1,078,203
------------ ------------ ------------
Income from operations........ 363,023 375,962 108,043
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income.................... 5,935 3,682 2,392
Interest expense................... (489) (443) (5,775)
Contract termination income........ -- -- 181,986
------------ ------------ ------------
NET INCOME.............................. $ 368,469 $ 379,201 $ 286,646
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-106
<PAGE>
OMNI MEDICAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK EARNINGS TOTAL
---------------- ADDITIONAL (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT PAID-IN CAPITAL DEFICIT) EQUITY (DEFICIT)
------ ------ --------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995.... 1,700 $1,700 $83,300 $ 733,070 $ 818,070
Net income............... -- -- -- 368,469 368,469
Distributions............ -- -- -- (166,800) (166,800)
------ ------ --------------- ------------- ----------------
BALANCE, December 31, 1996.... 1,700 1,700 83,300 934,739 1,019,739
------ ------ --------------- ------------- ----------------
Net income (unaudited)... -- -- -- 286,646 286,646
Distributions
(unaudited)............ -- -- -- (1,408,000) (1,408,000)
------ ------ --------------- ------------- ----------------
BALANCE, September 30, 1997
(unaudited)................. 1,700 $1,700 $83,300 $ (186,615) $ (101,615)
====== ====== =============== ============= ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-107
<PAGE>
OMNI MEDICAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, --------------------------
1996 1996 1997
------------ ------------ ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income......................... $ 368,469 $ 379,201 $ 286,646
Adjustments to reconcile net income
to net cash
provided by (used in) operating
activities --
Depreciation and amortization.... 7,602 5,921 73,256
Increase (decrease) in operating
cash flow resulting from:
Accounts receivable........... 148,277 (78,865) (326,251)
Inventories................... 240,874 22,378 (1,447,817)
Other non-current assets...... -- -- (182,000)
Accounts payable and accrued
expenses................... (86,869) 93,064 1,208,306
------------ ------------ ------------
Net cash provided by
(used in) operating
activities............ 678,353 421,699 (387,860)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid to
stockholders..................... (166,800) (163,200) (1,408,000)
Proceeds from issuance of notes
payable.......................... 909,000 879,000 1,465,000
Payments on notes payable.......... (1,059,000) (1,029,000) (15,000)
------------ ------------ ------------
Net cash provided by
(used in) financing
activities............ (316,800) (313,200) 42,000
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH......... 361,553 108,499 (345,860)
CASH, beginning of period............... 37,733 37,733 399,286
------------ ------------ ------------
CASH, end of period..................... $ 399,286 $ 146,232 $ 53,426
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for --
Interest...................... $ 489 $ 443 $ --
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-108
<PAGE>
OMNI MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Omni Medical, Inc., a Washington corporation (the Company or Omni), was
founded in 1986 and maintains its headquarters in Redmond, Washington. The
Company is a contract seller and distributor of specialty medical products.
On September 9, 1997 the Company and its stockholders entered into a
definitive merger agreement with TRIAD Medical Inc. (TRIAD), pursuant to which
the Company will be acquired by TRIAD for consideration consisting of $200,000
in cash and 128,517 shares of TRIAD common stock, concurrently with the closing
of the initial public offering by TRIAD of its common stock (the Offering).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
These financial statements have been prepared on the accrual basis of
accounting.
INTERIM FINANCIAL INFORMATION
The interim financial statements as of September 30, 1997, and for the nine
months ended September 30, 1996 and 1997, are unaudited, and certain information
and footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, trade
receivables, trade payables and debt instruments. The carrying amounts of those
instruments reported in the balance sheets are considered to estimate their
respective fair values due to the short-term nature of such financial
instruments and the current interest rate environment.
CONCENTRATIONS OF CREDIT RISKS
In the normal course of business, the Company extends credit to its
customers, which are primarily hospitals. The Company regularly reviews its
accounts receivable and makes provision for potentially uncollectible balances.
At December 31, 1996, and September 30, 1997, management believes the Company
had incurred no material impairments in the carrying values of its accounts
receivable.
INVENTORIES
Inventories consist primarily of medical supplies and equipment.
Inventories, net of allowances, are valued at the lower of cost or market. Cost
is determined using the first-in, first-out (FIFO) method. At December 31, 1996,
and at September 30, 1997, management believes the Company has incurred no
material impairment in the carrying values of its inventories, other than
impairments for which provision has been made.
F-109
<PAGE>
OMNI MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewal and betterments that extend the useful
lives of existing equipment are capitalized and depreciated. Upon retirement or
disposition of property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized in the statements of operations.
OTHER NON-CURRENT ASSETS
Other non-current assets consist primarily of a non-compete agreement with
Online Medical. The amount paid for the agreement is being amortized on a
straight-line basis over the life of the agreement. As of September 30, 1997,
$68,250 had been amortized in connection with the contract.
REVENUES AND EXPENSES
The Company's revenues are primarily derived from sales and specialty
medical products under agreement and arrangements with various manufacturers.
Cost of revenues consists primarily of product costs, net of rebates, and
freight charges. Selling expenses consist primarily of sales commissions,
salaries of sales managers, travel and entertainment expenses, trade show
expenses, and automobile allowances. General and administrative expenses consist
primarily of executive compensation and related benefits, administrative
salaries and benefits, office rent and utilities, communication expenses and
professional fees.
REVENUE RECOGNITION
Revenues are recognized when products and supplies are shipped.
INCOME TAXES
The Company has elected S corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under the Internal Revenue Code provisions applicable to S
corporations, the stockholders report the Company's taxable earnings or losses
in their personal federal income tax returns. Accordingly, no provision for
federal income taxes has been made in the accompanying financial statements.
Upon completion of the transaction with TRIAD, the Company will become a C
corporation and accrue a previously unrecognized deferred tax asset, which if
accrued on December 31, 1996 and September 30, 1997, would have been
approximately $40,400 and $0, respectively.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 129, "Disclosure of Information
About Capital Structure." SFAS No. 129 requires nonpublic entities to disclose
certain information about an entity's capital structure including the pertinent
rights and privileges of the various securities outstanding. The Company will be
required to adopt SFAS No. 129 in 1997 and, in the opinion of management, SFAS
No. 129 will not significantly change the existing financial statement
disclosures.
F-110
<PAGE>
OMNI MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED SEPTEMBER
USEFUL LIVES DECEMBER 31, 30,
IN YEARS 1996 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Machinery and equipment................. 7 $ 39,202 $ 39,202
Furniture and fixtures.................. 5-7 40,324 40,324
------------ ------------
79,526 79,526
Less -- accumulated depreciation and
amortization.......................... (65,934) (70,940)
------------ ------------
Property and equipment, net............. $ 13,592 $ 8,586
============ ============
</TABLE>
4. NOTES PAYABLE:
The Company entered into a secured revolving credit line agreement in April
1996 with a bank. The agreement provides for a maximum commitment of $275,000 to
be used for working capital needs. Interest is due monthly at the bank's
reference rate plus one percent (9.25 percent at December 31, 1996). The
commitment expired in March 1997. Borrowings under the agreement were secured by
substantially all the assets of the Company and were guaranteed by the
stockholders. At December 31, 1996 there were no borrowings outstanding under
the agreement.
In August 1997, the Company entered into a $1,000,000 borrowing agreement
with a bank, bearing interest at the bank's reference rate plus two percent
(5.94 percent at September 30, 1997), with principal and interest due on
February 19, 1998. The note is secured by certain assets owned by the
stockholders. The proceeds of this agreement were used to fund a $1,000,000
distribution to the stockholders. This amount represented the Company's
estimated S corporation accumulated adjustment account.
In September 1997, the Company entered into a $450,000 borrowing agreement
with a bank, with interest due monthly at the bank's reference rate plus one
percent (9.5 percent at September 30, 1997). The borrowings under this facility
are due on January 1, 1998 and are secured by substantially all the assets of
the Company. The proceeds of this agreement were used to fund working capital.
F-111
<PAGE>
OMNI MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. LEASES:
The Company leases office and warehouse facilities from third parties. The
lease agreements extend through February 28, 2000. The rent paid under these
leases was approximately $59,400, $47,500 and $42,300 for the year ended
December 31, 1996 and the nine months ended September 30, 1996 and September 30,
1997, respectively. The Company is required to pay taxes, maintenance, insurance
and certain other operating costs of the leased property.
The Company leases automobiles from third parties. The lease agreements
extend through March 31, 1998. The rent paid under these leases was
approximately $13,100, $9,700 and $10,300 for the year ended December 31, 1996
and the nine months ended September 30, 1996 and September 30, 1997,
respectively.
Future minimum lease payments required under noncancellable operating
leases that have initial or remaining noncancellable lease terms in excess of
one year at December 31, 1996 are as follows:
Year ending December 31 --
1997............................ $ 43,372
1998............................ 30,470
1999............................ 27,158
2000............................ 4,584
----------
$ 105,584
==========
6. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is a party to certain legal proceeding arising in the ordinary
course of business. Management believes the outcome of such legal proceedings
will not have a material adverse effect on the Company's financial position or
results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims under
losses on any of its insurance policies.
7. SIGNIFICANT SUPPLIERS:
The Company has four significant suppliers, whose products together
accounted for 72 percent of the Company's revenues during the year ended
December 31, 1996. Meadox Medical, Inc. products accounted for approximately 30
percent of the Company's revenues for the year ended December 31, 1996. The
Company's contract with Meadox Medical, Inc. terminated January 1, 1997 when
Meadox Medical, Inc. began direct distribution of its product lines. Concurrent
with the termination of the agreement, the Company and Meadox Medical, Inc.
entered into a one-year non-compete agreement pursuant to which Meadox Medical
agreed to pay approximately $182,000 to the Company. This amount is recorded as
other income in the nine month period ended September 30, 1997. Level One
products accounted for 18 percent of the Company's revenues for the year ended
December 31, 1996. Although the Company's distribution agreement with Level One
expired March 31, 1997, the Company is continuing to sell Level One products and
a new agreement is being negotiated. International Technidyne Corp. (ITC)
products accounted for 14 percent of the Company's revenues for the year ended
December 31, 1996. The Company's distribution contract with ITC requires minimum
purchase commitments. The contract expires on October 31, 1997. The Company's
contract with Biovascular, whose products accounted for 10 percent of the
Company's revenues
F-112
<PAGE>
OMNI MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
for the year ended December 31, 1997, has minimum purchase commitments and
expires on October 31, 1997.
8. BUY-SELL AGREEMENT:
As of December 31, 1996, the stockholders of the Company have entered into
a buy-sell agreement among themselves and the Company. Under the agreement: (i)
if a stockholder dies, the Company would have an option to purchase the shares
owned by the deceased stockholder; and (ii) if a stockholder desires to sell his
interest in the Company, then the Company and other stockholders would have a
right of first refusal under the agreement to purchase the shares owned by the
selling stockholder. This agreement was canceled on August 25, 1997.
9. EMPLOYEE BENEFIT PLAN:
The Company sponsors a defined contribution 401(k) profit-sharing plan for
employees meeting certain requirements. The Company's contributions during the
year ended December 31, 1996 and the nine months ended September 30, 1996 and
September 30, 1997 were $92,000, $80,000 and $0, respectively.
F-113
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of PCI Medical, Inc.:
We have audited the accompanying statements of operations and cash flows of
PCI Medical, Inc. (an Arizona corporation) for the period from January 1, 1996
to October 4, 1996. 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 statemens. 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 results of operations and cash flows of PCI
Medical, Inc. for the period from January 1, 1996 to October 4, 1996, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Houston, Texas
August 1, 1997
F-114
<PAGE>
PCI MEDICAL, INC.
STATEMENT OF OPERATIONS
PERIOD FROM
JANUARY 1, 1996
TO
OCTOBER 4, 1996
---------------
REVENUES................................ $ 6,049,214
COST OF REVENUES........................ 2,967,047
---------------
Gross profit....................... 3,082,167
SELLING EXPENSES........................ 724,656
GENERAL AND ADMINISTRATIVE EXPENSES..... 1,558,923
DEPRECIATION AND AMORTIZATION........... 131,644
---------------
Total operating expenses........... 2,415,223
---------------
Income from operations.................. 666,944
OTHER INCOME (EXPENSE)
Interest income.................... 4,888
Interest expense................... (6,460)
Other income, net.................. 65,186
---------------
NET INCOME.............................. $ 730,558
===============
The accompanying notes are an integral part of these financial statements.
F-115
<PAGE>
PCI MEDICAL, INC.
STATEMENT OF CASH FLOWS
PERIOD FROM
JANUARY 1, 1996
TO
OCTOBER 4, 1996
---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income......................... $ 730,558
Adjustment to reconcile net income
to net cash provided by operating
activities
Depreciation and
amortization................. 131,644
Gain on disposal.............. (52,670)
Increase (decrease) in
operating cash flows
resulting from:
Accounts receivable...... (110,237)
Inventories.............. 217,658
Prepaids and other
current assets.......... (38,264)
Other noncurrent
assets.................. (7,592)
Accounts payable and
accrued expenses........ (3,569)
---------------
Net cash provided
by operating
activities......... 867,528
---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and
equipment......................... (124,074)
Proceeds from disposals of property
and equipment..................... 74,790
---------------
Net cash used in
investing
activities......... (49,284)
---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on long-term debt....... 73,217
Principal payments on long-term
debt and capital leases........... (76,125)
Line of credit, net................ (395,000)
Distributions to stockholders...... (225,000)
---------------
Net cash used in
financing
activities......... (622,908)
---------------
INCREASE IN CASH AND CASH EQUIVALENTS... 195,336
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD............................. 30,319
---------------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD................................ $ 225,655
===============
The accompanying notes are an integral part of these financial statements.
F-116
<PAGE>
PCI MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
PCI Medical, Inc. (the Company) is primarily engaged in the contract sale
and distribution of medical supplies and devices and the rental, service and
repair of infusion devices and equipment in the hospital and alternate-site
health care markets in the southwestern United States. The Company was
incorporated in 1986.
On October 4, 1996, TRIAD Holdings, Inc. (THI) acquired the assets and
assumed certain liabilities of the Company, for cash consideration of $3,814,651
(net of cash acquired), notes payable of $702,343 and 60,000 Class B common
shares of THI valued at $330,000. As a result, separate operations of the
Company ceased and the results of the Company's operations for subsequent
periods are included in the consolidated financial statements of THI.
Accordingly, only the results of operations and cash flows for the period ended
October 4, 1996 have been included in the accompanying financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
These financial statements have been prepared on the accrual basis of
accounting.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted account principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
investments with original maturities of three months or less to be cash
equivalents.
COST OF REVENUES
Cost of revenues is determined using the first-in, first-out (FIFO) method
of valuing inventories.
DEPRECIATION
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are capitalized and amortized
over the lesser of the life of the applicable lease or the estimated useful life
of the applicable asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments that extend the useful
lives of existing equipment are capitalized and depreciated. On retirement or
disposition of property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized in the statement of operations.
DEFERRED RENT
Certain of the Company's facilities leases include scheduled rent increases
and free rent periods. For financial reporting purposes, rent expense is
recognized on a straight-line basis over the lease term.
REVENUES AND EXPENSES
The Company's revenues are primarily derived from rentals and servicing
infusion devices and sales of durable medical equipment. Cost of revenues
consists primarily of product costs, net of rebates, service labor and freight
charges. Selling expenses consist primarily of sales commissions, salaries of
sales
F-117
<PAGE>
PCI MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
managers, travel and entertainment expenses, trade show expenses and automobile
allowances. General and administrative expenses consist primarily of executive
compensation and related benefits, administrative salaries and benefits, office
rent and utilities, communication expenses and professional fees.
REVENUE RECOGNITION
Revenues are recorded at the time of shipment of products or performance of
services. Revenues from the rental of infusion pumps and other under cancelable
and noncancelable operating leases are recognized on a straight-line basis over
the rental period. The Company also provides financing for equipment sales under
sales-type lease arrangements.
INCOME TAXES
The Company is a Subchapter S corporation for income tax purposes. As an S
corporation, the Company is not subject to federal income taxes and accordingly,
no such taxes have been provided in the accompanying financial statements.
Federal income taxes related to the earnings of the Company are obligations of
the shareholders of the Company. The Company is subject to an Arizona franchise
tax, which is not significant. This amount has been included in general and
administrative expenses in the accompanying statement of operations.
3. LEASES:
The Company leases its office and warehouse facilities from an entity
controlled by its shareholders. Rent expense under this arrangment totaled
approximately $242,193 for the period from January 1, 1996 to October 4, 1996.
The leases provide for the Company to pay taxes, maintenance, insurance and
certain other operating costs of the leased property.
4. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is a party to certain legal proceedings arising in the ordinary
course of business. Managment believes the outcome of such legal proceedings
will not have a material adverse effect on the Company's financial position or
results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses under any of its insurance policies.
The sale, distribution, rental and repair of medical products involve a
risk of product liability claims. The Company maintains product liability
insurance coverage in amounts that it considers adequate.
F-118
<PAGE>
[GRAPHICS AND RELATED TEXT OMITTED, SEE APPENDIX]
================================================================================
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT RELATES, OR AN OFFER TO, OR A
SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
-------------------------------
TABLE OF CONTENTS
-------------------------------
PAGE
----
PROSPECTUS SUMMARY................... 3
RISK FACTORS......................... 8
THE COMPANY.......................... 15
USE OF PROCEEDS...................... 18
DIVIDEND POLICY...................... 18
CAPITALIZATION....................... 19
DILUTION............................. 20
SELECTED HISTORICAL AND PRO FORMA
COMBINED FINANCIAL DATA............ 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS...................... 23
BUSINESS............................. 28
MANAGEMENT........................... 36
CERTAIN TRANSACTIONS................. 42
PRINCIPAL STOCKHOLDERS............... 46
SHARES ELIGIBLE FOR FUTURE SALE...... 48
DESCRIPTION OF CAPITAL STOCK......... 49
UNDERWRITING......................... 52
LEGAL MATTERS........................ 54
EXPERTS.............................. 54
ADDITIONAL INFORMATION............... 54
INDEX TO FINANCIAL STATEMENTS........ F-1
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
4,000,000 SHARES
TRIAD
MEDICAL INC.
COMMON STOCK
----------------------
PROSPECTUS
----------------------
NATIONSBANC MONTGOMERY SECURITIES, INC.
SMITH BARNEY INC.
WEDBUSH MORGAN SECURITIES
, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses (other than underwriting
discounts and commissions) in connection with the offering described in this
Registration Statement, all of which shall be paid by TRIAD. All of such amounts
(except the SEC Registration Fee, the NASD Filing Fee and the Nasdaq National
Market Listing Fee) are estimated.
SEC Registration Fee.................... $ 16,728
NASD Filing Fee......................... 6,020
Nasdaq National Market Listing Fee...... 40,237
Blue Sky Fees and Expenses.............. 10,000
Printing and Engraving Costs............ 325,000
Legal Fees and Expenses................. 800,000
Accounting Fees and Expenses............ 3,000,000
Transfer Agent and Registrar Fees and
Expenses.............................. 5,000
Miscellaneous........................... 197,015
------------
Total.............................. $ 4,400,000
============
- ------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law permits a corporation
to indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he is or was a director, officer, employee or agent of the corporation or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses, judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action. In an action brought to obtain a judgment in the corporation's favor,
whether by the corporation itself or derivatively by a stockholder, the
corporation may only indemnify for expenses, including attorney's fees, actually
and reasonably incurred in connection with the defense or settlement of such
action, and the corporation may not indemnify for amounts paid in satisfaction
of a judgment or in settlement of the claim. In any such action, no
indemnification may be paid in respect of any claim, issue or matter as to which
such person shall have been adjudged liable to the corporation except as
otherwise approved by the Delaware Court of Chancery or the court in which the
claim was brought. In any other type of proceeding, the indemnification may
extend to judgments, fines and amounts paid in settlement, actually and
reasonably incurred in connection with such other proceeding, as well as to
expenses.
The statute does not permit indemnification unless the person seeking
indemnification has acted in good faith and in a manner he reasonably believed
to be in, or not opposed to, the best interests of the corporation and, in the
case of criminal actions or proceedings, the person had no reasonable cause to
believe his conduct was unlawful. The statute contains additional limitations
applicable to criminal actions and to actions brought by or in the name of the
corporation. The determination as to whether a person seeking indemnification
has met the required standard of conduct is to be made (1) by a majority vote of
the directors who are not parties to such action, suit or proceeding, even
though less than a quorum, or (2) if there are no such directors, or if such
directors so direct, by independent legal counsel in a written opinion, or (3)
by the stockholders.
TRIAD's Certificate of Incorporation and Bylaws require TRIAD to indemnify
its directors to the fullest extent permitted under Delaware law. Pursuant to
employment agreements entered into by TRIAD
II-1
<PAGE>
with its executive officers and certain other key employees, TRIAD must
indemnify such officers and employees in the same manner and to the same extent
that TRIAD is required to indemnify its directors under TRIAD's Certificate of
Incorporation and Bylaws. TRIAD's Certificate of Incorporation limits the
personal liability of a director to the corporation or its stockholders to
damages for breach of the director's fiduciary duty.
TRIAD has not purchased insurance on behalf of its directors and officers
against certain liabilities that may be asserted against, or incurred by, such
persons in their capacities as directors or officers of the registrant, or that
may arise out of their status as directors or officers of the registrant,
including liabilities under the federal and state securities laws. TRIAD has
entered into indemnification agreements to indemnify its directors to the
maximum extent permitted under Delaware law.
The Underwriting Agreement provides for indemnification of the directors
and officers of the Company in certain circumstances.
II-2
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following table reflects sales by TRIAD of unregistered securities
within the past three years. Share amounts have been adjusted for the
1.3379145-for-one stock split effected in September 1997. Except as otherwise
disclosed, the issuances by TRIAD of the securities sold in the transactions
referenced below were not registered under the Securities Act, pursuant to the
exemption contemplated in Section 4(2) thereof, for transactions not involving a
public offering. No underwriter was involved in the transactions and no
commissions were paid. The consideration for which the shares of Common Stock
were issued is indicated below:
<TABLE>
<CAPTION>
WARRANTS TO PURCHASE
NUMBER SHARES OF
DATE OF SHARES COMMON STOCK CONSIDERATION PURCHASER
- ------------------- --------- -------------------- ------------- -------------------------------------
<S> <C> <C> <C> <C>
April 11, 1997 260,893 $ 19,500 William C. Klintworth, Jr.
113,723 8,500 Clyde A. Blankenship
100,344 7,500 Michael K. Campbell
33,448 2,500 Lance C. Ruud
April 18, 1997 100,000 (1) Equus II Incorporated
May 12, 1997 20,069 $ 1,500 William C. Klintworth, Jr.
10,034 750 Clyde A. Blankenship
10,034 750 Michael K. Campbell
September 8, 1997 449,213(2) $ 300,000 Equus II Incorporated
September 8, 1997 25,000 Services PENMAN Private Equity and Mezzanine
Fund, L.P.
September 8, 1997 2,250 $ 11,250 James L. Stariha
1,250 6,250 Terry L. Harrell
1,250 6,250 Thomas H. Dean
1,250 6,250 Bruce R. Hoadley
1,000 5,000 David A. Meyer
1,000 5,000 James W. Eshcoff
2,000 10,000 Thomas M. Boucher
1,000 5,000 Michael W. Thomas
1,000 5,000 Paul C. Gries
5,000 25,000 Marvin L. Marks
5,000 25,000 Peter A. Miller
3,000 15,000 William Graue
3,000 15,000 Edward Berman
1,500 7,500 Harvey A. Lawhon
1,500 7,500 Robert L. and Chris Wahlenmaier
1,500 7,500 R. Bryan and Beverly Gregory
1,500 7,500 Thomas J. Madsen
8,000 40,000 Greg A. Sellards
30,000 150,000 Child Health Investment Corporation
1,000 5,000 Terry Family Trust
6,000 30,000 Bruce Baily
2,000 10,000 Stephen W. Walls
7,000 35,000 Klintworth Family Trust
8,000 40,000 John B. Benear, II
4,000 20,000 Jeff Haines
</TABLE>
(SEE NOTES ON FOLLOWING PAGE)
II-3
<PAGE>
- ------------
(1) TRIAD issued this Warrant to Equus II Incorporated ("Equus II") under a
Funding and Stock Purchase Agreement dated April 18, 1997, whereby Equus II
agreed to (i) purchase 300,000 shares of TRIAD's Series A Preferred Stock
for $300,000 and (ii) advance up to $2.2 million for purposes for funding
certain expenses relating to TRIAD's initial public offering of Common
Stock.
(2) 449,213 shares of Common Stock issued on conversion of the 300,000 shares of
TRIAD's Series A Preferred Stock issued on April 18, 1997 as set forth in
(1) above.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
EXHIBIT
NUMBER DESCRIPTION
- ----------------------------------------------------------------
**1.1 -- Form of Underwriting Agreement dated ,
1997 by and among TRIAD, Montgomery
Securities, Smith Barney Inc. and
Wedbush Morgan Securities.
*2.1 -- Uniform Provisions for the Acquisition
of the Founding Companies.
*2.2 -- Agreement and Plan of Reorganization
dated as of September 9, 1997 by and
among TRIAD, TRIAD Acquisition, Inc.,
THI and its stockholders.
*2.3 -- Agreement and Plan of Reorganization
dated as of September 9, 1997 by and
among TRIAD, HTD Acquisition, Inc., HTD
and its Stockholders.
*2.4 -- Agreement and Plan of Reorganization
dated as of September 9, 1997 by and
among TRIAD, Sun Acquisition, Inc., Sun
and its Stockholders.
*2.5 -- Agreement and Plan of Reorganization
dated as of September 9, 1997 by and
among TRIAD, Custom Acquisition, Inc.,
CMS and its Stockholders.
*2.6 -- Agreement and Plan of Reorganization
dated as of September 9, 1997 by and
among TRIAD, Kentec Acquisition, Inc.,
Kentec and its Stockholders.
*2.7 -- Agreement and Plan of Reorganization
dated as of September 9, 1997 by and
among TRIAD, PFS Acquisition, Inc.,
Products for Surgery and its
Stockholders.
*2.8 -- Agreement and Plan of Reorganization
dated as of September 9, 1997 by and
among TRIAD, MegaTech Acquisition, Inc.,
MegaTech and its Stockholders.
*2.9 -- Agreement and Plan of Reorganization
dated as of September 9, 1997 by and
among TRIAD, Omni Medical Acquisition,
Inc., Omni Medical and its Stockholders.
*2.10 -- Agreement and Plan of Reorganization
dated as of September 9, 1997 by and
among TRIAD, NEMS Acquisition, Inc., New
England Specialties and its
Stockholders.
*2.11 -- Agreement and Plan of Reorganization
dated as of September 9, 1997 by and
among TRIAD, Professional Equipment
Acquisition, Inc., Professional
Equipment and its Stockholders.
*2.12 -- Agreement and Plan of Reorganization
dated as of September 9, 1997 by and
among TRIAD, Wilson Acquisition, Inc.,
Wilson and its Stockholders.
*3.1 -- Certificate of Incorporation of TRIAD,
as amended.
*3.2 -- Bylaws of TRIAD, as amended.
*4.1 -- Form of Certificate representing Common
Stock.
*4.3 -- Form of Registration Rights Agreement
among TRIAD and the stockholders listed
on the signature pages thereto.
*5.1 -- Opinion of Porter & Hedges, L.L.P.
*10.1 -- 1997 Incentive Plan of TRIAD.
*10.2 -- Form of Indemnification Agreement
between TRIAD and each of its directors
and officers.
*10.3 -- Employment Agreement by and between
TRIAD and William C. Klintworth, Jr.
dated September 9, 1997.
*10.4 -- Employment Agreement by and between
TRIAD and Clyde A. Blankenship, Jr.
dated September 9, 1997.
*10.5 -- Employment Agreement by and between
TRIAD and Lance C. Ruud dated September X
9, 1997.
II-4
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ----------------------------------------------------------------
*10.6 -- Employment Agreement by and between R.
Tucker Coop and TRIAD dated September 9,
1997.
*10.7 -- Employment Agreement by and between
Walter D. Wallach and TRIAD dated
September 9, 1997.
*10.8 -- Employment Agreement by and between
TRIAD and Marvin L. Marks dated
September 9, 1997.
*10.9 -- Employment Agreement by and between
TRIAD and Kent J. Wilken dated September
9, 1997.
*10.10 -- Employment Agreement by and between
TRIAD and Greg H. Sellards dated
September 9, 1997.
*10.11 -- Employment Agreement by and between
TRIAD and Michael W. Thomas dated
September 9, 1997.
*10.12 -- Warrant to purchase 100,000 shares of
Common Stock of TRIAD dated as of April
18, 1997, as amended.
*10.13 -- Warrant to purchase 25,000 shares of
Common Stock of TRIAD dated as of
September 8, 1997.
*10.14 -- Funding and Stock Purchase Agreement
dated April 18, 1997 between TRIAD and
Equus II Incorporated, as amended.
*10.15 -- Employment Agreement by and between
TRIAD and Michael K. Campbell dated
September 9, 1997.
*10.16 -- Employment Agreement by and between
TRIAD and Steve Becsi dated September 9,
1997.
*10.17 -- Employment Agreement by and between
TRIAD and Doug Archer dated September 9,
1997.
*10.18 -- Employment Agreement by and between
TRIAD and Robert Zimardo dated September
9, 1997.
*10.19 -- Employment Agreement by and between
Triad Medical Inc., a California
corporation, and Jack Saladow dated
December 6, 1996.
*21.1 -- Subsidiaries of TRIAD.
**23.1 -- Consent of Arthur Andersen LLP.
*23.2 -- Consent of Porter & Hedges, L.L.P.
(contained in Exhibit 5.1)
*23.3 -- Consent of R. Tucker Coop as nominee for
director.
*23.4 -- Consent of Kelvin J. Pennington as a
nominee for director.
*23.5 -- Consent of Marvin L. Marks as a nominee
for director.
*23.6 -- Consent of Gregory H. Sellards as a
nominee for director.
*23.7 -- Consent of Kent J. Wilken as a nominee
for director.
*23.8 -- Consent of Edward T. Kuklenski as a
nominee for director.
*23.9 -- Consent of Michael W. Thomas as a
nominee for director.
*23.10 -- Consent of John B. Benear, II as nominee
for director.
*24.1 -- Power of Attorney.
**27.1 -- Financial Data Schedule.
- ------------
* Previously filed.
** Filed herewith.
(b) Financial Statement Schedules.
All schedules are omitted because they are not applicable or because the
required information is contained in the Financial Statements or Notes thereto.
II-5
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the Underwriting Agreement,
certificates representing the shares of Common Stock offered hereby in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For the purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as a part of this registration statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
HOUSTON, STATE OF TEXAS, ON NOVEMBER 28, 1997.
TRIAD MEDICAL INC.
By:/s/ WILLIAM C. KLINTWORTH, JR.
WILLIAM C. KLINTWORTH, JR.
CHAIRMAN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 2 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON NOVEMBER 28, 1997.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED
- ------------------------------------------------------ ---------------------------------------------------------
<S> <C>
/s/WILLIAM C. KLINTWORTH, JR. Chairman, President and Chief Executive Officer, Director
WILLIAM C. KLINTWORTH, JR. (Principal Executive Officer)
/s/LANCE C. RUUD Senior Vice President and Chief Financial Officer
LANCE C. RUUD (Principal Financial and Accounting Officer)
* Executive Vice President, Director
CLYDE A. BLANKENSHIP, JR.
* Director
NOLAN LEHMANN
*By: /s/LANCE C. RUUD
LANCE C. RUUD
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
AS ATTORNEY-IN-FACT
</TABLE>
II-7
<PAGE>
APPENDIX
TRIAD MEDICAL INC. GRAPHICS AND RELATED TEXT FOR PROSPECTUS
PAGE 2 (START OF GATE-FOLD)
TRIAD Medical Logo with TRIAD Medical Inc.
National in Scope - Regionally Directed - Locally Focused(sm)
TEXT: (MIDDLE LEFT SIDE OF PAGE)
TRIAD Medical was founded to become a leading national contract sales and
distribution company of specialized medial products designed for the acute care
and alternate site markets.
GRAPHICS:
Upper right corner is a photo of a pharmacy technician filling IV containers
under a laminar flow hood. Below that photo in the center of the page is a photo
of two doctors and two nurses in an operating room performing surgery with an IV
bag hanging above the patient. In the lower left corner of the page is a photo
of a sales representative detailing a physician in his office on a new product.
TEXT (LOWER RIGHT CORNER OF PAGE)
ACROSS THE CONTINUUM
Anesthesiology/Pain Management Products
Cardiovascular/Vascular Products
Critical Care Products
I.V. Therapy Products
Surgical Products
(INSIDE SPREAD OF GATE-FOLD)
TEXT (UPPER LEFT CORNER OF INSIDE PAGE)
TRIAD Medical provides a broad range of specialty products used extensively in
the surgery, anesthesiology, pain management and critical care markets. As a
national specialty sales, service and distribution company, the Company is well
positioned to provide a full range of high technology products seamlessly to the
market.
GRAPHICS (UPPER RIGHT CORNER AND SPREAD INTO THE MIDDLE OF THE INSIDE PAGE):
Upper portion of page a collage of 4 photos depicting (1) a nurse standing next
to a baby in neonatal care using a Pall Biomedical filter,(2) a nurse in a
critical care unit hanging I.V. containers and
1
<PAGE>
showing an I.V. pump and (3) physicians in surgery using a Sharplan Laser System
and (4) nurses and physicians in surgery using a variety of surgical
instruments.
TEXT (MIDDLE ON LEFT SIDE OF INSIDE PAGE)
TRIAD Medical's national network of facilities will help position the expansion
of its biomedical equipment service, repair and rental operations throughout the
United States.
GRAPHICS (LOWER LEFT CORNER OF INSIDE PAGE)
Photo of a technician repairing an infusion pump.
TEXT (MIDDLE OF INSIDE PAGE ON LOWER RIGHT SIDE)
The sale and distribution of specialty medical products require a focused
selling and training effort by representatives. The Company maintains an
experienced sales staff, with its sales representatives averaging 15 years of
medical product sales experience.
GRAPHICS (LOWER RIGHT CORNER OF INSIDE PAGE)
Two photos: one showing a physician sitting at a desk with two sales
representatives detailing products and one shows a group of physicians around a
specialty piece of equipment (exact type of equipment unknown) being trained by
a sales representative.
TEXT (TOP OF OUTSIDE PAGE IN CENTER AND UPPER RIGHT CORNER)
TRIAD Medical Logo with Triad Medical Inc.
National in Scope - Regionally Directed - Locally Focused(sm)
TRIAD Medical delivers solutions to health care providers across the full
continuum of care . . . from the most critical of care areas in a hospital to
the comfort of a patient's home.
GRAPHICS (CENTER OF OUTSIDE PAGE NEAR THE TOP AND SPREADING INTO CENTER OF PAGE)
Collage of four photos (1) a baby in the neonatal care unit, (2) a nurse caring
for a patient's catheter in a home setting with an I.V. pump in the background,
(3) two physicians and two nurses in surgery using surgical instruments with an
I.V. bag hanging on an I.V. pole and (4) a picture of an I.V. bag.
GRAPHICS (LOWER LEFT CORNER OF OUTSIDE PAGE)
Sales representative standing with a nurse and physician next to a patient in a
critical care area detailing the nurse and physician on a new product. Photo has
a TRIAD Medical logo adjacent to it.
2
<PAGE>
TEXT (LOWER RIGHT CORNER OF OUTSIDE PAGE)
TRIAD Medical provides intravenous therapy products to both the acute care and
alternate site markets. The Company believes this broad market focus will
position the Company with greater opportunities for the cross-selling of all its
products.
INSIDE BACK COVER
TEXT (UPPER MIDDLE OF PAGE)
TRIAD Medical Logo with Triad Medical Inc.
National in Scope - Regionally Directed - Locally Focused(sm)
GRAPHICS (MIDDLE AND LOWER RIGHT CORNER OF PAGE)
In the center of the page is a map of the U.S. showing the facility locations
and corporate office locations of TRIAD Medical and directly below it in the
lower right corner is a picture of the TRIAD Medical corporate office in Laguna
Hills, CA.
TEXT (BOTTOM LEFT CORNER OF PAGE)
TRIAD Medical represents over 180 manufacturers and serves customers in all 50
states. The Company believes its national presence, specialized sales and
marketing capabilities will enhance the manufacturers' access to the national
market, reduce costs and provide the Company with opportunities to negotiate
national or regional contracts.
3
EXHIBIT 1.1
Draft of November 21, 1997
4,000,000 SHARES
TRIAD MEDICAL INC.
COMMON STOCK
UNDERWRITING AGREEMENT
DATED DECEMBER ___, 1997
<PAGE>
UNDERWRITING AGREEMENT
December ___, 1997
NATIONSBANC MONTGOMERY SECURITIES, INC.
SMITH BARNEY INC.
WEDBUSH MORGAN SECURITIES
As Representatives of the several Underwriters
c/o NATIONSBANC MONTGOMERY SECURITIES, INC.
600 Montgomery Street
San Francisco, California 94111
Ladies and Gentlemen:
INTRODUCTORY. TRIAD Medical Inc., a Delaware corporation (the "Company"),
proposes to issue and sell to the several underwriters named in SCHEDULE A (the
"Underwriters") an aggregate of 4,000,000 shares (the "Firm Shares") of its
common stock, par value $.001 per share ("Common Stock"). In addition, the
Company has granted to the Underwriters an option to purchase up to an
additional 600,000 shares (the "Optional Shares") of Common Stock, as provided
in Section 2. The Firm Shares and, if and to the extent such option is
exercised, the Optional Shares are herein sometimes collectively called the
"Shares." NationsBanc Montgomery Securities, Inc., Smith Barney Inc. and Wedbush
Morgan Securities have agreed to act as representatives of the several
Underwriters (in such capacity, the "Representatives") in connection with the
offering and sale of the Shares.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (File No.
333-35449), which contains a form of prospectus to be used in connection with
the public offering and sale of the Shares. Such registration statement, as
amended, including the financial statements, exhibits and schedules thereto, in
the form in which it was declared effective by the Commission under the
Securities Act of 1933, as amended, and the rules and regulations promulgated
thereunder (collectively, the "Securities Act"), including any information
deemed to be a part thereof at the time of effectiveness pursuant to Rule 430A
or Rule 434 under the Securities Act, is called the "Registration Statement."
Any registration statement filed by the Company pursuant to Rule 462(b) under
the Securities Act is called the "Rule 462(b) Registration Statement," and from
and after the date and time of filing of the Rule 462(b) Registration Statement
the term "Registration Statement" shall include the Rule 462(b) Registration
Statement. Such prospectus, in the form first used by the Underwriters to
1
<PAGE>
confirm sales of the Shares, is called the "Prospectus." All references in this
Agreement to the Registration Statement, the Rule 462(b) Registration Statement,
a preliminary prospectus, the Prospectus, or any amendments or supplements to
any of the foregoing, shall include any copy thereof filed with the Commission
pursuant to its Electronic Data Gathering, Analysis and Retrieval System
("EDGAR").
The Company hereby confirms its agreements with the Underwriters as
follows:
SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company hereby represents, warrants and covenants to each Underwriter
as follows:
(a) COMPLIANCE WITH REGISTRATION REQUIREMENTS. The Registration Statement
and any Rule 462(b) Registration Statement have been declared effective by the
Commission under the Securities Act. The Company has complied to the
Commission's satisfaction with all requests of the Commission for additional or
supplemental information. No stop order suspending the effectiveness of the
Registration Statement or any Rule 462(b) Registration Statement is in effect
and no proceedings for such purpose have been instituted or are pending or, to
the best knowledge of the Company, are contemplated or threatened by the
Commission.
Each preliminary prospectus and the Prospectus when filed complied in all
material respects with the Securities Act and, if filed by electronic
transmission pursuant to EDGAR, was identical (except as permitted by Regulation
S-T under the Securities Act) to the copy thereof delivered to the Underwriters
for use in connection with the offer and sale of the Shares. Each of the
Registration Statement, any Rule 462(b) Registration Statement and any
post-effective amendment thereto, at the time it became effective, complied in
all material respects with the applicable requirements of the Securities Act and
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading. The Prospectus, as amended or supplemented, as of its
date and at all subsequent times, did not and will not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements therein, in the light of the circumstances under which
they were made, not misleading. The representations and warranties set forth in
the two immediately preceding sentences do not apply to statements in or
omissions from the Registration Statement, any Rule 462(b) Registration
Statement, or any post-effective amendment thereto, or the Prospectus, or any
amendments or supplements thereto, made in reliance upon and in conformity with
information relating to any Underwriter furnished to the Company in writing by
the Representative expressly for use therein. There are no contracts,
instruments or other documents required to be described or referred to in the
Prospectus or to be filed as exhibits to the Registration Statement which have
not been described or referred to or filed as required.
(b) OFFERING MATERIALS FURNISHED TO UNDERWRITERS. The Company has
delivered to each of the Representatives one complete manually signed copy of
the Registration Statement and of each consent and certificate of experts filed
as a part thereof, and conformed copies of the Registration
2
<PAGE>
Statement (without exhibits) and preliminary prospectuses and the Prospectus, as
amended or supplemented, in such quantities and at such places as each of the
Representatives has requested for each of the Underwriters.
(c) DISTRIBUTION OF OFFERING MATERIAL BY THE COMPANY. The Company has not
distributed and will not distribute, prior to the later of the Second Closing
Date (as defined below) and the completion of the Underwriters' distribution of
the Shares, any offering material in connection with the offering and sale of
the Shares other than a preliminary prospectus, the Prospectus or the
Registration Statement.
(d) THE UNDERWRITING AGREEMENT. This Agreement has been duly authorized,
executed and delivered by, and is a valid and binding agreement of, the Company,
enforceable in accordance with its terms, except as rights to indemnification
hereunder may be limited by applicable law and except as that enforceability may
be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally or by general
equitable principles.
(e) AUTHORIZATION OF THE SHARES. The Shares to be purchased by the
Underwriters from the Company have been duly authorized for issuance and sale
pursuant to this Agreement and, when issued and delivered by the Company
pursuant to this Agreement, will be validly issued, fully paid and
nonassessable.
(f) NO APPLICABLE REGISTRATION OR OTHER SIMILAR RIGHTS. There are no
persons with registration or other similar rights to have any equity or debt
securities registered for sale under the Registration Statement or included in
the offering contemplated by this Agreement, except for such rights as have been
duly waived. There is no holder of any securities of the Company or any other
person who has the right, contractual or otherwise, to cause the Company to sell
or otherwise issue to him or her, or permit him or her to underwrite the sale
of, any of the Shares.
(g) NO MATERIAL ADVERSE CHANGE. Except as otherwise disclosed in the
Prospectus, subsequent to the respective dates as of which information is given
in the Prospectus: (i) there has been no material adverse change, or any
development that could reasonably be expected to result in a material adverse
change, in the condition, financial or otherwise, or in the earnings, business,
operations or prospects, whether or not arising from transactions in the
ordinary course of business, of the Company and its subsidiaries (including each
of the entities identified as "Founding Companies" in SCHEDULE B, each of which
(together with any of its subsidiaries) will become a subsidiary of the Company
on the Closing Date pursuant to the acquisitions to be consummated on the First
Closing Date (as herein defined) as described in the Registration Statement (the
"Acquisitions")) (collectively, the "Subsidiaries"), considered as one entity
(any such change is called a "Material Adverse Change"); (ii) the Company and
the Subsidiaries, considered as one entity, have not incurred any material
liability or obligation, indirect, direct or contingent, not in the ordinary
course of business nor entered into any material transaction or agreement not in
the ordinary course of business; and (iii) there has been no dividend or
distribution of any kind declared, paid or
3
<PAGE>
made by the Company or, except for dividends paid to the Company or any of the
other Subsidiaries, by any of the Subsidiaries on any class of capital stock or
repurchase or redemption by the Company or any of the Subsidiaries of any class
of capital stock.
(h) INDEPENDENT ACCOUNTANTS. Arthur Andersen LLP, who have expressed their
opinions with respect to the historical financial statements (which term as used
in this Agreement includes the related notes thereto) filed with the Commission
as a part of the Registration Statement and included in the Prospectus, are
independent public or certified public accountants as required by the Securities
Act.
(i) PREPARATION OF THE FINANCIAL STATEMENTS. The historical financial
statements filed with the Commission as a part of the Registration Statement and
included in the Prospectus present fairly in all material respects the financial
position of each of the Company, TRIAD Holdings, Inc. and its subsidiaries,
Healthcare Technology Delivery, Inc. and its subsidiaries, Sun Medical, Inc.,
Custom Medical Specialties, Inc., Kentec Medical, Inc., Products for Surgery,
Inc. and its subsidiaries, MegaTech Medical, Inc., Omni Medical, Inc. and PCI
Medical, Inc. as of and at the respective dates indicated and the results of
each such company's (and, in the case of each of TRIAD Holdings, Inc.,
Healthcare Technology Delivery, Inc. and Products for Surgery, Inc., their
respective subsidiaries) operations and cash flows for the periods specified and
on the basis described therein, respectively. Such financial statements have
been prepared in conformity with generally accepted accounting principles as
applied in the United States on a consistent basis throughout the periods
involved, except as may be expressly stated in the respective related notes
thereto. The pro forma combined financial statements of the Company and the
Founding Companies, together with the related notes, as set forth in the
Registration Statement, present fairly the information shown therein, have been
prepared in accordance with the applicable provisions of Article 11 of
Regulation S-X promulgated by the Commission with respect to pro forma financial
statements and have been properly compiled on the pro forma bases described
therein, and in the opinion of the Company, the assumptions used in the
preparation thereof are reasonable and the adjustments used therein are
appropriate to give effect to the transactions or circumstances referred to
therein. No other financial statements or supporting schedules, other than the
Financial Data Schedule required by Item 601(c) of Regulation S-K under the
Securities Act, are required to be included in the Registration Statement. The
financial data set forth in the Prospectus under the captions "Prospectus
Summary--Summary Unaudited Pro Forma Combined Financial Data," "Prospectus
Summary--Summary Historical Financial Data for Accounting Acquirer,"
"Capitalization" and "Selected Historical and Pro Forma Combined Financial Data"
fairly present the information set forth therein on a basis consistent with that
of the audited financial statements or the pro forma combined financial
statements, as the case may be, contained in the Registration Statement.
(j) INCORPORATION AND GOOD STANDING OF THE COMPANY AND ITS SUBSIDIARIES.
Each of the Company and the Subsidiaries has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation and has full corporate power and authority to
own, lease and operate its properties and to conduct its business as described
in the Prospectus and (i) in the case of the Company, to enter into and perform
its obligations under this
4
<PAGE>
Agreement and to issue, sell and deliver the Shares to the Underwriters
hereunder and (ii) in the case of the Company and each Subsidiary, as
applicable, to enter into and perform its obligations under each of the
agreements relating to the Acquisitions, which have been included as exhibits to
the Registration Statement (the "Acquisition Agreements") and to carry out the
provisions thereof. Each of the Company and each Subsidiary is duly qualified as
a foreign corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business, except for such
jurisdictions where the failure to so qualify or to be in good standing would
not, individually or in the aggregate, result in a Material Adverse Change. All
of the issued and outstanding capital stock of each Subsidiary (upon giving
effect to the Acquisitions) has been duly authorized and validly issued, is
fully paid and nonassessable and on the closing of the Acquisitions will be
owned by the Company, directly or through one of the other Subsidiaries, free
and clear of any security interest, mortgage, pledge, lien, encumbrance, equity
or claim. Upon giving effect to the Acquisitions, the Company does not own or
control, directly or indirectly, any corporation, association or other entity
other than the Subsidiaries.
(k) CAPITALIZATION AND OTHER CAPITAL STOCK MATTERS. The authorized, issued
and outstanding capital stock of the Company is (after giving effect to the
closing of the Acquisitions and the issuance of the shares of Common Stock
contemplated by the Acquisition Agreements and the issuance of the Shares
pursuant to the terms of this Agreement) as set forth in the Prospectus under
the caption "Capitalization" (other than for subsequent issuances, if any,
pursuant to employee benefit plans described in the Prospectus or upon exercise
of outstanding options or warrants described in the Prospectus). The authorized,
issued and outstanding capital stock of the Company (including the Common Stock)
conform in all material respects to the descriptions thereof contained in the
Prospectus. All of the issued and outstanding shares of Common Stock (other than
the Shares) outstanding as of the First Closing Date (including, without
limitation, the shares of Common Stock to be issued in connection with the
Acquisitions) will have been, as of the First Closing Date, duly authorized and
validly issued, and will be, as of the First Closing Date, fully paid and
nonassessable and have been issued in compliance with federal and state
securities laws. None of the outstanding shares of Common Stock as of the First
Closing Date will have been issued in violation of any preemptive rights, rights
of first refusal or other similar rights to subscribe for or purchase securities
of the Company. There are no authorized or outstanding options, warrants,
preemptive rights, rights of first refusal or other rights to purchase, or
equity or debt securities convertible into or exchangeable or exercisable for,
any capital stock of the Company or any of the Subsidiaries other than those
described in the Prospectus. The description of the Company's stock option and
other stock plans or arrangements, and the options or other rights granted
thereunder, set forth in the Prospectus accurately and fairly presents the
information required to be shown with respect to such plans, arrangements,
options and rights. The form of certificate used to evidence the Common Stock is
in due and proper form and complies with all applicable requirements of the
charter and bylaws of the Company and the General Corporation Law of the State
of Delaware.
(l) ACQUISITION AGREEMENTS. The execution and delivery of, and the
performance by the Company, the Founding Companies and the shareholders of each
Founding Company of their
5
<PAGE>
respective obligations under, the Acquisition Agreements to which they are
parties, respectively, have been duly and validly authorized by the Company, the
Founding Companies and the shareholders of each Founding Company and each
Acquisition Agreement has been duly executed and delivered by the Company and
each Founding Company and Founding Company shareholder which is a party to such
agreement, and constitutes the legal, valid and binding agreement of the Company
and each such Founding Company and Founding Company shareholder, enforceable in
accordance with its terms, except as that enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles and except as the enforceability of the provisions contained therein
relating to restrictions on competition may be limited under applicable law.
(m) STOCK EXCHANGE LISTING AND EXCHANGE ACT REGISTRATION. The Shares and
the other shares of Common Stock that will be outstanding on the Closing Date
have been approved for inclusion on the Nasdaq National Market, and the Common
Stock has been duly registered under the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
(n) NON-CONTRAVENTION OF EXISTING INSTRUMENTS; NO FURTHER AUTHORIZATIONS
OR APPROVALS REQUIRED. Neither the Company nor any of the Subsidiaries is in
violation of its respective charter, by-laws or other organizational documents.
Except as disclosed in the Registration Statement and the Prospectus, neither
the Company nor any of the Subsidiaries is in violation of any law,
administrative regulation or administrative or court decree applicable to the
Company or any Subsidiary or is in default (or, with the giving of notice or
lapse of time, would be in default) ("Default") in the performance of any
obligation, agreement or condition contained in any indenture, mortgage, loan or
credit agreement, note, contract, franchise, lease or other instrument to which
the Company or any of the Subsidiaries is a party or by which it or any of them
may be bound (including, without limitation, the Company's Revolving Credit
Facility with First National Bank of Chicago, as agent, and the lenders named
therein (the "Revolving Credit Facility")), or to which any of the property or
assets of the Company or any of the Subsidiaries is subject (each, an "Existing
Instrument"), except for such violations or Defaults as would not, individually
or in the aggregate, result in a Material Adverse Change. The Company's
execution, delivery and performance of this Agreement and consummation of the
transactions contemplated hereby and by the Prospectus and the Company's and
each of the Subsidiaries' execution and delivery of the Acquisition Agreements
to which it is a party and consummation of the transactions contemplated thereby
(i) has been duly authorized by all necessary corporate action and have not and
will not result in any violation of the provisions of the charter, by-laws or
other organizational documents of the Company or any Subsidiary, (ii) will not
conflict with or constitute a breach of, or Default or a Debt Repayment
Triggering Event (as defined below) under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of the
Company or any of the Subsidiaries pursuant to, or require the consent of any
other party to, any Existing Instrument, except for such conflicts, breaches,
Defaults, liens, charges or encumbrances as would not, individually or in the
aggregate, result in a Material Adverse Change and (iii) will not result in any
violation of any law, administrative regulation or administrative or court
decree applicable to the Company or any Subsidiary. No consent, approval,
authorization or other order of, or registration or filing with, any
6
<PAGE>
court or other governmental or regulatory authority or agency, is required for
(i) the Company's execution, delivery and performance of this Agreement and
consummation of the transactions contemplated hereby and by the Prospectus and
(ii) the Company's and each of the Subsidiaries' execution and delivery of the
Acquisition Agreements to which it is a party and consummation of the
transactions contemplated thereby; except such as have been obtained or made by
the Company or the Subsidiary, as applicable, and are in full force and effect
under the Securities Act, the Exchange Act, applicable state securities or blue
sky laws, the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended,
and the rules thereunder, and from the National Association of Securities
Dealers, Inc. (the "NASD"). As used herein, a "Debt Repayment Triggering Event"
means any event or condition which gives, or with the giving of notice or lapse
of time would give, the holder (or any person acting on such holder's behalf) of
any note, debenture or other evidence of indebtedness (other than indebtedness
to be repaid on the First Closing Date with proceeds from the sale of the Firm
Shares hereunder, as contemplated under the caption "Use of Proceeds" in the
Prospectus) the right to require the repurchase, redemption or repayment of all
or a portion of such indebtedness by the Company or any of the Subsidiaries.
(o) NO MATERIAL ACTIONS OR PROCEEDINGS. Except as otherwise disclosed in
the Prospectus, there are no legal or governmental actions, suits or proceedings
pending or, to the best of the Company's knowledge, threatened (i) against or
affecting the Company or any of the Subsidiaries, (ii) which has as the subject
thereof any officer or director of, or property owned or leased by, the Company
or any of the Subsidiaries or (iii) relating to environmental or discrimination
matters, where in any such case (A) there is a reasonable possibility that such
action, suit or proceeding might be determined adversely to the Company or such
Subsidiary and (B) any such action, suit or proceeding, if so determined
adversely, would reasonably be expected to result in a Material Adverse Change
or adversely affect the consummation of the transactions contemplated by this
Agreement. No labor dispute with the employees of the Company or any of the
Subsidiaries, or, to the best of the Company's knowledge, with the employees of
any principal supplier, contractor or customer of the Company or any Subsidiary,
exists or, to the best of the Company's knowledge, is threatened or imminent,
except for any such disputes as would not, individually or in the aggregate,
result in a Material Adverse Change.
(p) INTELLECTUAL PROPERTY RIGHTS. The Company and each of the Subsidiaries
own or possess enforceable rights to use all trademarks, trade names, patent
rights, copyrights, licenses, approvals, trade secrets and other similar rights
(collectively, "Intellectual Property Rights") described in the Prospectus or
the Acquisition Agreements as being owned by them or any of them or material to
the conduct of their businesses as now conducted; and the expected expiration of
any of such Intellectual Property Rights would not result in a Material Adverse
Change. Neither the Company nor any of the Subsidiaries (A) has received a
notice of, or knows of any basis for, any conflict with the asserted rights of
others with respect to any of the foregoing or (B) has knowledge of any
infringement by any other person or entity with respect to any of the foregoing.
(q) ALL NECESSARY PERMITS, ETC. The Company and each Subsidiary possess
such valid and current certificates, authorizations, licenses or permits
(collectively, "Permits") issued by the
7
<PAGE>
appropriate state, federal or foreign regulatory agencies or bodies necessary to
conduct their respective businesses, except for any Permits as to which the
failure to possess the same would not, individually or in the aggregate, result
in a Material Adverse Change. Neither the Company nor any Subsidiary has
received any notice of proceedings relating to the revocation or modification
of, or non-compliance with, any such Permit, nor does the Company or any
Subsidiary have any reason to believe that any such Permit will not be renewed,
except for such revocations, modifications, failures to be in compliance, or
non-renewals as would not, individually or in the aggregate, result in a
Material Adverse Change. The Company and each of the Subsidiaries have fulfilled
and performed all their respective current material obligations with respect to
such Permits, and no event has occurred that allows, or after notice or lapse of
time, or both, would allow, revocation or termination thereof or result in any
other material impairment of the rights of the holder of any such Permit; and
such Permits contain no restrictions that are materially burdensome to the
Company and the Subsidiaries.
(r) TITLE TO PROPERTIES. The Company and each of the Subsidiaries have
good and marketable title to all the properties and assets reflected as owned in
the financial statements referred to in Section 1(i) above or in the Acquisition
Agreements, in each case free and clear of any security interests, mortgages,
liens, encumbrances, equities, claims and other defects, except as described in
the Registration Statement and the Prospectus and except such as do not
materially and adversely affect the value of such property and do not materially
interfere with the use made or proposed to be made of such property by the
Company or such Subsidiary. The real property, improvements, equipment and
personal property held under lease by the Company or any Subsidiary are held
under valid and enforceable leases, with such exceptions as are not material and
do not materially interfere with the use made or proposed to be made of such
real property, improvements, equipment or personal property by the Company or
such Subsidiary.
(s) TAX LAW COMPLIANCE. Except as disclosed in the Registration Statement
and the Prospectus, the Company and each of the Subsidiaries (i) have filed in a
timely manner all federal, state and foreign income and franchise tax returns
required to be filed by them (or have properly requested extensions thereof),
which returns are complete and accurate, and (ii) have paid all taxes required
to be paid by any of them and, if due and payable, any related or similar
assessment, fine or penalty levied against any of them, except where the failure
to do so would not, individually or in the aggregate, result in a Material
Adverse Change. The Company and each Subsidiary have made adequate charges,
accruals and reserves in the applicable financial statements referred to in
Section 1(i) above in respect of all federal, state and foreign income and
franchise taxes for all periods as to which the tax liability of the Company or
any of the Subsidiaries, as applicable, has not been finally determined. Neither
the Company nor any of the Subsidiaries will incur any material federal or state
income tax liability by reason of any of the Acquisitions.
(t) COMPANY NOT AN "INVESTMENT COMPANY." The Company has been advised of
the rules and requirements under the Investment Company Act of 1940, as amended
(the "Investment Company Act"). The Company is not, and after receipt of payment
for the Shares will not be, an
8
<PAGE>
"investment company" within the meaning of Investment Company Act and will
conduct its business in a manner so that it will not become subject to the
Investment Company Act.
(u) INSURANCE. Each of the Company and the Subsidiaries are insured by
recognized, financially sound and reputable institutions with policies in such
amounts and with such deductibles and covering such risks as are generally
deemed adequate and customary for their businesses including, but not limited
to, policies covering real and personal property owned or leased by the Company
and the Subsidiaries against theft, damage, destruction, acts of vandalism and
earthquakes, and all such policies are in full force and effect. The Company and
each of the Subsidiaries are in compliance with the terms of all such policies
and instruments in all material respects. The Company has no reason to believe
that it or any Subsidiary will not be able to (i) renew its existing insurance
coverage as and when such policies expire or (ii) obtain comparable coverage
from similar institutions as may be necessary or appropriate to conduct its
business as now conducted and at a cost that would not result in a Material
Adverse Change. Neither of the Company nor any Subsidiary has been denied any
insurance coverage which it has sought or for which it has applied. There are no
material claims by the Company or any of the Subsidiaries under any insurance
policy or instrument as to which any insurance company is denying liability or
defending under a reservation of rights clause.
(v) NO PRICE STABILIZATION OR MANIPULATION. The Company has not taken and
will not take, directly or indirectly, any action designed to or that might be
reasonably expected to cause or result in stabilization or manipulation of the
price of the Common Stock to facilitate the sale or resale of the Shares.
(w) RELATED PARTY TRANSACTIONS. There are no business relationships or
related-party transactions involving the Company or any Subsidiary or any other
person required to be described in the Prospectus which have not been described
as required.
(x) NO UNLAWFUL CONTRIBUTIONS OR OTHER PAYMENTS. Neither the Company nor
any of the Subsidiaries nor, to the best of the Company's knowledge, any
employee or agent of the Company or any Subsidiary, has made any contribution or
other payment to any official of, or candidate for, any federal, state or
foreign office in violation of any law or of the character required to be
disclosed in the Prospectus.
(y) ACCOUNTING CONTROLS. The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurances that (i) its
transactions and those of the Subsidiaries are executed in accordance with
management's general or specific authorization; (ii) its transactions and those
of the Subsidiaries are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles as
applied in the United States and to maintain accountability for assets; (iii)
access to its assets and those of the Subsidiaries is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for its assets and those of the Subsidiaries is compared
with existing assets at reasonable intervals and appropriate action is taken
with respect to any differences. The
9
<PAGE>
Company's and each of the Subsidiaries' accounting systems and other
computer-based information systems are currently fully functional and capable of
functioning in the year 2000 and beyond or the software codes utilized therein
are capable of being converted to provide full functionality in the year 2000
and beyond without material expense to the Company or any of the Subsidiaries
and without any significant interruption to or interference with the business
operations or administration of the Company or any of the Subsidiaries.
(z) COMPLIANCE WITH ENVIRONMENTAL LAWS. Except as would not, individually
or in the aggregate, result in a Material Adverse Change, (i) neither the
Company nor any of the Subsidiaries is in violation of any federal, state, local
or foreign law or regulation relating to pollution or protection of human health
or the environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata) or wildlife, including without
limitation, laws and regulations relating to emissions, discharges, releases or
threatened releases of chemicals, pollutants, contaminants, wastes, toxic
substances, hazardous substances, petroleum and petroleum products
(collectively, "Materials of Environmental Concern"), or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Materials of Environmental Concern (collectively,
"Environmental Laws"), which violation includes, but is not limited to,
noncompliance with any permits or other governmental authorizations required for
the operation of the business of the Company or any of the Subsidiaries under
applicable Environmental Laws, or noncompliance with the terms and conditions
thereof, nor has the Company or any of the Subsidiaries received any written
communication, whether from a governmental authority, citizens group, employee
or otherwise, that alleges that the Company or any of the Subsidiaries is in
violation of any Environmental Law; (ii) there is no claim, action or cause of
action filed with a court or governmental authority with respect to which the
Company or any Subsidiary has received notice, no investigation with respect to
which the Company or any Subsidiary has received written notice, and no written
notice by any person or entity alleging potential liability for investigatory
costs, cleanup costs, governmental responses costs, natural resources damages,
property damages, personal injuries, attorneys' fees or penalties arising out
of, based on or resulting from the presence, or release into the environment, of
any Material of Environmental Concern at any location owned, leased or operated
by the Company or any of the Subsidiaries, now or in the past (collectively,
"Environmental Claims"), pending or, to the best of the Company's knowledge,
threatened against the Company or any of the Subsidiaries or any person or
entity whose liability for any Environmental Claim the Company or any of the
Subsidiaries has retained or assumed either contractually or by operation of
law; and (iii) to the best of the Company's knowledge, there are no past or
present actions, activities, circumstances, conditions, events or incidents,
including, without limitation, the release, emission, discharge, presence or
disposal of any Material of Environmental Concern, that reasonably could result
in a violation of any Environmental Law or form the basis of a potential
Environmental Claim against the Company or any of the Subsidiaries or against
any person or entity whose liability for any Environmental Claim the Company or
any of the Subsidiaries has retained or assumed either contractually or by
operation of law.
(aa) ERISA COMPLIANCE. Except as disclosed in the Registration Statement
and the Prospectus, (i) the Company and the Subsidiaries and any "employee
benefit plan" (as defined under
10
<PAGE>
the Employee Retirement Income Security Act of 1974, as amended, and the
regulations and published interpretations thereunder (collectively, "ERISA"))
established or maintained by the Company, any of the Subsidiaries or their
"ERISA Affiliates" (as defined below), respectively, are in compliance in all
material respects with ERISA, (ii) no "reportable event" (as defined under
ERISA) has occurred or is reasonably expected to occur with respect to any
"employee benefit plan" established or maintained by the Company, the
Subsidiaries or any of their ERISA Affiliates, (iii) no "employee benefit plan"
established or maintained by the Company, any of the Subsidiaries or any of
their ERISA Affiliates, respectively, if such "employee benefit plan" were
terminated, would have any "amount of unfunded benefit liabilities" (as defined
under ERISA), (iv) neither the Company, any of the Subsidiaries nor any of their
ERISA Affiliates, respectively, has incurred or reasonably expects to incur any
liability under (A) Title IV of ERISA with respect to termination of, or
withdrawal from, any "employee benefit plan" or (B) Sections 412, 4971, 4975 or
4980B of the Internal Revenue Code of 1986, as amended, and the regulations and
published interpretations thereunder (the "Code") and (v) each "employee benefit
plan" established or maintained by the Company, any of the Subsidiaries or any
of their ERISA Affiliates, respectively that is intended to be qualified under
Section 401(a) of the Code is so qualified and nothing has occurred, whether by
action or failure to act, which would cause the loss of such qualification,
except for such failures to be in compliance, occurrences, unfunded benefit
liabilities, liabilities or failures to qualify as would not, individually or in
the aggregate, result in a Material Adverse Change. "ERISA Affiliate" means,
with respect to the Company or a Subsidiary, any member of any group of
organizations described in Section 414(b),(c),(m) or (o) of the Code of which
the Company or such Subsidiary is a member.
Any certificate signed by an officer of the Company and delivered to any
Representative or to counsel for the Underwriters on the First Closing Date or
the Second Closing Date in connection with this Agreement or any of the
transactions contemplated hereby shall be deemed to be a representation and
warranty by the Company to each Underwriter as to the matters set forth therein.
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE SHARES.
THE FIRM SHARES. The Company agrees to issue and sell to the several
Underwriters the Firm Shares upon the terms herein set forth. On the basis of
the representations, warranties and agreements herein contained, and upon the
terms but subject to the conditions herein set forth, the Underwriters agree,
severally and not jointly, to purchase from the Company the respective number of
Firm Shares set forth opposite their names on SCHEDULE A. The purchase price per
Firm Common Share to be paid by the several Underwriters to the Company shall be
$[___] per share.
THE FIRST CLOSING DATE. Delivery of certificates for the Firm Shares to be
purchased by the Underwriters and payment therefor shall be made at the offices
of NationsBanc Montgomery Securities, Inc., 9 West 57th Street, 40th Floor, New
York, New York (or such other place as may be agreed to by the Company and the
Representatives) at 9:00 a.m., New York time, on [______________], 1997, or such
other time and date not later than 1:30 p.m. New York time , on [_____________],
1997 as the Representatives shall designate by notice to the Company (the time
and date of such closing are called the "First Closing Date"). The Company
hereby acknowledges
11
<PAGE>
that circumstances under which the Representatives may provide notice to
postpone the First Closing Date as originally scheduled include, but are in no
way limited to, any determination by the Company or the Representatives to
recirculate to the public copies of an amended or supplemented Prospectus or a
delay as contemplated by the provisions of Section 10.
THE OPTIONAL SHARES; THE SECOND CLOSING DATE. In addition, on the basis of
the representations, warranties and agreements herein contained, and upon the
terms but subject to the conditions herein set forth, the Company hereby grants
an option to the several Underwriters to purchase, severally and not jointly, up
to an aggregate of 600,000 Optional Shares from the Company at the purchase
price per share to be paid by the Underwriters for the Firm Shares. The option
granted hereunder is for use by the Underwriters solely in covering any
over-allotments in connection with the sale and distribution of the Firm Shares.
The option granted hereunder may be exercised at any time (but not more than
once) upon notice by the Representatives to the Company, which notice may be
given at any time within 30 days from the date of this Agreement. Such notice
shall set forth (i) the aggregate number of Optional Shares as to which the
Underwriters are exercising the option, (ii) the names and denominations in
which the certificates for the Optional Shares are to be registered and (iii)
the time, date and place at which such certificates will be delivered (which
time and date may be simultaneous with, but not earlier than, the First Closing
Date; and in such case the term "First Closing Date" shall refer to the time and
date of delivery of certificates for the Firm Shares and the Optional Shares).
Such time and date of delivery, if subsequent to the First Closing Date, is
called the "Second Closing Date" and shall be determined by the Representatives
and shall not be earlier than three nor later than five full business days after
delivery of such notice of exercise. If any Optional Shares are to be purchased,
each Underwriter agrees, severally and not jointly, to purchase the number of
Optional Shares (subject to such adjustments to eliminate fractional shares as
the Representatives may determine) that bears the same proportion to the total
number of Optional Shares to be purchased as the number of Firm Shares set forth
on SCHEDULE A opposite the name of such Underwriter bears to the total number of
Firm Shares. The Representatives may cancel the option at any time prior to its
expiration by giving written notice of such cancellation to the Company.
PUBLIC OFFERING OF THE SHARES. The Representatives hereby advise the
Company that the Underwriters intend to offer for sale to the public, as
described in the Prospectus, their respective portions of the Shares as soon
after this Agreement has been executed and the Registration Statement has been
declared effective as the Representatives, in their judgment, have determined is
advisable and practicable.
PAYMENT FOR THE SHARES. Payment for the Shares shall be made at the First
Closing Date (and, if applicable, at the Second Closing Date) by wire transfer
of immediately available funds to the order of the Company.
It is understood that the Representatives have been authorized, for their
respective own accounts and the accounts of the several Underwriters, to accept
delivery of and receipt for, and make payment of the purchase price for, the
Firm Shares and any Optional Shares the Underwriters
12
<PAGE>
have agreed to purchase. NationsBanc Montgomery Securities, Inc., individually
and not as the Representative of the Underwriters, may (but shall not be
obligated to) make payment for any Shares to be purchased by any Underwriter
whose funds shall not have been received by the Representatives by the First
Closing Date or the Second Closing Date, as the case may be, for the account of
such Underwriter, but any such payment shall not relieve such Underwriter from
any of its obligations under this Agreement.
DELIVERY OF THE SHARES. The Company shall deliver, or cause to be
delivered, to the Representative for the accounts of the several Underwriters
certificates for the Firm Shares at the First Closing Date, against payment by
wire transfer of immediately available funds of the aggregate purchase price
therefor. The Company shall also deliver, or cause to be delivered, to the
Representative for the accounts of the several Underwriters, certificates for
the Optional Shares the Underwriters have agreed to purchase at the First
Closing Date or the Second Closing Date, as the case may be, against payment by
wire transfer of immediately available funds of the aggregate purchase price
therefor. The certificates for the Shares shall be in definitive form and
registered in such names and denominations as the Representatives shall have
requested at least two full business days prior to the First Closing Date (or
the Second Closing Date, as the case may be) and shall be made available for
inspection on the business day preceding the First Closing Date (or the Second
Closing Date, as the case may be) at a location in New York City as the
Representatives may designate. Time shall be of the essence, and delivery at the
time and place specified in this Agreement is a further condition to the
obligations of the Underwriters.
DELIVERY OF PROSPECTUS TO THE UNDERWRITERS. Not later than 12:01 p.m. on
the second business day following the date the Shares are released by the
Underwriters for sale to the public, the Company shall deliver or cause to be
delivered copies of the Prospectus in such quantities and at such places as the
Representatives shall reasonably request.
SECTION 3. ADDITIONAL COVENANTS.
The Company further covenants and agrees with each Underwriter as follows:
(a) REPRESENTATIVE'S REVIEW OF PROPOSED AMENDMENTS AND SUPPLEMENTS. During
such period beginning on the date hereof and ending on the later of the First
Closing Date or such date, as in the opinion of counsel for the Underwriters,
the Prospectus is no longer required by law to be delivered in connection with
sales by an Underwriter or dealer (the "Prospectus Delivery Period"), prior to
amending or supplementing the Registration Statement (including any registration
statement filed under Rule 462(b) under the Securities Act) or the Prospectus,
the Company shall furnish to the Representatives for review a copy of each such
proposed amendment or supplement, and the Company shall not file any such
proposed amendment or supplement to which any Representative reasonably objects.
(b) SECURITIES ACT COMPLIANCE. After the date of this Agreement, the
Company shall advise the Representatives promptly (and, if requested by the
Representatives, confirm such advice
13
<PAGE>
in writing) of: (i) the receipt of any comments of, or requests for additional
or supplemental information from, the Commission; (ii) the time and date of any
filing of any post-effective amendment to the Registration Statement or any
amendment or supplement to any preliminary prospectus or the Prospectus; (iii)
the time and date that any post-effective amendment to the Registration
Statement becomes effective; and (iv) the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or any
post-effective amendment thereto or of any order preventing or suspending the
use of any preliminary prospectus or the Prospectus, or of any proceedings to
remove, suspend or terminate from listing or quotation the Common Stock from any
securities exchange upon which it is listed for trading or included or
designated for quotation, or of the threatening or initiation of any proceedings
for any of such purposes. If the Commission shall enter any such stop order at
any time, the Company will use its best efforts to obtain the lifting of such
order at the earliest possible moment. Additionally, the Company agrees that it
shall comply with the provisions of Rules 424(b) and 430A, as applicable, under
the Securities Act and will use its reasonable efforts to confirm that any
filings made by the Company under such Rule 424(b) were received in a timely
manner by the Commission.
(c) AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS AND OTHER SECURITIES ACT
MATTERS. If, during the Prospectus Delivery Period, any event shall occur or
condition exist as a result of which it is necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not misleading,
or if in the opinion of the Representatives or counsel for the Underwriters it
is otherwise necessary to amend or supplement the Prospectus to comply with law,
the Company agrees to promptly prepare (subject to Section 3(a) hereof), file
with the Commission and furnish at its own expense to the Underwriters and to
dealers, amendments or supplements to the Prospectus so that the statements in
the Prospectus as so amended or supplemented will not, in the light of the
circumstances when the Prospectus is delivered to a purchaser, be misleading or
so that the Prospectus, as amended or supplemented, will comply with law.
(d) COPIES OF ANY AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS. The
Company agrees to furnish the Representatives, without charge, during the
Prospectus Delivery Period, as many copies of the Prospectus and any amendments
and supplements thereto as the Representatives may reasonably request.
(e) BLUE SKY COMPLIANCE. The Company shall cooperate with the
Representatives and counsel for the Underwriters to qualify or register the
Shares for sale under (or obtain exemptions from the application of) the state
securities or blue sky laws or Canadian provincial securities laws (if
applicable) of those jurisdictions designated by the Representatives, shall
comply with such laws and shall continue such qualifications, registrations and
exemptions in effect so long as required for the distribution of the Shares. The
Company shall not be required to qualify as a foreign corporation or to take any
action that would subject it to general service of process in any such
jurisdiction where it is not presently qualified or where it would be subject to
taxation as a foreign corporation. The Company will advise the Representatives
promptly of the suspension of the qualification or registration of (or any such
exemption relating to) the Shares for offering, sale or trading in any
14
<PAGE>
jurisdiction or any initiation or threat of any proceeding for any such purpose,
and in the event of the issuance of any order suspending such qualification,
registration or exemption, the Company shall use its best efforts to obtain the
withdrawal thereof at the earliest possible moment.
(f) USE OF PROCEEDS. The Company shall apply the net proceeds from the
sale of the Shares sold by it in the manner described under the caption "Use of
Proceeds" in the Prospectus.
(g) TRANSFER AGENT. The Company shall engage and maintain, at its expense,
a registrar and transfer agent for the Common Stock.
(h) EARNINGS STATEMENT. As soon as practicable, the Company will make
generally available to its security holders and to the Representative an
earnings statement (which need not be audited) covering the twelve-month period
ending [_____________], 1998 that satisfies the provisions of Section 11(a) of
the Securities Act.
(i) PERIODIC REPORTING OBLIGATIONS. During the Prospectus Delivery Period
the Company shall file, on a timely basis, with the Commission and the Nasdaq
National Market all reports and documents required to be filed under the
Exchange Act.
(j) AGREEMENT NOT TO OFFER OR SELL ADDITIONAL SECURITIES. During the
period of two years following the date of the Prospectus (the "Lock-Up Period"),
the Company will not, without the prior written consent of NationsBanc
Montgomery Securities, Inc. (which consent may be withheld at the sole
discretion of NationsBanc Montgomery Securities, Inc.), directly or indirectly,
sell, offer, contract or grant any option to sell, pledge, transfer, distribute,
establish an open "put equivalent position" within the meaning of Rule 16a-1(h)
under the Exchange Act or otherwise dispose of, or announce the offering of, or
file any registration statement under the Securities Act in respect of, any
shares of Common Stock, options or warrants to acquire shares of the Common
Stock or securities exchangeable or exercisable for or convertible into shares
of Common Stock (other than as contemplated by this Agreement with respect to
the Shares); PROVIDED, HOWEVER, that the Company may (i) issue shares of Common
Stock in connection with the Acquisitions, (ii) issue shares of Common Stock or
options to purchase Common Stock, or Common Stock upon exercise of options,
pursuant to any warrants, stock option, stock bonus or other stock plan or
arrangement described in the Prospectus, so long as the recipients of those
shares, options or shares issued upon exercise of such options, agree in writing
not to sell, offer, dispose of or otherwise transfer any such shares or options
during the Lock-Up Period without the prior written consent of NationsBanc
Montgomery Securities, Inc. pursuant to an agreement in form and substance
substantially the same as the form set forth in EXHIBIT D hereto (PROVIDED,
HOWEVER, that, if any such recipient is an employee of the Company or any
Subsidiary but is not an executive officer or director of the Company or a
holder of five percent or more of the outstanding shares of Common Stock at any
time during the first 180 days of the Lock-Up Period, then the Lock-Up Period
shall be deemed to have expired as of the end of that 180-day period), and (iii)
issue shares of Common Stock in connection with future acquisitions (provided
that, during the first year of the Lock-Up Period, no more than 3,000,000 shares
in the aggregate are issued in connection with such acquisitions without the
prior written
15
<PAGE>
consent of NationsBanc Montgomery Securities, Inc.), so long as the recipients
of those shares agree in writing not to sell, offer or dispose of or otherwise
transfer any such shares during the first year of the Lock-Up Period without the
prior written consent of NationsBanc Montgomery Securities, Inc. pursuant to an
agreement in form and substance substantially the same as the form set forth in
Exhibit D hereto.
(k) FUTURE REPORTS TO THE REPRESENTATIVES. During the period of five years
hereafter the Company will furnish to the Representatives, in care of
NationsBanc Montgomery Securities, Inc., at 600 Montgomery Street, San
Francisco, CA 94111, Attention: ________________________: (i) as soon as
practicable after the end of each fiscal year, when made available to
stockholders of the Company generally, copies of the Annual Report of the
Company containing the balance sheet of the Company as of the close of such
fiscal year and statements of income, stockholders' equity and cash flows for
the year then ended and the opinion thereon of the Company's independent public
or certified public accountants; (ii) as soon as practicable after the filing
thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly
Report on Form 10-Q, Current Report on Form 8-K or other report filed by the
Company with the Commission, the Nasdaq National Market or any securities
exchange; and (iii) as soon as available, copies of any report or communication
of the Company mailed generally to holders of its capital stock.
SECTION 4. PAYMENT OF EXPENSES. The Company agrees to pay all costs, fees
and expenses incurred in connection with the performance of its obligations
hereunder and in connection with the transactions contemplated hereby, including
without limitation (i) all expenses incident to the issuance and delivery of the
Shares (including all printing and engraving costs), (ii) all fees and expenses
of the registrar and transfer agent of the Common Stock, (iii) all necessary
issue, transfer and other stamp taxes in connection with the issuance and sale
of the Shares to the Underwriters, (iv) all fees and expenses of the Company's
counsel, independent public or certified public accountants and other advisors,
(v) all costs and expenses incurred in connection with the preparation,
printing, filing, shipping and distribution of the Registration Statement
(including financial statements, exhibits, schedules, consents and certificates
of experts), each preliminary prospectus and the Prospectus, and all amendments
and supplements thereto, and this Agreement, (vi) all filing fees, attorneys'
fees and expenses incurred by the Company or the Underwriters in connection with
qualifying or registering (or obtaining exemptions from the qualification or
registration of) all or any part of the Shares for offer and sale under the
state securities or blue sky laws or the provincial securities laws of Canada,
and, if requested by the Representative, preparing and printing a "Blue Sky
Survey" or memorandum, and any supplements thereto, advising the Underwriters of
such qualifications, registrations and exemptions, (vii) the filing fees
incident to, and the reasonable fees and expenses of counsel for the
Underwriters in connection with, the NASD's review and approval of the
Underwriters' participation in the offering and distribution of the Shares,
(viii) the fees and expenses associated with including the Shares on the Nasdaq
National Market, and (ix) the transportation and other expenses incurred by or
on behalf of Company representatives in connection with presentations to
prospective purchasers of the Shares, and (x) all other fees, costs and expenses
referred to in Item 13 of Part II of the Registration Statement. Except
16
<PAGE>
as provided in this Section 4, Section 6, Section 8 and Section 9 hereof, the
Underwriters shall pay their own expenses, including the fees and disbursements
of their counsel.
SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters to purchase and pay for the Shares as
provided herein on the First Closing Date and, with respect to the Optional
Shares, the Second Closing Date, shall be subject to the accuracy of the
representations and warranties on the part of the Company set forth in Section 1
hereof as of the date hereof and as of the First Closing Date as though then
made and, with respect to the Optional Shares, as of the Second Closing Date as
though then made, to the timely performance by the Company of its covenants and
other obligations hereunder, and to each of the following additional conditions:
(a) ACCOUNTANTS' COMFORT LETTER. On the date hereof, the Representatives
shall have received from Arthur Andersen LLP, independent public accountants for
the Company, a letter dated the date hereof addressed to the Underwriters, in
form and substance satisfactory to the Representatives, containing statements
and information of the type ordinarily included in accountant's "comfort
letters" to underwriters, delivered according to Statement of Auditing Standards
No. 72 (or any successor bulletin), with respect to the audited and unaudited
financial statements and certain financial information contained in the
Registration Statement and the Prospectus (and the Representatives shall have
received an additional [___] conformed copies of such accountants' letter for
each of the several Underwriters).
(b) COMPLIANCE WITH REGISTRATION REQUIREMENTS; NO STOP ORDER; NO OBJECTION
FROM NASD. For the period from and after effectiveness of this Agreement and
prior to the First Closing Date and, with respect to the Optional Shares, the
Second Closing Date:
(i) the Company shall have filed the Prospectus with the Commission
(including the information required by Rule 430A under the Securities Act)
in the manner and within the time period required by Rule 424(b) under the
Securities Act; or the Company shall have filed a post-effective amendment
to the Registration Statement containing the information required by such
Rule 430A, and such post-effective amendment shall have become effective;
(ii) no stop order suspending the effectiveness of the Registration
Statement, any Rule 462(b) Registration Statement, or any post-effective
amendment to the Registration Statement, shall be in effect and no
proceedings for such purpose shall have been instituted or threatened by
the Commission; and
(iii) the NASD shall have raised no objection to the fairness and
reasonableness of the underwriting terms and arrangements.
17
<PAGE>
(c) NO MATERIAL ADVERSE CHANGE OR RATINGS AGENCY CHANGE. For the period
from and after the date of this Agreement and prior to the First Closing Date
and, with respect to the Optional Shares, the Second Closing Date:
(i) in the judgment of the Representatives there shall not have
occurred any Material Adverse Change; and
(ii) there shall not have occurred any downgrading, nor shall any
notice have been given of any intended or potential downgrading or of any
review for a possible change that does not indicate the direction of the
possible change, in the rating accorded any securities of the Company or
any of its subsidiaries by any "nationally recognized statistical rating
organization" as such term is defined for purposes of Rule 436(g)(2) under
the Securities Act.
(d) OPINION OF COUNSEL FOR THE COMPANY. On each of the First Closing Date
and the Second Closing Date, the Representative shall have received the
favorable opinion of Porter & Hedges, L.L.P., counsel for the Company, dated as
of such Closing Date, the form of which is attached as EXHIBIT A (and the
Representatives shall have received an additional [___] conformed copies of such
counsel's legal opinion for each of the several Underwriters).
(e) OPINION OF GROUP COUNSEL FOR THE FOUNDING COMPANIES. On the First
Closing Date, the Representatives shall have received the favorable opinion of
Akin, Gump, Strauss, Hauer & Feld, L.L.P., counsel for the Founding Companies
(other than TRIAD Holdings, Inc.) and of Stradling, Yocca, Carlson & Rauth,
counsel for TRIAD Holdings, Inc., each dated as of such Closing Date, the form
of which is attached as EXHIBIT B (and the Representatives shall have received
an additional [___] conformed copies of each of such counsel's legal opinion for
each of the several Underwriters).
(f) OPINION OF LOCAL COUNSEL FOR THE FOUNDING COMPANIES. On the First
Closing Date, the Representatives shall have received the favorable opinion of
each of the local counsel for each of the Founding Companies, as specified on
SCHEDULE C hereto, dated as of such Closing Date, the form of which is attached
as EXHIBIT C (and the Representatives shall have received an additional [____]
conformed copies of such counsel's legal opinion for each of the several
Underwriters).
(g) OPINION OF COUNSEL FOR THE UNDERWRITERS. On each of the First Closing
Date and the Second Closing Date, the Representatives shall have received the
favorable opinion of Baker & Botts, L.L.P., counsel for the Underwriters, dated
as of such Closing Date, with respect to the matters set forth in paragraphs 1,
9, 10, 11 and 12 (with respect to the captions "Description of Capital Stock"
and "Underwriting" under subparagraph (a) only) and the next-to-last paragraph
of EXHIBIT A (and the Representatives shall have received an additional [___]
conformed copies of such counsel's legal opinion for each of the several
Underwriters).
18
<PAGE>
(h) ACQUISITIONS. On the First Closing Date, the Acquisitions shall have
been consummated on the terms set forth in the Registration Statement and the
Acquisition Agreements, without waiver or modification of any material terms or
provisions of any Acquisition Agreement, except as may be approved by the
Representatives.
(i) OFFICERS' CERTIFICATE. On each of the First Closing Date and the
Second Closing Date, the Representatives shall have received a written
certificate executed by the Chief Executive Officer or President of the Company
and the Chief Financial Officer of the Company, dated as of such Closing Date,
to the effect set forth in subsections (b)(ii) and (c)(ii) of this Section 5,
and further to the effect that:
(i) for the period from and after the date of this Agreement and
prior to such Closing Date, there has not occurred any Material Adverse
Change;
(ii) the representations, warranties and covenants of the Company
set forth in Section 1 of this Agreement are true and correct with the
same force and effect as though expressly made on and as of such Closing
Date; and
(iii) the Company has complied with all the agreements herein and
satisfied all the conditions on its part to be performed or satisfied
hereunder at or prior to such Closing Date.
(j) BRING-DOWN COMFORT LETTER. On each of the First Closing Date and the
Second Closing Date, the Representatives shall have received from Arthur
Andersen LLP, independent public accountants for the Company, a letter dated
such date, in form and substance satisfactory to the Representatives, to the
effect that they reaffirm the statements made in the letter furnished by them
pursuant to subsection (a) of this Section 5, except that the specified date
referred to therein for the carrying out of procedures shall be no more than
three business days prior to the First Closing Date or Second Closing Date (and,
in any event, shall not be prior to the date of this Agreement), as the case may
be (and the Representatives shall have received an additional [___] conformed
copies of such accountants' letter for each of the several Underwriters).
(k) LOCK-UP AGREEMENT FROM CERTAIN STOCKHOLDERS OF THE COMPANY. On or
prior to the date hereof, the Company shall have furnished or caused to be
furnished to the Representatives an agreement in substantially the form of
EXHIBIT D hereto (with such modifications thereto as have, in certain
circumstances, been approved by the Representatives) from (i) each of the
directors and officers of the Company, (ii) each stockholder of the Company
(without giving effect to the Acquisitions) and each holder of a warrant or
option to purchase Common Stock and (iii) each person receiving shares of Common
Stock in any Acquisition, and such agreement shall be in full force and effect
on each of the First Closing Date and the Second Closing Date.
(l) ADDITIONAL DOCUMENTS. On or before each of the First Closing Date and
the Second Closing Date, the Representatives and counsel for the Underwriters
shall have received such information, documents and opinions as they may
reasonably require for the purposes of enabling
19
<PAGE>
them to pass upon the issuance and sale of the Shares as contemplated herein, or
in order to evidence the accuracy of any of the representations and warranties,
or the satisfaction of any of the conditions or agreements, herein contained.
If any condition specified in this Section 5 is not satisfied when and as
required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company at any time on or prior to the First
Closing Date and, with respect to the Optional Shares, at any time prior to the
Second Closing Date, which termination shall be without liability on the part of
any party to any other party, except that Section 4, Section 6, Section 8 and
Section 9 shall at all times be effective and shall survive such termination.
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this Agreement is
terminated by the Representatives pursuant to Section 5, Section 7, Section 10
or Section 11(i), (iv) or (v), or if the sale to the Underwriters of the Shares
on the First Closing Date is not consummated because of any refusal, inability
or failure on the part of the Company to perform any agreement herein or to
comply with any provision hereof, the Company agrees to reimburse the
Representatives and the other Underwriters (or such Underwriters as have
terminated this Agreement with respect to themselves), severally, upon demand
for all out-of-pocket expenses that shall have been reasonably incurred by the
Representatives and the Underwriters in connection with the proposed purchase
and the offering and sale of the Shares, including but not limited to fees and
disbursements of counsel, printing expenses, travel expenses, postage, facsimile
and telephone charges.
SECTION 7. EFFECTIVENESS OF THIS AGREEMENT.
This Agreement shall not become effective until the later of (i) the
execution and delivery of this Agreement by all the parties hereto and (ii)
notification by the Commission to the Company and the Representatives of the
effectiveness of the Registration Statement under the Securities Act.
Prior to such effectiveness, this Agreement may be terminated by any party
by notice to each of the other parties hereto, and any such termination shall be
without liability on the part of (a) the Company to any Underwriter, except that
the Company shall be obligated to reimburse the expenses of the Representatives
and the Underwriters pursuant to Sections 4 and 6 hereof, (b) any Underwriter to
the Company or (c) any party hereto to any other party except that the
provisions of Section 8 and Section 9 shall at all times be effective and shall
survive such termination.
SECTION 8. INDEMNIFICATION.
(a) INDEMNIFICATION OF THE UNDERWRITERS. The Company agrees to indemnify
and hold harmless each Underwriter, its officers and employees, and each person,
if any, who controls any Underwriter within the meaning of the Securities Act or
the Exchange Act against any loss, claim, damage, liability or expense, as
incurred, to which such Underwriter or such controlling person may become
subject, under the Securities Act, the Exchange Act or other federal or state
statutory law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such
20
<PAGE>
settlement is effected with the written consent of the Company), insofar as such
loss, claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based (i) upon any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement, or any amendment thereto, including any information deemed to be a
part thereof pursuant to Rule 430A under the Securities Act, or the omission or
alleged omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading; or (ii) upon any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto), or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and to reimburse each
Underwriter and each such controlling person for any and all expenses (including
the reasonable fees and disbursements of counsel chosen by NationsBanc
Montgomery Securities, Inc.) as such expenses are reasonably incurred by such
Underwriter or such controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action; PROVIDED, HOWEVER, that the foregoing indemnity
agreement shall not apply to any loss, claim, damage, liability or expense to
the extent, but only to the extent, arising out of or based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
reliance upon and in conformity with written information furnished to the
Company by the Representatives expressly for use in the Registration Statement,
any preliminary prospectus or the Prospectus (or any amendment or supplement
thereto); and PROVIDED, FURTHER, that with respect to any preliminary
prospectus, the foregoing indemnity agreement shall not inure to the benefit of
any Underwriter from whom the person asserting any loss, claim, damage,
liability or expense purchased Shares, or any person controlling such
Underwriter, if copies of the Prospectus were timely delivered to the
Underwriter pursuant to Section 2 and a copy of the Prospectus (as then amended
or supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such Underwriter
to such person, if required by law so to have been delivered, at or prior to the
written confirmation of the sale of the Shares to such person, and if the
Prospectus (as so amended or supplemented) would have cured the defect giving
rise to such loss, claim, damage, liability or expense. The indemnity agreement
set forth in this Section 8(a) shall be in addition to any liabilities that the
Company may otherwise have.
(b) INDEMNIFICATION OF THE COMPANY, ITS DIRECTORS AND OFFICERS. Each
Underwriter agrees, severally and not jointly, to indemnify and hold harmless
the Company, each of its directors, each of its officers who signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of the Securities Act or the Exchange Act, against any loss, claim,
damage, liability or expense, as incurred, to which the Company, or any such
director, officer or controlling person may become subject, under the Securities
Act, the Exchange Act, or other federal or state statutory law or regulation, or
at common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of such Underwriter), insofar as
such loss, claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based upon any untrue or alleged untrue
statement of a material fact contained in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto), or arises out of or is based upon the omission or alleged omission to
state
21
<PAGE>
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in the Registration Statement, any preliminary
prospectus, the Prospectus (or any amendment or supplement thereto), in reliance
upon and in conformity with written information furnished to the Company by the
Representatives expressly for use therein; and to reimburse the Company, or any
such director, officer or controlling person for any legal and other expense
reasonably incurred by the Company, or any such director, officer or controlling
person in connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action. The Company
hereby acknowledges that the only information that the Underwriters have
furnished to the Company expressly for use in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto) are the statements set forth (A) as the last paragraph on the outside
front cover page of the Prospectus, (B) as the last paragraph on the inside
front cover page of the Prospectus concerning stabilization by the Underwriters
and (C) in the table in the first paragraph and in the second, sixth, eighth and
ninth paragraphs under the caption "Underwriting" in the Prospectus; and the
Underwriters confirm that such statements are correct. The indemnity agreement
set forth in this Section 8(b) shall be in addition to any liabilities that each
Underwriter may otherwise have.
(c) NOTIFICATIONS AND OTHER INDEMNIFICATION PROCEDURES. Promptly after
receipt by an indemnified party under this Section 8 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 8, notify
the indemnifying party in writing of the commencement thereof, but the omission
so to notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party for contribution or otherwise than under
the indemnity agreement contained in this Section 8 or to the extent it is not
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it shall elect,
jointly with all other indemnifying parties similarly notified, by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party; PROVIDED, HOWEVER, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that a conflict may arise between the positions of the indemnifying party and
the indemnified party in conducting the defense of any such action or that there
may be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of such indemnifying
party's election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified
22
<PAGE>
party shall have employed separate counsel in accordance with the proviso to the
next preceding sentence (it being understood, however, that the indemnifying
party shall not be liable for the expenses of more than one separate counsel
(together with local counsel), approved by the indemnifying party (NationsBanc
Montgomery Securities, Inc. in the case of Section 8(b) and Section 9),
representing the indemnified parties who are parties to such action) or (ii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of commencement of the action, in each of which cases the
reasonable fees and expenses of counsel shall be at the expense of the
indemnifying party.
(d) SETTLEMENTS. The indemnifying party under this Section 8 shall not be
liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
against any loss, claim, damage, liability or expense by reason of such
settlement or judgment. Notwithstanding the foregoing sentence, if at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel as contemplated by Section
8(c) hereof, the indemnifying party agrees that it shall be liable for any
settlement of any proceeding effected without its written consent if (i) such
settlement is entered into more than 30 days after receipt by such indemnifying
party of the aforesaid request, (ii) such indemnifying party shall have received
notice of the terms of such settlement at least 15 days prior to such settlement
being entered into and (iii) such indemnifying party shall not have reimbursed
the indemnified party in accordance with such request prior to the date of such
settlement. Notwithstanding the immediately preceding sentence, if at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, an indemnifying party shall
not be liable for any settlement effected without its consent if such
indemnifying party (i) reimburses such indemnified party in accordance with such
request to the extent it in its good faith judgment considers such request to be
reasonable and (ii) provides written notice to the indemnified party
substantiating the unpaid balance as unreasonable, in each such case prior to
the date of such settlement. No indemnifying party shall, without the prior
written consent of the indemnified party, effect any settlement, compromise or
consent to the entry of judgment in any pending or threatened action, suit or
proceeding in respect of which any indemnified party is or could have been a
party and indemnity was or could have been sought hereunder by such indemnified
party, unless such settlement, compromise or consent includes an unconditional
release of such indemnified party from all liability on claims that are the
subject matter of such action, suit or proceeding.
SECTION 9. CONTRIBUTION.
If the indemnification provided for in Section 8 is for any reason held to
be unavailable to or is otherwise insufficient to hold harmless an indemnified
party in respect of any losses, claims, damages, liabilities or expenses
referred to therein, then each indemnifying party shall contribute to the
aggregate amount paid or payable by such indemnified party, as incurred, as a
result of any losses, claims, damages, liabilities or expenses referred to
therein (i) in such proportion as is
23
<PAGE>
appropriate to reflect the relative benefits received by the Company, on the one
hand, and the Underwriters, on the other hand, from the offering of the Shares
pursuant to this Agreement or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Company, on the one hand, and the Underwriters,
on the other hand, in connection with the statements or omissions or
inaccuracies in the representations and warranties herein which resulted in such
losses, claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Company, on the
one hand, and the Underwriters, on the other hand, in connection with the
offering of the Shares pursuant to this Agreement shall be deemed to be in the
same respective proportions as the total net proceeds from the offering of the
Shares pursuant to this Agreement (before deducting expenses) received by the
Company, and the total underwriting discount received by the Underwriters, in
each case as set forth on the front cover page of the Prospectus bear to the
aggregate initial public offering price of the Shares as set forth on such
cover. The relative fault of the Company, on the one hand, and the Underwriters,
on the other hand, shall be determined by reference to, among other things,
whether any such untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact or any such inaccurate or
alleged inaccurate representation or warranty relates to information supplied by
the Company, on the one hand, or the Underwriters, on the other hand, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses, claims,
damages, liabilities and expenses referred to above shall be deemed to include,
subject to the limitations set forth in Section 8(c), any legal or other fees or
expenses reasonably incurred by such party in connection with investigating or
defending any action or claim. The provisions set forth in Section 8(c) with
respect to notice of commencement of any action shall apply if a claim for
contribution is to be made under this Section 9; PROVIDED, HOWEVER, that no
additional notice shall be required with respect to any action for which notice
has been given under Section 8(c) for purposes of indemnification.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 9 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in this Section 9.
Notwithstanding the provisions of this Section 9, no Underwriter shall be
required to contribute any amount in excess of the underwriting commissions
received by such Underwriter in connection with the Shares underwritten by it
and distributed to the public. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to this
Section 9 are several, and not joint, in proportion to their respective
underwriting commitments as set forth opposite their names in SCHEDULE A. For
purposes of this Section 9, each officer and employee of an Underwriter and each
person, if any, who controls an Underwriter within the meaning of the Securities
Act or the
24
<PAGE>
Exchange Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of the Securities Act or the Exchange Act shall have the same rights
to contribution as the Company.
SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS. If, on the
First Closing Date or the Second Closing Date, as the case may be, any one or
more of the several Underwriters shall fail or refuse to purchase Shares that it
or they have agreed to purchase hereunder on such date, and the aggregate number
of Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase does not exceed 10% of the aggregate number of the Shares to
be purchased on such date, the other Underwriters shall be obligated, severally,
in the proportions that the number of Firm Shares set forth opposite their
respective names on SCHEDULE A bears to the aggregate number of Firm Shares set
forth opposite the names of all such nondefaulting Underwriters, or in such
other proportions as may be specified by the Representatives with the consent of
the nondefaulting Underwriters, to purchase the Shares which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date. If, on the First Closing Date or the Second Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase Shares
and the aggregate number of Shares with respect to which such default occurs
exceeds 10% of the aggregate number of Shares to be purchased on such date, and
arrangements satisfactory to the Representatives and the Company for the
purchase of such Shares are not made within 48 hours after such default, this
Agreement shall terminate without liability of any party to any other party
except that the provisions of Section 4, Section 6, Section 8, Section 9 and
this Section 10 shall at all times be effective and shall survive such
termination. In any such case either the Representatives or the Company shall
have the right to postpone the First Closing Date or the Second Closing Date, as
the case may be, but in no event for longer than seven days in order that the
required changes, if any, to the Registration Statement and the Prospectus or
any other documents or arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
10. Any action taken under this Section 10 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
SECTION 11. TERMINATION OF THIS AGREEMENT. Prior to the First Closing Date
this Agreement may be terminated by the Representatives by notice given to the
Company if at any time (i) trading or quotation in any of the Company's
securities shall have been suspended or limited by the Commission or by the
Nasdaq Stock Market, or trading in securities generally on the Nasdaq Stock
Market or the New York Stock Exchange shall have been suspended or limited, or
minimum or maximum prices shall have been generally established on any of such
stock exchanges by the Commission or the NASD; (ii) a general banking moratorium
shall have been declared by any of federal, New York, Delaware or California
authorities; (iii) there shall have occurred any outbreak or escalation of
national or international hostilities or any crisis or calamity, or any change
in the United States or international financial markets, or any substantial
change or development involving
25
<PAGE>
a prospective substantial change in United States' or international political,
financial or economic conditions, as in the judgment of the Representatives is
material and adverse and makes it impracticable to market the Shares in the
manner and on the terms described in the Prospectus or to enforce contracts for
the sale of securities; (iv) in the judgment of the Representatives there shall
have occurred any Material Adverse Change; or (v) the Company or any of the
Subsidiaries shall have sustained a loss by strike, fire, flood, earthquake,
accident or other calamity of such character as in the judgment of the
Representatives may interfere materially with the conduct of the business and
operations of the Company and the Subsidiaries, considered as one entity,
regardless of whether or not such loss shall have been insured. Any termination
pursuant to this Section 11 shall be without liability on the part of (a) the
Company to any Underwriter, except that the Company shall be obligated to
reimburse the expenses of the Representatives and the Underwriters pursuant to
Sections 4 and 6 hereof, (b) any Underwriter to the Company or (c) of any party
hereto to any other party except that the provisions of Section 8 and Section 9
shall at all times be effective and shall survive such termination.
SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers and of the several Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter
or the Company or any of its or their partners, officers or directors or any
controlling person, as the case may be, and will survive delivery of and payment
for the Shares sold hereunder and any termination of this Agreement.
SECTION 13. NOTICES. All communications hereunder shall be in writing and
shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:
If to the Representatives:
c/o NationsBanc Montgomery Securities, Inc.
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 249-5508
Attention: Jeff B. Child
with a copy to:
NationsBanc Montgomery Securities, Inc.
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 249-5553
Attention: David A. Baylor, Esq.
26
<PAGE>
If to the Company:
TRIAD Medical Inc.
23161 Mill Creek Drive, Suite 300
Laguna Hills, California 92653
Facsimile: (714) 770-0727
Attention: Walter D. Wallach
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
SECTION 14. SUCCESSORS. This Agreement will inure to the benefit of and be
binding upon the parties hereto, including any substitute Underwriters pursuant
to Section 10 hereof, and to the benefit of the employees, officers and
directors and controlling persons referred to in Section 8 and Section 9, and in
each case their respective successors and personal representatives, and no other
person will have any right or obligation hereunder. The term "successors" shall
not include any purchaser of the Shares as such from any of the Underwriters
merely by reason of such purchase.
SECTION 15. PARTIAL UNENFORCEABILITY. The invalidity or unenforceability
of any Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision hereof.
If any Section, paragraph or provision of this Agreement is for any reason
determined to be invalid or unenforceable, there shall be deemed to be made such
minor changes (and only such minor changes) as are necessary to make it valid
and enforceable.
SECTION 16. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE
OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN
SUCH STATE.
SECTION 17. GENERAL PROVISIONS. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed in two
or more counterparts, each one of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement may not be amended or modified unless in writing by all of the
parties hereto, and no condition herein (express or implied) may be waived
unless waived in writing by each party for whom the condition is meant to
benefit. The Table of Contents and the Section headings herein are for the
convenience of the parties only and shall not affect the construction or
interpretation of this Agreement.
Each of the parties hereto acknowledges that it is a sophisticated
business person who was adequately represented by counsel during negotiations
regarding the provisions hereof, including, without limitation, the
indemnification provisions of Section 8 and the contribution provisions of
27
<PAGE>
Section 9, and is fully informed regarding said provisions. Each of the parties
hereto further acknowledges that the provisions of Sections 8 and 9 hereto
fairly allocate the risks in light of the ability of the parties to investigate
the Company, its affairs and its business in order to assure that adequate
disclosure has been made in the Registration Statement, any preliminary
prospectus and the Prospectus (and any amendments and supplements thereto), as
required by the Securities Act and the Exchange Act.
28
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to the Company the enclosed copies hereof,
whereupon this instrument, along with all counterparts hereof, shall become a
binding agreement in accordance with its terms.
Very truly yours,
TRIAD MEDICAL INC.
By:____________________________
William C. Klintworth, Jr.
Chief Executive Officer
The foregoing Underwriting Agreement is hereby confirmed and accepted by
the Representatives in San Francisco, California as of the date first above
written.
NATIONSBANC MONTGOMERY SECURITIES, INC.
SMITH BARNEY INC.
WEDBUSH MORGAN SECURITIES
Acting as Representatives of the several Underwriters named in the attached
Schedule A.
By: NATIONSBANC MONTGOMERY SECURITIES, INC.
By:
Name:
29
<PAGE>
SCHEDULE A
NUMBER OF
FIRM SHARES
UNDERWRITERS TO BE PURCHASED
NationsBanc Montgomery Securities, Inc................ __________
Smith Barney Inc...................................... __________
Wedbush Morgan Securities............................. __________
----------
Total 4,000,000
A-1
<PAGE>
SCHEDULE B
FOUNDING COMPANIES
TRIAD Holdings, Inc., a Delaware corporation
Healthcare Technology Delivery, Inc., a Delaware corporation
Sun Medical, Inc., a Texas corporation
Custom Medical Specialties, Inc., an Indiana corporation
Kentec Medical, Inc., a California corporation
Products for Surgery, Inc., a Texas corporation
MegaTech Medical, Inc., a Maryland corporation
Omni Medical, Inc., a Washington corporation
New England Medical Specialties, Inc., a Connecticut corporation
Professional Equipment Co., Inc., a Connecticut corporation
Wilson Medical Specialties, Inc., a Washington corporation
B-1
<PAGE>
SCHEDULE C
LOCAL COUNSEL FOR FOUNDING COMPANIES
FOUNDING COMPANY LOCAL COUNSEL
TRIAD Holdings, Inc. Stradling Yocca Carlson & Rauth,
a Professional Corporation
Healthcare Technology Delivery, Inc. [To Come]
Sun Medical, Inc. [To Come]
Custom Medical Specialties, Inc. [To Come]
Kentec Medical, Inc. [To Come]
Products for Surgery, Inc. [To Come]
MegaTech Medical, Inc. [To Come]
Omni Medical, Inc. [To Come]
New England Medical Specialties, Inc. [To Come]
Professional Equipment Co., Inc. [To Come]
Wilson Medical Specialties, Inc. [To Come]
C-1
<PAGE>
EXHIBIT A
THE FINAL OPINION IN DRAFT FORM SHOULD BE ATTACHED AS EXHIBIT A AT THE TIME THIS
AGREEMENT IS EXECUTED.
Opinion of counsel for the Company to be delivered pursuant to Section
5(d) of the Underwriting Agreement. References to the Prospectus in this EXHIBIT
A include any supplements thereto at the Closing Date.
1. The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware.
2. The Company has full corporate power and authority to own, lease and
operate its properties and to conduct its business as now being conducted and as
proposed to be conducted as described in the Prospectus and to (i) enter into
and perform its obligations under the Underwriting Agreement and to issue, sell
and deliver the Shares to the Underwriters as provided therein and (ii) enter
into and perform its obligations under each of the Acquisition Agreements and to
carry out the provisions thereof.
3. The Company is duly qualified as a foreign corporation to transact
business and is in good standing in the State of California and in each other
jurisdiction in which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business, except for such
jurisdictions (other than the State of California) where the failure to so
qualify or to be in good standing would not, individually or in the aggregate,
result in a Material Adverse Change.
4. Each Subsidiary has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has full corporate power and authority to own, lease and operate
its properties and to conduct its business as now being conducted and as
proposed to be conducted as described in the Prospectus and, to the knowledge of
such counsel, is duly qualified as a foreign corporation to transact business
and is in good standing in each jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of property or the
conduct of business, except for such jurisdictions where the failure to so
qualify or to be in good standing would not, individually or in the aggregate,
result in a Material Adverse Change.
5. All of the issued and outstanding capital stock of each Subsidiary
(upon giving effect to the Acquisitions) has been duly authorized and validly
issued, is fully paid and nonassessable and on the closing of the Acquisitions
will be owned by the Company, directly, or through one of the other
Subsidiaries, free and clear of any security interest, mortgage, pledge, lien,
encumbrance, equity or, to the knowledge of such counsel, any pending or
threatened claim, except for the security interests therein in favor of the
lenders under the Revolving Credit Facility securing the obligations thereunder.
1
<PAGE>
6. The authorized, issued and outstanding capital stock of the Company
(including the Common Stock) conforms in all material respects to the
descriptions thereof set forth in the Prospectus. After giving effect to the
closing of the Acquisitions and the issuance of the shares of Common Stock
contemplated by the Acquisition Agreements, but without giving effect to the
issuance of the Shares pursuant to the terms of the Underwriting Agreement, the
Company has issued and outstanding _________ shares of Common Stock and no
shares of preferred stock. All of those outstanding shares of Common Stock (a)
have been duly authorized and validly issued, (b) are fully paid and
nonassessable, (c) were not issued in violation of or subject to any preemptive
rights, rights of first refusal or similar rights under the Company's charter,
bylaws or other organizational documents, the laws of the State of Delaware or,
to such counsel's knowledge, otherwise and (d) to such counsel's knowledge, have
been issued in compliance with the registration and qualification requirements
of federal and state securities laws. The form of certificate used to evidence
the Common Stock is in due and proper form and complies with all applicable
requirements of the charter and bylaws of the Company and the General
Corporation Law of the State of Delaware. The description of the Company's stock
option and other stock plans or arrangements, and the options or other rights
granted thereunder, set forth in the Prospectus accurately and fairly presents
in all material respects the information required to be shown with respect to
such plans, arrangements, options and rights.
7. No stockholder of the Company or any other person has any preemptive
right, right of first refusal or other similar right to subscribe for or
purchase securities of the Company arising (a) by operation of the charter or
bylaws of the Company or the General Corporation Law of the State of Delaware or
(b) to the knowledge of such counsel, otherwise.
8. The Underwriting Agreement has been duly authorized, executed and
delivered by, and is a valid and binding agreement of, the Company, enforceable
against the Company in accordance with its terms, except as rights to
indemnification thereunder may be limited by applicable law and except as that
enforceability may be limited by (i) any applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally, (ii) general equitable principles (regardless of
whether that enforceability is considered in a proceeding in equity or at law)
and (iii) any implied covenant of good faith or fair dealing, and except as
rights to indemnity and contribution thereunder may be limited by applicable
Federal or state laws.
9. The Shares to be purchased by the Underwriters from the Company have
been duly authorized for issuance and sale pursuant to the Underwriting
Agreement and, when issued and delivered by the Company pursuant to the
Underwriting Agreement against payment of the consideration set forth therein,
will be validly issued, fully paid and nonassessable.
10. Each of the Registration Statement and the Rule 462(b) Registration
Statement, if any, has been declared effective by the Commission under the
Securities Act. To the knowledge of such counsel, no stop order suspending the
effectiveness of either of the Registration Statement or the Rule 462(b)
Registration Statement, if any, has been issued under the Securities Act and no
2
<PAGE>
proceedings for such purpose have been instituted or are pending or are
contemplated or threatened by the Commission. Any required filing of the
Prospectus and any supplement thereto pursuant to Rule 424(b) under the
Securities Act has been made in the manner and within the time period required
by such Rule 424(b).
11. The Registration Statement, including any Rule 462(b) Registration
Statement, the Prospectus and each amendment or supplement to the Registration
Statement and the Prospectus, as of their respective effective or issue dates
(other than the financial statements and the notes thereto and the auditors'
reports thereon and the other financial data included therein, as to which no
opinion need be rendered) complied as to form in all material respects with the
applicable requirements of the Securities Act.
12. The statements (a) in the Prospectus under the captions "Risk
Factors--Government Regulation," "Risk Factors--Potential Effect of Shares
Eligible for Future Sale on Price of Common Stock," "Risk Factors--Preferred
Stock; Potential Anti-Takeover Effects," "The Company--Summary of Terms of the
Acquisitions," "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Pro Forma Combined--Liquidity and Capital Resources,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--THI--Liquidity and Capital Resources," "Business--Manufacturer
Relationships," "Business--Facilities," "Business--Government Regulation,"
"Business--Litigation and Insurance," "Management--Executive Compensation;
Employment Agreements," "Management--Incentive Plan," "Certain Transactions,"
"Shares Eligible for Future Sale," "Description of Capital Stock" and
"Underwriting" and (b) in Item 14 and Item 15 of Part II of the Registration
Statement, insofar as such statements constitute matters of law, summaries of
legal matters, the Company's charter or by-law provisions, documents or legal
proceedings, or legal conclusions, has been reviewed by such counsel and fairly
present and summarize, in all material respects, the matters referred to
therein.
13. To the knowledge of such counsel, there are no legal or governmental
actions, suits or proceedings pending or threatened which are required to be
disclosed in the Registration Statement, other than those disclosed therein.
14. To the knowledge of such counsel, there are no Existing Instruments
required to be described or referred to in the Prospectus or to be filed as
exhibits to the Registration Statement other than those described or referred to
therein or filed as exhibits thereto, respectively; and the descriptions thereof
and references thereto are correct in all material respects.
15. No consent, approval, authorization or other order of, or registration
or filing with, any court or other governmental or regulatory authority or
agency is required for the Company's execution, delivery and performance of the
Underwriting Agreement and consummation of the transactions contemplated thereby
and by the Prospectus, except as required under the Securities Act, the Exchange
Act, applicable state securities or blue sky laws and from the NASD.
3
<PAGE>
16. The execution and delivery of the Underwriting Agreement by the
Company and the performance by the Company of its obligations thereunder: (a)
have been duly authorized by all necessary corporate action on the part of the
Company; (b) will not result in any violation of the provisions of the charter
or bylaws of the Company or any Subsidiary; (c) will not conflict with or
constitute a breach of, or Default or a Debt Repayment Triggering Event under,
or result in the creation or imposition of any lien, charge or encumbrance upon
any property or assets of the Company or any of its Subsidiaries pursuant to, or
require the consent of any other party to, (i) the Revolving Credit Facility or
(ii) to the best knowledge of such counsel, any other Existing Instrument which
has been described in or filed as an exhibit to the Registration Statement,
except for such conflicts, breaches, defaults, Debt Repayment Triggering Events,
liens, charges and encumbrances as would not, and such consents the absence of
which would not, individually or in the aggregate, result in a Material Adverse
Change; and (d) to the knowledge of such counsel, will not result in any
violation of any law, administrative regulation or administrative or court
decree applicable to the Company or any Subsidiary.
17. The Shares and the other shares of Common Stock that will be
outstanding on the Closing Date have been approved for inclusion on the Nasdaq
National Market.
18. The Company is not, and after receipt of payment for the Shares will
not be, an "investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act.
19. To the knowledge of such counsel, there are no persons with (a)
registration or other similar rights to have any equity or debt securities
registered for sale under the Registration Statement or included in the offering
contemplated by the Underwriting Agreement or (b) any right, contractual or
otherwise, to cause the Company to sell or otherwise issue to them, or to permit
them to underwrite the sale of, any of the Shares.
20. To the knowledge of such counsel, neither the Company nor any
Subsidiary is in violation of its charter, bylaws or other organizational
documents or any law, administrative regulation or administrative or court
decree applicable to the Company or any Subsidiary or is in Default in the
performance or observance of any obligation, agreement, covenant or condition
contained in any Existing Instrument which has been described in or filed as an
exhibit to the Registration Statement, except in each such case for such
violations or Defaults as would not, individually or in the aggregate, result in
a Material Adverse Change.
21. The execution and delivery of each of the Acquisition Agreements by
the Company and the performance by the Company of its obligations thereunder,
respectively: (a) have been duly authorized by all necessary corporate action on
the part of the Company; (b) have not and will not result in any violation of
the provisions of the charter, bylaws or other organizational documents of the
Company or any Subsidiary; (c) will not conflict with or constitute a breach of,
or Default or a Debt Repayment Triggering Event under, or result in the creation
or imposition of any lien, charge or encumbrance upon any property or assets of
the Company or any of its Subsidiaries pursuant to,
4
<PAGE>
or require the consent of any other party to, (i) the Revolving Credit Facility
or (ii) to the knowledge of such counsel, any other Existing Instrument which
has been described in or filed as an exhibit to the Registration Statement,
except for such conflicts, breaches, defaults, Debt Repayment Triggering Events,
liens, charges and encumbrances as would not, and such consents the absence of
which would not, individually or in the aggregate, result in a Material Adverse
Change; and (d) to the knowledge of such counsel, will not result in any
violation of any law, administrative regulation or administrative or court
decree applicable to the Company or any Subsidiary which has been described in
or filed as an exhibit to the Registration Statement, except for such conflicts,
breaches, defaults, Debt Repayment Triggering Events, liens, charges and
encumbrances as would not, and such consents the absence of which would not,
individually or in the aggregate, result in a Material Adverse Change.
22. Each of the Acquisition Agreements has been duly executed and
delivered by the Company and is a legal, valid and binding agreement of the
Company, enforceable in accordance with its terms, except as that enforceability
may be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally or by general
equitable principles (regardless of whether that enforceability is considered in
a proceeding in equity or at law), and except as the enforceability of the
provisions contained in the Acquisition Agreements establishing restrictions on
competition may be limited by applicable Federal or state laws.
23. Each of the Acquisitions has been consummated pursuant to the terms of
the Acquisition Agreement related thereto.
In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the Company,
representatives of the independent public accountants for the Company and with
representatives of the Underwriters at which the contents of the Registration
Statement and the Prospectus, and any supplements or amendments thereto, and
related matters were discussed and, although such counsel has not undertaken to
determine independently, and is not passing upon and does not assume any
responsibility for, the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus (other than as
specified above), and any supplements or amendments thereto, on the basis of the
foregoing, nothing has come to their attention which would lead them to believe
that either the Registration Statement or any amendments thereto, at the time
the Registration Statement or such amendments became effective, contained an
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading
or that the Prospectus, as of its date or at the First Closing Date or the
Second Closing Date, as the case may be, contained an untrue statement of a
material fact or omitted to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading (it being understood that such counsel need express no
belief as to the financial statements or schedules or other financial or
statistical data derived therefrom, included in the Registration Statement or
the Prospectus or any amendments or supplements thereto).
5
<PAGE>
In rendering such opinion, such counsel may rely (a) as to matters (i)
involving the application of laws of any jurisdiction other than the General
Corporation Law of the State of Delaware, the laws of the State of New York or
the State of Texas or the federal law of the United States or (ii) concerning
the Subsidiaries as set forth in paragraphs 4, 20 and 21 above, to the extent
they deem proper and specified in such opinion, upon the opinion (which shall be
dated the First Closing Date or the Second Closing Date, as the case may be,
shall be satisfactory in form and substance to the Underwriters, shall expressly
state that the Underwriters may rely on such opinion as if it were addressed to
them and shall be furnished to the Representative) of other counsel of good
standing whom they believe to be reliable and who are satisfactory to counsel
for the Underwriters; PROVIDED, HOWEVER, that such counsel shall further state
that they believe that they and the Underwriters are justified in relying upon
such opinion of other counsel, and (b) as to matters of fact, to the extent they
deem proper, on certificates of responsible officers of the Company and public
officials.
6
<PAGE>
Triad Healthcare Corporation, et al.-1- ______________ ___, 1997
EXHIBIT B
[Letterhead of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
or Stradling, Yocca, Carlson & Rauth, as applicable]
______________ ___, 1997
TRIAD Medical Inc.
23161 Mill Creek Drive, Suite 300
Laguna Hills, California 92653
NationsBanc Montgomery Securities, Inc.
Smith Barney Inc.
Wedbush Morgan Securities
as Representatives of the several Underwriters
c/o NationsBanc Montgomery Securities, Inc.
600 Montgomery Street
San Francisco, California 94111
Gentlemen:
We have acted as counsel to TRIAD Holdings, Inc., a Delaware corporation
("THI"), Custom Medical Specialties, Inc., an Indiana corporation ("Custom"),
Healthcare Technology Delivery, Inc., a Delaware corporation ("HTD"), Kentec
Medical, Inc., a California corporation ("Kentec"), MegaTech Medical, Inc., a
Maryland corporation ("MegaTech"), New England Medical Specialties, Inc., a
Connecticut corporation ("NEMS"), Omni Medical, Inc., a Washington corporation
("Omni Medical"), Products for Surgery, Inc., a Texas corporation ("PSI"),
Professional Equipment Co., Inc., a Connecticut corporation ("Professional
Equipment"), Sun Medical, Inc., a Texas corporation ("Sun"), and Wilson Medical
Specialties, Inc., a Washington corporation ("Wilson") (THI, Custom, HTD,
Kentec, MegaTech, NEMS, Omni Medical, PSI, Professional Equipment, Sun and
Wilson each being a "Founding Company" and, collectively, the "Founding
Companies"), in connection with the following agreements, each dated as of
September 9, 1997 (each being an "Acquisition Agreement" and, collectively, the
"Acquisition Agreements"): (i) the Agreement and Plan of Reorganization among
TRIAD Medical Inc. ("TRIAD"), TRIAD Acquisition, Inc., a Delaware corporation,
THI and the stockholders of THI, (ii) the Agreement and Plan of Reorganization
among TRIAD, Custom Acquisition, Inc., an Indiana corporation, Custom and the
sole stockholder of Custom, (iii) the Agreement and Plan of Reorganization among
TRIAD, HTD Acquisition, Inc., a Delaware corporation, HTD and the stockholders
of HTD, (iv) the Agreement and Plan of Reorganization among TRIAD, Kentec
Acquisition, Inc., a California corporation, Kentec and the
<PAGE>
Triad Healthcare Corporation, et al.-2- ______________ ___, 1997
sole stockholder of Kentec, (v) the Agreement and Plan of Reorganization among
TRIAD, MegaTech Acquisition, Inc., a Maryland corporation, MegaTech and the
stockholders of MegaTech, (vi) the Agreement and Plan of Reorganization among
TRIAD, NEMS Acquisition, Inc., a Connecticut corporation, NEMS and the
stockholders of NEMS, (vii) the Agreement and Plan of Reorganization among
TRIAD, Omni Acquisition, Inc., a Washington corporation, Omni Medical and the
stockholders of Omni Medical, (viii) the Agreement and Plan of Reorganization
among TRIAD, PFS Acquisition, Inc., a Texas corporation, PSI and the
stockholders of PSI, (ix) the Agreement and Plan of Reorganization among TRIAD,
Professional Acquisition, Inc., a Connecticut corporation, Professional
Equipment and the stockholders of Professional Equipment, (x) the Agreement and
Plan of Reorganization among TRIAD, Sun Acquisition, Inc., a Texas corporation,
Sun and the sole stockholder of Sun and (xi) the Agreement and Plan of
Reorganization among TRIAD, Wilson Acquisition, Inc., a Washington corporation,
Wilson and the stockholders of Wilson. This opinion is delivered to you pursuant
to Section 7.04(a)(ii)(B)(2) of each of the Acquisition Agreements and Section
5(e) of the Underwriting Agreement dated __________ ___, 1997 (the "Underwriting
Agreement"), among TRIAD and NationsBanc Montgomery Securities, Inc., Smith
Barney Inc. and Wedbush Morgan Securities, individually and as representatives
of the several underwriters named in Schedule A thereto. Except where otherwise
indicated, capitalized terms used and not otherwise defined herein have the
meanings given to them in the Uniform Provisions for the Acquisition of Founding
Companies, which is incorporated by reference into and forms a part of each of
the Acquisition Agreements.
We have examined the originals, or copies certified or otherwise
identified to our satisfaction, of the Acquisition Agreements, the respective
Certificates of Merger referred to in (and as defined in) the Acquisition
Agreements, the Charter Documents, each as amended to date, of each of the
Founding Companies, corporate records of each of the Founding Companies,
including minute books as furnished to us by the Founding Companies,
certificates of public officials and of representatives of the Founding
Companies and such statutes and other instruments and documents as we have
deemed appropriate as a basis for the opinions hereinafter expressed.
In rendering the following opinions, we have relied on the respective
representations and warranties of the Founding Companies and their respective
stockholders contained in the Acquisition Agreements and in certificates of
officers of the Founding Companies with respect to the accuracy of the factual
matters that form the basis for any of the opinions contained herein. In making
our examination, we have assumed, without independent investigation, that all
signatures on documents examined by us are genuine, all documents submitted to
us as originals are authentic and all documents submitted to us as certified or
photostatic copies of original documents conform to those original documents and
all those original documents are authentic. In addition, we have assumed the due
authorization, execution and delivery of all documents referred to herein by the
parties thereto other than the Founding Companies and their respective
stockholders.
<PAGE>
Triad Healthcare Corporation, et al.-3- ______________ ___, 1997
On the basis of the foregoing, and subject to the assumptions, limitations
and qualifications hereinafter set forth, we are of the opinion that:
1. Each Acquisition Agreement has been duly executed and delivered by the
Founding Company party thereto and constitutes the legal, valid and binding
obligation of that Founding Company, enforceable against that Founding Company
in accordance with its terms, except as that enforceability may be subject to
the effect of (a) any applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting the enforcement of creditors' rights
generally, (b) general principles of equity (regardless of whether that
enforceability is considered in a proceeding in equity or at law) and (c) any
implied covenant of good faith and fair dealing. Each Acquisition Agreement has
been duly executed and delivered by each of the stockholders of the Founding
Company party thereto and constitutes the legal, valid and binding obligation of
each of those stockholders, enforceable against each of those stockholders in
accordance with its terms, except as that enforceability may be subject to the
effect of (a) any applicable bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting the enforcement of creditors' rights generally, (b)
general principles of equity (regardless of whether that enforceability is
considered in a proceeding in equity or at law) and (c) any implied covenant of
good faith and fair dealing.
2. Neither the execution, delivery and performance of the Acquisition
Agreements nor the consummation of the transactions contemplated thereby will
(a) violate, breach or constitute a default under (i) any Governmental
Requirement known to us and applicable to any of the Founding Companies or (ii)
any Material Agreement of any of the Founding Companies known to us or (b) cause
or result in the imposition of, or afford any Person the right to obtain, any
Lien upon any property or assets of any of the Founding Companies (or upon any
revenues, income or profits of any of the Founding Companies therefrom) pursuant
to any such Material Agreement.
3. Except for the filings of the Certificates of Merger with the
applicable Governmental Authorities, no Governmental Approvals are required to
be obtained, and no reports or notices or filings with any Governmental
Authority are required to be made, by any Founding Company or any stockholder of
any Founding Company for the execution, delivery or performance by each Founding
Company of the Acquisition Agreement to which it is a party, the enforcement
against that Founding Company and its stockholders of their respective
obligations thereunder or the effectuation of the merger or the other
transactions contemplated thereby to be effected at or prior to the Closing.
4. To our knowledge, there is no pending or threatened litigation that (a)
questions the validity of any Acquisition Agreement or any action taken or to be
taken by any Founding Company or any stockholder of any Founding Company in
connection with the Acquisition Agreements, at law or in equity, before or by
any Governmental Authority or before any arbitrator or (b) if adversely
determined, would have a material adverse effect (i) on the condition (financial
or other), earnings, business, operations or prospects of any Founding Company,
(ii) on the ability of any Founding
<PAGE>
Triad Healthcare Corporation, et al.-4- ______________ ___, 1997
Company to perform its obligations under the Acquisition Agreement to which it
is a party or (iii) on the ability of any stockholder of any Founding Company to
perform his, her or its obligations under the Acquisition Agreement to which he,
she or it is a party.
5. Each of the mergers contemplated by the Acquisition Agreements has been
consummated pursuant to the terms of the Acquisition Agreement related thereto.
In the opinions set forth above, phrases such as "to our knowledge,"
"known to us" and those with equivalent wording refer to the conscious awareness
of information by the lawyers of this Firm who have prepared this opinion,
signed this letter or been actively involved in assisting and advising the
Founding Companies and their stockholders in connection with the negotiation,
execution and delivery of the Acquisition Agreement and related matters, without
any independent investigation by any lawyer of this Firm.
The opinions expressed in paragraph 1 above are subject to the additional
qualification that we express no opinion as to the enforceability of (a) any
severability or reformation provisions contained in any Acquisition Agreement,
(b) any provisions in any Acquisition Agreement which purport to entitle a party
to indemnification in respect of any matter arising under any securities laws or
to the extent indemnification in respect of any matter would otherwise be
against public policy, (c) any provisions of any Acquisition Agreement
purporting to establish a right to enforce a covenant or restriction by
injunctions or restraining orders or (d) any provisions of any Acquisition
Agreement that have the effect of prohibiting oral amendments or waivers of any
provisions of those documents.
This opinion and the matters addressed herein are as of the date hereof,
and we undertake no, and hereby disclaim any, obligation to advise you of any
change in any matter set forth herein occurring after the date hereof. This
opinion is being furnished to you for use solely in connection with the
transactions being consummated pursuant to the Acquisition Agreements or the
Underwriting Agreement. No other use or distribution of this opinion may be made
without our prior written consent, except that this opinion may be provided to
and relied upon by ______________, as Agent, and the other [Lenders] parties to
the [Credit Agreement] dated __________ ___, 1997 with TRIAD.
Very truly yours,
<PAGE>
TRIAD Medical Inc., et al. -1- ______________ ___, 1997
EXHIBIT C
[Letterhead of Local Counsel to Acquired Company]
___________ ___, 1997
TRIAD Medical Inc.
23161 Mill Creek Drive, Suite 300
Laguna Hills, California 92653
NationsBanc Montgomery Securities, Inc.
Smith Barney Inc.
Wedbush Morgan Securities
as Representatives of the several Underwriters
c/o NationsBanc Montgomery Securities, Inc.
600 Montgomery Street
San Francisco, California 94111
Gentlemen:
We have acted as counsel to _______________, a corporation
_________________, a _____________ corporation (the "Company"), ________________
and _______________ (together, the "Stockholders"), in connection with the
Agreement and Plan of Reorganization dated as of September 9, 1997 (the
"Acquisition Agreement"), by and among TRIAD Medical Inc., a Delaware
corporation ("TRIAD"), ___________ Acquisition, Inc., a _____________
corporation ("TRIAD Sub"), the Company and the Stockholders. This opinion is
delivered to you pursuant to Section 7.04(a)(ii)(B)(2) of the Acquisition
Agreement and Section 5(f) of the Underwriting Agreement dated _______________
___, 1997 (the "Underwriting Agreement") by and between TRIAD and NationsBanc
Montgomery Securities, Inc., Smith Barney Inc. and Wedbush Morgan Securities,
individually and as representatives of the several underwriters named in
Schedule A thereto. Capitalized terms used and not otherwise defined herein have
the meanings given to them in the Acquisition Agreement.
We have examined the originals, or copies certified or otherwise
identified to our satisfaction, of the Acquisition Agreement, the Certificate of
Merger dated ______________ ___, 1997 with respect to the Merger between TRIAD
Sub and the Company, [the Employment Agreement[s] dated as of September 9, 1997,
between the Company and [each of] _______________ (the "Employment
Agreement[s]"),] the Charter Documents, each as amended to date, of the Company,
corporate
<PAGE>
TRIAD Medical Inc., et al. -2- ______________ ___, 1997
records of the Company, including minute books as furnished to us by the
Company, certificates of public officials and of representatives of the Company
and such statutes and other instruments and documents as we have deemed
appropriate as a basis for the opinions hereinafter expressed.
In rendering the following opinions, we have relied on the respective
representations and warranties of the Stockholders and the Company contained in
the Acquisition Agreement and in certificates of the Stockholders and of
officers of the Company with respect to the accuracy of the factual matters that
form the basis for any of the opinions contained herein. In making our
examination, we have assumed, without independent investigation, that all
signatures on documents examined by us are genuine, all documents submitted to
us as originals are authentic and all documents submitted to us as certified or
photostatic copies of original documents conform to those original documents and
all those original documents are authentic. In addition, we have assumed the due
authorization, execution and delivery of all documents referred to herein by the
parties thereto other than the Stockholders and the Company and the due
authority of all persons executing such documents except the Stockholders and
the persons executing those documents on behalf of the Company.
On the basis of the foregoing, and subject to the assumptions, limitations
and qualifications hereinafter set forth, we are of the opinion that:
1. The Company is a corporation duly organized, validly existing and in
good standing under the laws of the [State][Commonwealth] of ____________ and
has all requisite corporate power and authority to own and operate its
properties, to lease the properties it operates under lease and to conduct its
business as currently conducted. [The Company is duly qualified as a foreign
corporation to do business and is in good standing in every jurisdiction outside
the [State][Commonwealth] of _________________ in which the failure to so
qualify would have a material adverse effect on its business.][The Company is
not required to be qualified as a foreign corporation to do business in any
jurisdiction in which the failure to so qualify would have a material adverse
effect on its business.] To our knowledge, the Company is not in violation of
any provision of its Charter Documents.
2. The Company has all requisite corporate power and authority to execute,
deliver and perform its obligations under the Acquisition Agreement and to
effectuate the Merger and the other transactions contemplated thereby to be
effected at or prior to the Closing. The execution and delivery of the
Acquisition Agreement by the Company, and the performance by the Company of its
obligations under the Acquisition Agreement, have been duly authorized by all
necessary corporate action and proceedings required under its Charter Documents
and applicable Governmental Requirements. Each Stockholder has the legal
capacity to execute, deliver and perform such Stockholder's obligations under
the Acquisition Agreement [and the Employment Agreement to which such
Stockholder is a party, if any].
<PAGE>
TRIAD Medical Inc., et al. -3- ______________ ___, 1997
3. [Each subsidiary of the Company is a corporation duly organized,
validly existing and in good standing under the laws of the
[State][Commonwealth] of __________________ and has all requisite corporate
power and authority to own and operate its properties, to lease the properties
it operates under lease and to conduct its business as currently conducted.
[Each subsidiary of the Company is duly qualified as a foreign corporation to do
business and is in good standing in every jurisdiction outside the
[State][Commonwealth] of _________________ in which the failure to so qualify
would have a material adverse effect on its business.] [No such subsidiary is
required to be qualified as a foreign corporation to do business in any
jurisdiction in which the failure to so qualify would have a material adverse
effect on its business.] To our knowledge, no such subsidiary is in violation of
any provision of its Charter Documents.]
[4. All the issued and outstanding capital stock of each subsidiary of the
Company has been duly authorized and validly issued, is fully paid and
nonassessable and is owned by the Company directly or indirectly through wholly
owned subsidiaries, free and clear of any Lien or, to the best knowledge of such
counsel, any pending or threatened claim.]
5. The Acquisition Agreement has been duly executed and delivered by the
Company and constitutes the legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, except as that
enforceability may be subject to the effect of (a) any applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the enforcement
of creditors' rights generally, (b) general principles of equity (regardless of
whether that enforceability is considered in a proceeding in equity or at law)
and (c) any implied covenant of good faith and fair dealing. The Acquisition
Agreement has been duly executed and delivered by the Stockholders and
constitutes the legal, valid and binding obligation of the Stockholders,
enforceable against the Stockholders in accordance with its terms, except as
that enforceability may be subject to the effect of (a) any applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights generally, (b) general principles of equity
(regardless of whether that enforceability is considered in a proceeding in
equity or at law) and (c) any implied covenant of good faith and fair dealing.
[The] Employment Agreement[s] to which [_____________ is a party] [__________,
_______________, and _________________, respectively, are parties] [has][have
each] been duly executed and delivered by the Stockholder party thereto and
constitutes the legal, valid and binding obligation of that Stockholder,
enforceable against that Stockholder in accordance with its terms, except as
that enforceability may be subject to the effect of (a) any applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights generally, (b) general principles of equity
(regardless of whether that enforceability is considered in a proceeding in
equity or at law) and (c) any implied covenant of good faith and fair dealing.]
6. Neither the execution, delivery and performance of the Acquisition
Agreement nor the consummation of the transactions contemplated thereby do or
will (a) violate, breach or
<PAGE>
TRIAD Medical Inc., et al. -4- ______________ ___, 1997
constitute a default under (i) any Charter Document of the Company [or any of
its subsidiaries], (ii) any Governmental Requirement applicable to the Company
[or any of its subsidiaries] or (iii) any Material Agreement of the Company [or
any of its subsidiaries] known to us or (b) cause or result in the imposition
of, or afford any Person the right to obtain, any Lien upon any property or
assets of the Company [or any of its subsidiaries] (or upon any revenues, income
or profits of the Company [or any of its subsidiaries] therefrom) pursuant to
any such Material Agreement. The execution, delivery and performance in
accordance with its terms by any Stockholder of the Acquisition Agreement [and
the Employment Agreement[s]], and the consummation of the transactions
contemplated thereby do not and will not, (a) violate or conflict with any
Governmental Requirement applicable to any of the Stockholders, (b) breach or
constitute a default under any material agreement or instrument known to us to
which any Stockholder is a party or by which any Stockholder or any of the
shares of Company Capital Stock owned by any Stockholder are bound or subject or
(c) result in the creation or imposition of, or afford any Person the right to
obtain, any Lien upon any property or assets of any Stockholder (or upon any
revenues, income or profits of any Stockholder therefrom) or the Company [or any
of its subsidiaries] pursuant to any such agreement or instrument.
7. Except for the filing of the Certificate of Merger with the [Secretary
of State] of the [State][Commonwealth] of ________________ , no Governmental
Approvals are required to be obtained, and no reports or notices or filings with
any Governmental Authority are required to be made, by the Company or any
Stockholder for the execution, delivery or performance by the Company of the
Acquisition Agreement, the enforcement against the Company and the Stockholders
of their respective obligations thereunder or the effectuation of the Merger or
the other transactions contemplated thereby to be effected at or prior to the
Closing.
8. To our knowledge, except pursuant to the Acquisition Agreement, there
are no existing options, warrants, subscriptions or other rights to purchase or
securities convertible into or exchangeable for, the capital stock of the
Company [or any of its subsidiaries]. To our knowledge, except as disclosed
pursuant to the Acquisition Agreement, neither the Company nor any Stockholder
is a party to or bound by any agreement, instrument, contract, obligation,
commitment or understanding of any character, except for the Acquisition
Agreement, relating to the sale, assignment, conveyance, encumbrance, transfer
or delivery of any capital stock of the Company [or any of its subsidiaries] or
all or substantially all the assets of the Company.
9. [Each of] the Company [and its subsidiaries] has obtained all consents
of all third parties necessary under each lease (whether relating to real
property or personal property) to which it is a party for the consummation of
the transactions contemplated by the Acquisition Agreement.
10. To our knowledge, there is no pending or threatened Litigation that
(a) questions the validity of the Acquisition Agreement [or the Employment
Agreement[s]] or any action taken or to be taken by the Company or any
Stockholder in connection with the Acquisition Agreement [or the
<PAGE>
TRIAD Medical Inc., et al. -5- ______________ ___, 1997
Employment Agreement[s]], at law or in equity, before or by any Governmental
Authority or before any arbitrator or (b) if adversely determined, would have a
material adverse effect (i) on the condition (financial or other), earnings,
business, operations or prospects of the Company [and its subsidiaries, taken as
a whole], (ii) on the ability of the Company to perform its obligations under
the Acquisition Agreement or (iii) on the ability of any Stockholder to perform
his [or her] obligations under the Acquisition Agreement [or the Employment
Agreement[s]].
11. Immediately prior to the Effective Time: (a) the authorized Capital
Stock of the Company consisted of _______ shares of common stock, par value $___
per share, of which _______ shares were issued and outstanding; (b) all such
outstanding shares of Capital Stock of the Company were (i) duly authorized and
validly issued in accordance with the applicable Governmental Requirements of
the [State] [Commonwealth] of ____________ and the Charter Documents of the
Company, (ii) fully paid and nonassessable, (iii) not issued in violation of any
preemptive rights, rights of first refusal or other similar rights and (iv) to
our knowledge, were issued in compliance with the applicable provisions of
federal and state securities laws; (c) except as disclosed pursuant to the
Acquisition Agreement, no shares of Capital Stock of the Company were held in
the treasury of the Company; and (d) the Stockholders owned all the issued and
outstanding shares of Capital Stock of the Company free and clear, to our
knowledge, of any Lien or adverse claim.
12. The Certificate of Merger complies with the applicable law of the
[State][Commonwealth] of ______________ and, following the filing thereof by the
Surviving Corporation with the [Secretary of State] of the [State][Commonwealth]
of ________________ and the payment of all applicable filing fees with respect
thereto, the Merger will be effective at the Effective Time.
In the opinions set forth above, phrases such as "to our knowledge,"
"known to us" and those with equivalent wording refer to the conscious awareness
of information by the lawyers of this Firm who have prepared this opinion,
signed this letter or been actively involved in assisting and advising the
Company and the Stockholders in connection with the negotiation, execution and
delivery of the Acquisition Agreement and related matters, without any
independent investigation by any lawyer of this Firm.
[The opinions expressed in paragraph 1 [and paragraph 3] as to the
qualification and good standing of [each of] the Company [and its subsidiaries]
as a foreign corporation are based solely on our review of certificates of
public officials of the relevant jurisdiction.] The Acquisition Agreement
provides, except where otherwise specifically provided, that it is to be
governed by and construed and enforced in accordance with the substantive laws
of the State of New York. For purposes of our opinions expressed in paragraph 5
above, we have assumed, with your approval, that the laws of the State of New
York are identical to the laws of the [State] [Commonwealth] of
<PAGE>
TRIAD Medical Inc., et al. -6- ______________ ___, 1997
_____________, and no opinion is expressed herein as to any matter governed by
any law other than the laws of the [State] [Commonwealth] of _____________ and
the federal laws of the United States of America, each as in effect on the date
hereof.
The opinions expressed in paragraph 5 above are subject to the additional
qualification that we express no opinion as to the enforceability of (a) any
severability or reformation provisions contained in the Acquisition Agreement
[or the Employment Agreement[s]], (b) any provisions in the Acquisition
Agreement [or the Employment Agreement[s]] which purport to entitle a party to
indemnification in respect of any matter arising under any securities laws or to
the extent indemnification in respect of any matter would otherwise be against
public policy, (c) any provisions of the Acquisition Agreement [or the
Employment Agreement[s]] purporting to establish a right to enforce a covenant
or restriction by injunctions or restraining orders or (d) any provisions of the
Acquisition Agreement [or the Employment Agreement[s]] that have the effect of
prohibiting oral amendments or waivers of any provisions of those documents.
This opinion and the matters addressed herein are as of the date hereof,
and we undertake no, and hereby disclaim any, obligation to advise you of any
change in any matter set forth herein occurring after the date hereof This
opinion is being furnished to you for use solely in connection with the
transactions being consummated pursuant to the Acquisition Agreement and the
Underwriting Agreement. No other use or distribution of this opinion may be made
without our prior written consent, except that this opinion may be provided to
and relied upon by _______________, as Agent, and the other [Lenders] parties to
the [Credit Agreement] dated ______________ ___, 1997 with TRIAD.
Very truly yours,
<PAGE>
NationsBanc Montgomery Securities, Inc.
Smith Barney Inc.
Wedbush Morgan Securities -1- November 1, 1997
EXHIBIT D
November 1, 1997
NationsBanc Montgomery Securities, Inc.
Smith Barney Inc.
Wedbush Morgan Securities
As Representatives of the Several Underwriters
c/o NationsBanc Montgomery Securities, Inc.
600 Montgomery Street
San Francisco, California 94111
RE: TRIAD Medical Inc. (the "Company")
Ladies & Gentlemen:
The undersigned is, or will be as of the closing of the Offering (as hereinafter
defined), an owner of record or beneficially of certain shares of common stock,
par value $.001 per share, of the Company ("Common Stock") or securities
convertible into or exchangeable or exercisable for Common Stock. The Company
proposes to carry out a public offering of Common Stock (the "Offering") for
which you will act as the representatives of the underwriters. The undersigned
recognizes that the Offering will be of benefit to the undersigned and will
benefit the Company by, among other things, raising additional capital for
certain acquisitions. The undersigned acknowledges that you and the other
underwriters are relying on the representations and agreements of the
undersigned contained in this letter in carrying out the Offering and in
entering into underwriting arrangements with the Company with respect to the
Offering.
In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not, without the prior written consent of NationsBanc
Montgomery Securities, Inc. ("Montgomery Securities") (which consent may be
withheld in its sole discretion), directly or indirectly, sell, offer, contract
or grant any option to sell (including without limitation any short sale),
pledge, transfer, distribute, establish an open "put equivalent position" within
the meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934, or
otherwise dispose of any shares of Common Stock, options or warrants to acquire
shares of Common Stock, or securities exchangeable or exercisable for or
convertible into shares of Common Stock (collectively, the "Securities")
currently or hereafter owned either of record or beneficially (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934, as amended) by the
undersigned, or publicly announce the undersigned's intention to do any of the
foregoing, for a period commencing on the date hereof and continuing through the
close of trading on the date two years after the date of the final prospectus
relating to the Offering; PROVIDED, HOWEVER, that the undersigned shall not be
restricted from any transfer of Securities to any Related Person (as hereinafter
defined) of the undersigned but only if such transfer is made in compliance with
all applicable federal and state securities laws and such Related Person agrees
to be bound by
General Form
<PAGE>
NationsBanc Montgomery Securities, Inc.
Smith Barney Inc.
Wedbush Morgan Securities -2- November 1, 1997
the restrictions of this letter agreement pursuant to a written agreement
delivered to Montgomery Securities at the address set forth above. For purposes
hereof a "Related Person" shall have the meaning assigned to that term in the
Company's Uniform Provisions for the Acquisition of the Founding Companies, in
the form included as Exhibit 2.1 to the Registration Statement on Form S-1
relating to the Offering at the time that Registration Statement first becomes
effective under the Securities Act of 1933, as amended. The undersigned also
agrees and consents to the entry of stop transfer instructions with the
Company's transfer agent and registrar against the transfer of shares of Common
Stock or securities convertible into or exchangeable or exercisable for Common
Stock held by the undersigned except in compliance with the foregoing
restrictions.
With respect to the Offering only, the undersigned waives any registration
rights relating to registration under the Securities Act of any Common Stock
owned either of record or beneficially by the undersigned, including any rights
to receive notice of the Offering.
This agreement is irrevocable and will be binding on the undersigned and the
respective successors, heirs, personal representatives and assigns of the
undersigned and shall be for the benefit of the Company and the underwriters for
the Offering.
Printed Name of Holder
By:
Signature
Printed Name of Person Signing (AND INDICATE CAPACITY OF PERSON SIGNING IF
SIGNING AS CUSTODIAN, TRUSTEE, OR ON BEHALF OF AN ENTITY)
General Form
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our ten
reports and all references to our Firm included in this registration statement
on Form S-1 (No.333-35449) filed by TRIAD Medical Inc.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
Houston, Texas
November 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-END> DEC-31-1996 SEP-30-1997
<CASH> 816,560 353,338
<SECURITIES> 0 0
<RECEIVABLES> 6,109,862 9,334,332
<ALLOWANCES> 193,863 95,721
<INVENTORY> 3,993,437 4,275,413
<CURRENT-ASSETS> 12,075,108 14,841,171
<PP&E> 1,066,749 8,323,897
<DEPRECIATION> 440,340 3,778,302
<TOTAL-ASSETS> 18,062,479 23,786,402
<CURRENT-LIABILITIES> 6,170,680 10,569,474
<BONDS> 0 0
0 0
0 0
<COMMON> 23,419 24,104
<OTHER-SE> 6,524,063 7,447,866
<TOTAL-LIABILITY-AND-EQUITY> 18,062,479 23,786,402
<SALES> 32,237,683 29,323,066
<TOTAL-REVENUES> 36,257,683 36,387,356
<CGS> 26,656,397 25,614,612
<TOTAL-COSTS> 27,492,002 27,142,668
<OTHER-EXPENSES> 7,290,181 8,125,142
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 368,831 428,107
<INCOME-PRETAX> 1,171,257 722,389
<INCOME-TAX> 464,885 276,837
<INCOME-CONTINUING> 706,372 445,837
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 706,372 445,837
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
