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As filed with the Securities and Exchange Commission on December 24, 1997
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CONTINUCARE CORPORATION
(Exact name of registrant as specified in its charter)
FLORIDA 59-2716023
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
100 SOUTHEAST 2ND STREET
36TH FLOOR
MIAMI, FLORIDA 33131
(305) 350-7515
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
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CHARLES M. FERNANDEZ
PRESIDENT AND CHIEF EXECUTIVE OFFICER
100 SOUTHEAST 2ND STREET
36TH FLOOR
MIAMI, FLORIDA 33131
(305) 350-7515
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies of communications to:
REBECCA R. ORAND, ESQ.
GREENBERG TRAURIG HOFFMAN
LIPOFF ROSEN & QUENTEL, P.A.
1221 BRICKELL AVENUE
MIAMI, FLORIDA 33131
(305) 579-0500
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
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If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
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 (the "Securities Act"), other than securities offered only in connection
with dividend or interest reinvestment plans, check the following box. [X]
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. [ ]
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<TABLE>
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CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE AGGREGATE PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) FEE
<C> <C> <C> <C> <C>
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8% Convertible Subordinated Notes due 2002....... $46,000,000 100% $46,000,000 $13,570
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Common Stock, $.001 par value, issuable upon conversion 6,344,828
of 8% Convertible Subordinated Notes due 2002.. shares(2) N/A N/A N/A
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</TABLE>
(1) Determined pursuant to Rule 457 under the Securities Act of 1933, as
amended for the purpose of calculating the registration fee.
(2) Represents shares originally issuable upon conversion of the Notes being
registered under this Registration Statement at a conversion rate of $7.25
plus an additional indeterminate number of shares as may become issuable
upon the conversion of the Notes being registered hereunder by means of
adjustment in the conversion price therefor. Pursuant to Rule 457(i), there
is no filing fee with respect to the shares of Common Stock being
registered hereunder because no additional consideration will be received
in connection with the exercise of the conversion privilege.
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.
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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
PRELIMINARY PROSPECTUS DATED DECEMBER 24, 1997
PRELIMINARY PROSPECTUS
CONTINUCARE CORPORATION
$46,000,000
8% CONVERTIBLE SUBORDINATED NOTES
DUE 2002
6,344,828 SHARES OF COMMON STOCK,
$.0001 PAR VALUE ISSUABLE UPON CONVERSION THEREOF
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This Prospectus relates to the resale of (i) up to $46,000,000
aggregate principal amount of 8% Convertible Subordinated Notes due 2002 (the
"Notes") of Continucare Corporation, a Florida corporation (the "Company"), and
(ii) 6,344,828 shares of Common Stock, $.0001 par value (the "Common Stock"), of
the Company, which are initially issuable upon conversion of the Notes (the
"Shares" and together with the Notes, the "Securities"). The Securities that are
being registered hereby are to be offered for the account of the entities listed
in the "Selling Shareholders" section of this Prospectus (the "Selling
Shareholders"), or supplements to this Prospectus. The Notes were acquired by
the Selling Shareholders from the Company on October 30, 1997 in connection with
a private placement (the "Private Placement").
The Notes are unsecured subordinated obligations of the Company with an
aggregate principal amount of $46,000,000 and mature on October 31, 2002. The
Notes bear interest at the rate of 8% per annum from the date of initial
issuance, or from the most recent Interest Payment Date (as defined herein) to
which interest has been paid or provided for, payable semi-annually on April 30
and October 31 of each year, commencing April 30, 1998, to the Person (as
defined herein) in whose name the Notes (or any predecessor Notes) are
registered at the close of business on the Regular Record Date (as defined
herein) for such interest, which shall be the April 15 or October 15 (whether or
not a Business Day (as defined herein)), as the case may be, next preceding such
Interest Payment Date. Interest on the Notes will be paid on the basis of a
360-day year of twelve 30-day months, based on actual days elapsed.
The Common Stock may be offered from time to time by the Selling
Shareholders in transactions on the American Stock Exchange ("AMEX") or in
privately-negotiated transactions, at fixed prices which may be changed, at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. Specific information
concerning the Selling Shareholders and their plan of distribution is set forth
under "Selling Shareholders" and "Plan of Distribution."
The Notes are convertible into Common Stock at any time after 60 days
from the Private Placement and before maturity, unless previously redeemed, at a
conversion price of $7.25 per share (the "Conversion Price"), subject to
adjustment in certain events. The Common Stock of the Company is traded on AMEX
under the symbol "CNU." On December 22, 1997, the closing price of the Common
Stock as reported by the AMEX was $5.6875 per share.
The Notes do not provide for a sinking fund. The Notes are not
redeemable by the Company prior to October 31, 2000. Thereafter, the Notes are
redeemable at the option of the Company, in whole or in part, at the
<PAGE> 3
redemption prices set forth in this Prospectus, together with accrued interest.
Upon a Repurchase Event (as defined herein), each holder of Notes shall have the
right, at the holder's option, to require the Company to repurchase such
holder's Notes, or any portion thereof that is an integral multiple of $1,000,
on the date (the "Repurchase Date") that is 45 calendar days after the date of
the Company Notice (as defined herein) for a cash price equal to 101% of the
principal amount of such Notes to be repurchased, together with accrued interest
to the Repurchase Date. See "Description of Notes - Repurchase at Option of
Holders Upon a Repurchase Event."
The Notes are unsecured obligations of the Company and are subordinated
to all present and future Senior Indebtedness (as defined herein) and
liabilities of subsidiaries of the Company. The Indenture (as defined herein)
does not restrict the incurrence of any other indebtedness or liabilities by the
Company or its subsidiaries. See "Risk Factors -- Subordination."
There is no existing public market for the Notes and there can be no
assurance as to the liquidity of any markets that may develop for the Notes, the
ability of the holders to sell their Notes or what price holders of the Notes
will be able to sell their Notes. The Selling Shareholders have informed the
Company that they are making and currently intend to continue making a market in
the Notes. The Selling Shareholders, however, are not obligated to do so and any
such market making may be discontinued at any time without notice, in the sole
discretion of the Selling Shareholders. Prior to the resale of the Notes
pursuant to this Prospectus, each of the Notes was eligible for trading in the
Private Offerings, Resales and Trading through Automated Linkages Market (the
"PORTAL Market"). Notes sold pursuant to this Prospectus will no longer be
eligible for trading in the PORTAL Market. The Company does not intend to apply
for listing of the Notes on any securities exchange.
The Company intends that the Registration Statement of which this
Prospectus is a part, will remain effective until October 30, 1999, or such
earlier date as of which such Registration Statement is no longer required for
the transfer of the Securities. The Notes and the Shares are being registered to
permit public secondary trading of the Notes and, upon conversion, the
underlying Common Stock, by the holders thereof from time to time after the date
of this Prospectus. The Company has agreed, among other things, to bear all
expenses (other than underwriting discounts and selling commissions) in
connection with the registration and sale of the Securities covered by this
Prospectus.
The Company will not receive any of the proceeds from the sale of the
Notes or the Shares by the Selling Shareholders. The Notes and the Shares may be
offered in negotiated transactions or otherwise, at market prices prevailing at
the time of sale or at negotiated prices. In addition, the Shares may be offered
from time to time through ordinary brokerage transactions on the AMEX. See "Plan
of Distribution." The Selling Shareholders may be deemed to be "Underwriters" as
defined in the Securities Act of 1933, as amended (the "Securities Act"). If any
broker-dealers are used by the Selling Shareholders, any commissions paid to
broker-dealers and, if broker-dealers purchase any Notes or Shares as
principals, any profits received by such broker-dealers on the resale of the
Notes or Shares may be deemed to be underwriting discounts or commissions under
the Securities Act. In addition, any profits realized by the Selling
Shareholders may be deemed to be underwriting commissions.
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES
OFFERED HEREBY.
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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
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The Date of this Prospectus is December 24, 1997
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No dealer, salesperson or any other person has been authorized to give
any information or to make any representations other than those contained in
this Prospectus, and, if given or made, such information and representations
must not be relied upon as having been authorized by the Company. This
Prospectus does not constitute an offer to sell or a solicitation of any offer
to buy the securities described herein by anyone in any jurisdiction in which
such offer or solicitation is not authorized, or in which the person making the
offer or solicitation is not qualified to do so, or to any person to whom it is
unlawful to make such offer or solicitation. Under no circumstances shall the
delivery of this Prospectus or any sale made pursuant to this Prospectus create
any implication that the information contained in this Prospectus is correct as
of any time subsequent to the date of this Prospectus.
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TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
Available Information.............................................................................................3
Documents Incorporated by Reference...............................................................................4
The Company.......................................................................................................4
Risk Factors......................................................................................................5
Use of Proceeds..................................................................................................14
Unaudited Pro Forma Consolidated Financial Information...........................................................15
Ratio of Earnings to Fixed Charges...............................................................................23
Description of Notes.............................................................................................23
Registration Rights..............................................................................................34
Description of Capital Stock.....................................................................................36
Selling Shareholders.............................................................................................36
Plan of Distribution.............................................................................................38
Certain Federal Income Tax Consequences..........................................................................39
Legal Matters....................................................................................................41
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................41
Experts..........................................................................................................41
</TABLE>
CERTAIN OF THE MATTERS DISCUSSED UNDER THE CAPTIONS "RISK FACTORS" AND
ELSEWHERE IN THIS PROSPECTUS MAY CONSTITUTE FORWARD-LOOKING STATEMENTS FOR
PURPOSES OF THE SECURITIES ACT AND THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED (THE "EXCHANGE ACT"), AND AS SUCH MAY INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE
OR FINANCIAL CONDITION OF THE COMPANY TO BE MATERIALLY DIFFERENT FROM FUTURE
RESULTS, PERFORMANCE OR FINANCIAL CONDITION EXPRESSED OR IMPLIED BY ANY SUCH
FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS THAT COULD CAUSE THE ACTUAL
RESULTS, PERFORMANCE OR FINANCIAL CONDITION OF THE COMPANY TO DIFFER MATERIALLY
FROM THE COMPANY'S EXPECTATIONS ARE DISCLOSED IN THIS PROSPECTUS AND THE
DOCUMENTS INCORPORATED BY REFERENCE HEREIN ("CAUTIONARY STATEMENTS"), INCLUDING,
WITHOUT LIMITATION, THOSE STATEMENTS MADE IN CONJUNCTION WITH ANY SUCH
FORWARD-LOOKING STATEMENTS, THOSE INCLUDED UNDER "RISK FACTORS" AND OTHERWISE
HEREIN AND THEREIN. ANY SUCH FORWARD-LOOKING STATEMENTS ARE EXPRESSLY QUALIFIED
IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS.
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AVAILABLE INFORMATION
The Company has filed with the United States Securities and Exchange
Commission (the "Commission") a Registration Statement on Form S-3 (together
with all amendments, exhibits and schedules thereto, the "Registration
Statement") under the Securities Act covering the Securities offered hereby.
This Prospectus does not contain all the information set forth in the
Registration Statement, and the exhibits and schedules thereto. For further
information, with respect to the Company and the Securities, reference is made
to the Registration Statement, and the exhibits and schedules thereto, which can
be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices located at Seven World
Trade Center, 13th Floor, New York,
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New York 10048 and the Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material may also be obtained at
prescribed rates from the Public Reference Section of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Reports,
proxy statements and information statements and other information filed
electronically by the Company with the Commission are available at the
Commission's worldwide web site at http://www.sec.gov. The Company is subject to
the informational requirements of the Exchange Act, and, in accordance
therewith, files reports, proxy statements and information statements and other
information with the Commission. Such reports, proxy statements and information
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission referenced above.
DOCUMENTS INCORPORATED BY REFERENCE
The Company hereby incorporates by reference its: (i) Annual Report on
Form 10-KSB for the fiscal year ended June 30, 1997, as amended by the Company's
Annual Report on Form 10-KSB/A; (ii) Definitive proxy statement for the Annual
Meeting of Stockholders for fiscal 1996 on Schedule 14A; (iii) Quarterly Report
on Form 10-QSB for the fiscal quarter ended September 30, 1997; (iv) Current
Report on Form 8-K relating to an event on September 19, 1997, as amended on
Form 8-K/A; (v) Current Report on Form 8-K relating to an event on October 7,
1997; (vi) Current Report on Form 8-K relating to an event on October 30, 1997;
(vii) Current Report on Form 8-K relating to an event on October 31, 1997;
(viii) Current Report on Form 8-K relating to an event on December 5, 1997; and
(ix) Registration Statement on Form 8-A, filed with the Commission on
September 4, 1996, describing the Common Stock, including any further amendment
or reports filed for the purpose of updating such description.
All reports filed by the Company pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act subsequent to the date hereof and prior to any
termination of the offering of the Securities covered by this Prospectus are
deemed to be incorporated by reference into this Prospectus and to be a part
hereof from the respective dates of filing. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any subsequently filed document
that is also incorporated herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
Copies of all documents incorporated herein by reference (other than
exhibits to such documents, unless such exhibits are specifically incorporated
by reference into such documents) will be provided without charge to each person
who receives a copy of this Prospectus on written or oral request to 100
Southeast 2nd Street, 36th Floor, Miami, Florida 33131, or by telephone at (305)
350-7515, Attn: President.
THE COMPANY
Continucare provides a continuum of outpatient and ancillary healthcare
services with a primary focus on rehabilitative outpatient treatment of
musculoskeletal injuries and diseases, such as arthritis, osteoporosis, stroke
and traumatic injuries. The Company's services include physical rehabilitation,
physician practice management, home healthcare, behavioral health management and
laboratory services within its physician practices. Commencing its current
business in February 1996, the Company has derived substantially all of its
revenues from contracts to provide management, staffing and billing services for
physical rehabilitation and behavioral health programs in hospitals and
freestanding rehabilitation centers. The Company is actively expanding its
Florida delivery services network to establish a mature continuum services model
to replicate in other selected markets. The Company's clients include Tenet
Healthcare, Inc., Bally Total Fitness and Foundation Health Services, Inc.
The Company's principal place of business is 100 Southeast 2nd Street,
36th Floor, Miami, Florida 33131, and its telephone number at that address is
(305) 350-7515. Unless otherwise indicated or required by the context,
references to the "Company" include its consolidated subsidiaries.
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RISK FACTORS
In addition to the other information contained in this Prospectus and
the documents incorporated by reference herein, the following factors, among
others, should be considered carefully in evaluating an investment in the
Securities offered hereby.
LIMITED OPERATING HISTORY; NEW AREAS OF OPERATIONS
Continucare has been involved in its current business since February
1996, and has had limited operations to date. The Company's prospects must be
considered in light of the risks, delays, expenses and difficulties frequently
encountered in connection with an early-stage business in a highly-regulated,
competitive environment. No assurance can be given that the Company will
successfully implement any of its plans in a timely or effective manner or
whether the Company will be able to generate significant revenues or continue to
operate profitably.
In addition, as part of its strategy to expand its continuum of
healthcare services, the Company has recently expanded its services to include
home health and physician practices. In connection with certain recent
acquisitions, the Company has and will enter into managed care or capitated
arrangements pursuant to which the Company would be subject to significant risk
if its revenues were insufficient to cover increased variable costs resulting
from requirements of greater than expected levels of medical care. There is no
assurance that the Company will be able to successfully integrate these newly
acquired businesses into its current operations.
RISKS RELATING TO ACQUISITION STRATEGY
The Company has expanded and intends to continue to expand its
operations through acquisitions of healthcare related companies. The Company
continually engages in evaluations of potential acquisitions. In implementing
this acquisition strategy, the Company will compete with other potential
acquirors, some of which may have greater financial or operational resources
than the Company. Competition for acquisitions may intensify due to the ongoing
consolidation in the healthcare industry, which may increase the costs of
capitalizing on such opportunities. Consummation of acquisitions could result in
the incurrence or assumption by the Company of additional indebtedness and the
issuance of additional equity. The issuance of shares of Common Stock for an
acquisition may result in dilution to shareholders.
The financial performance of the Company is and will continue to be
subject to various risks associated with the acquisition of businesses,
including the expenses associated with the integration of the acquired
businesses, difficulties in assimilating the operations of the acquired
businesses and diversion of management resources. The successful integration of
acquired businesses is important to the Company's future financial performance.
The anticipated benefits from any of these acquisitions may not be achieved
unless the operations of the acquired businesses are successfully combined with
those of the Company in a timely manner. The process of integrating the various
businesses could cause the interruption of, or a loss of momentum in, the
activities of some or all of these businesses, which could have a material
adverse effect on the Company's operations, financial results and cash flows.
There can be no assurance that the Company will realize any of the anticipated
benefits from its acquisitions. Also, as the Company enters into new geographic
markets, the Company will be required to comply with laws and regulations of
states that differ from those in which the Company's operations are currently
conducted. There can be no assurance that the Company will be able to
effectively establish a presence in these new markets. While many of the
expenses arising from the Company's efforts in these areas may have a negative
effect on operating results until such time, if at all, as these expenses are
offset by increased revenues, there can be no assurance that the Company will be
able to implement its acquisition strategy, or that this strategy will
ultimately be successful.
As part of its regular on-going evaluation of acquisition
opportunities, the Company is currently engaged in a number of separate and
unrelated preliminary discussions concerning possible acquisitions that the
Company believes would be synergistic with its core business if consummated.
These acquisitions may involve consideration substantially in excess of amounts
previously paid by the Company in any single acquisition. The Company is in the
early stages of such discussions and has not entered into any agreement in
principle with respect to any of these
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possible acquisitions. The purchase price for the possible acquisitions may be
paid in cash, through the issuance of Common Stock (which would increase the
number of shares of Common Stock outstanding) or other securities of the
Company, borrowings (which may adversely affect the Company's ability to service
its debt) (including the Notes), or a combination thereof. Prior to consummating
any such possible acquisitions, the Company, among other things, will have to
initiate and satisfactorily complete its due diligence investigation; negotiate
the financial and other terms (including price) and conditions of such
acquisitions; obtain appropriate Board of Directors, regulatory and other
necessary consents and approvals; and secure financing. The Company cannot
predict whether any such acquisitions will be consummated or, if consummated,
will result in a financial or other benefit to the Company.
REIMBURSEMENT CONSIDERATIONS
The Company receives fees for its services to client hospitals,
community mental health centers ("CMHCs"), comprehensive outpatient
rehabilitation facilities ("CORFs"), home health agencies ("HHAs") and from
patient billings. The Company or its clients receive reimbursement under either
the Medicare or Medicaid programs or payments from insurers, self-funded benefit
plans or other third-party payors. The Medicare and Medicaid programs are
subject to statutory and regulatory changes, retroactive and prospective rate
adjustments, administrative rulings and funding restrictions, any of which could
have the effect of limiting or reducing reimbursement levels. Because a
substantial portion of the services provided by the Company are covered by
Medicare, any changes which limit or reduce Medicare reimbursement levels could
have a material adverse effect on the Company.
Significant changes have been and may be made in the Medicare program,
which could have a material adverse effect on the Company's financial condition.
In addition, legislation has been or may be introduced in the Congress of the
United States which, if enacted, could adversely affect the operations of the
Company by, for example, decreasing reimbursement by third-party payors such as
Medicare or limiting the ability of the Company to maintain or increase the
level of services provided to patients.
Title XVIII of the Social Security Act authorizes Part A of the
Medicare program, the health insurance program that pays for inpatient care for
covered persons (generally, those age 65 and older and the long term disabled)
and Medicare Part B, a voluntary supplemental medical assistance insurance
program. Health care providers, including the Company's CORFs and HHAs may
participate in the Medicare program subject to certain conditions of
participation and acceptance of a provider agreement by the Secretary of Health
and Human Services ("HHS"). Only enumerated services, upon satisfaction of
certain criteria, are eligible for Medicare reimbursement. Relative to the
services of the Company's Medicare certified HHAs and CORFs, Medicare reimburses
the "reasonable costs" for services up to program limits. Medicare reimbursed
costs are subject to audit, which may result in a decrease in payments the
Company has previously received.
Medicare pays acute care hospitals for most services provided to
eligible inpatients under a payment system known as the "Prospective Payment
System" ("PPS"). Separate PPS payments are made for inpatient operating costs
and inpatient capital-related costs. Some costs are also paid on the basis of
"reasonable cost."
Medicare Part B reimburses the operating cost component of most
outpatient services on a reasonable cost basis, subject to a 5.8% reduction
which the Balanced Budget Act of 1997 (the "Budget Act"), extended through
federal fiscal year 2000. See "--The Balanced Budget Act of 1997." Medicare
reimburses hospitals for some outpatient services on the basis of fee schedules,
which may be less than a hospital's actual costs for providing the services
rendered. The ultimate impact on a hospital will depend upon its ability to
control the costs of providing such services. Under the Budget Act, the
Secretary of HHS is required to develop a proposal to place outpatient hospital
services under the PPS beginning in calendar year 1999. Such a system would
cause a hospital with costs above the payment rate to incur losses on such
services provided to Medicare patients.
Reimbursement for services rendered to patients in a hospital's
distinct part psychiatric unit are exempted from PPS and are reimbursed on a
"reasonable cost" basis, subject to per diem limits contained in the Tax Equity
and Fiscal Responsibility Act of 1982 ("TEFRA") rate of increase ceiling on
inpatient costs per discharge. The
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TEFRA target limits are based on the hospital's allowable inpatient operating
costs per case for its cost reporting period beginning on or after October 1,
1982. The TEFRA target limits are adjusted annually to account for inflation.
Pursuant to the Budget Act, there will be no annual update to the TEFRA target
limits. A hospital's target limit update will depend on the hospital's target
amount and costs. Hospitals exceeding their target limit may be entitled to an
exception to those limits. In some instances, the Company's costs of providing
behavioral health programs to hospitals may contribute to the hospitals' costs
being in excess of reimbursement under the TEFRA target limits.
Pursuant to the Medicaid program, the federal government supplements
funds provided by the various states for medical assistance to the medically
indigent. Payment for such medical and health services is made to providers in
an amount determined in accordance with procedures and standards established by
state law under federal guidelines. Significant changes have been and may
continue to be made in the Medicaid program which could have a material adverse
effect on the financial condition, results of operations and cash flows of the
Company.
During certain fiscal years, the amounts appropriated by state
legislatures for payment of Medicaid claims has not been sufficient to reimburse
providers for services rendered to Medicaid patients. Failure of a state to pay
Medicaid claims on a timely basis may have a material adverse effect on the
Company's cash flow, results of operations and financial condition.
In 1992, the Medicare program begin reimbursing physicians and certain
non-physician professionals such as physical occupational and speech therapists,
clinical psychologists and clinical social workers, pursuant to a fee schedule
derived using a resource-based relative value scale ("RBRVS"). Reimbursement
amounts under the physician fee schedule are subject to periodic review and
adjustment and may affect the Company's revenues to the extent they are
dependent on reimbursement under the fee schedule.
THE BALANCED BUDGET ACT OF 1997
The Budget Act, recently passed by Congress and signed into law by
President Clinton on August 5, 1997, contains numerous provisions related to
Medicare and Medicaid reimbursement and many provisions that may affect the
Company's CMHCs, CORFs and HHAs. Although many of the details will not be
clarified and/or implemented for the next one to six years, the general thrust
of the provisions dealing with Medicare and Medicaid contained in the Budget Act
are intended to incentivize providers to deliver services at lower costs. The
Budget Act also expands the current requirements that hospitals have a discharge
planning process, including information on the availability of non-hospital home
health services and providers in the area. Each plan must also identify the
entities to whom a patient is referred in which the hospital has a "disclosable
financial interest" or which has such an interest in the provider. The effective
date of the disclosure provisions is not known at this time. The Secretary of
HHS is required to issue regulations implementing such provisions within one
year of the date of enactment. Hence, the Budget Act provides the Company's HHAs
with greater access to hospital patients, a market previously more restricted.
The Budget Act also requires the Secretary of HHS to implement a PPS for both
CORF and HHA services, and reduces the amount of Medicare reimbursement for HHA
services. Under such a PPS system, providers will be reimbursed a fixed fee per
treatment unit, and a provider having costs greater than the prospective amount
will incur losses. It cannot be predicted what effect, if any, such new PPS will
have on the operations of the Company. The Budget Act also established per
beneficiary caps on certain outpatient rehabilitation services, including a
$1,500 annual limit per discipline, for outpatient rehabilitation services.
Among the other changes made by the Budget Act are the following: (i)
reducing the amounts which the federal government will pay for services provided
to Medicare and Medicaid beneficiaries by an estimated $115 billion and $13
billion, respectively over the next five years; (ii) reducing payments to
hospitals for inpatient and outpatient services provided to Medicare
beneficiaries by an estimated $44 billion over the next five years; (iii)
establishing the Medicare+Choice Program, which expands the availability of
managed care alternatives to Medicare beneficiaries, including Medical Savings
Accounts; (iv) converting the Medicare reimbursement of outpatient hospital
services from a reasonable cost basis to a PPS; (v) adjusting the manner in
which Medicare calculates the amount of copayments which are deducted from the
Medicare payment to hospitals for outpatient
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services; (vi) freezing the Medicare hospital PPS and PPS-exempt hospital and
distinct part unit update for fiscal year 1998, and limiting the level of annual
updates for subsequent years; (vii) reducing various other Medicare payments to
providers; (viii) repealing the federal Boren amendment, which imposed certain
requirements on the level of reimbursement paid to hospitals for services
rendered to Medicaid beneficiaries; (ix) permitting states to mandate managed
care for Medicaid beneficiaries without the need for federal waivers; (x)
instituting permanent, mandatory exclusion from any federal health care program
for those convicted of three health care-related crimes, and a mandatory 10-year
exclusion for those convicted of two health care-related crimes. Additionally,
the Secretary of HHS will be able to deny entry into Medicare or Medicaid or
deny renewal to any provider or supplier convicted of any felony that the
Secretary deems to be "inconsistent with the best interests" of the program's
beneficiaries; and (xi) creating a new civil monetary penalty for violations of
the federal Anti-Kickback Law for cases in which a person contracts with an
excluded provider for the provision of health care items or services where the
person knows or should know that the provider has been excluded from
participation in a federal health care program. Violations will result in
damages three times the remuneration involved, as well as a penalty of $50,000
per violation.
It is not possible at this time to predict how the provisions of the
Budget Act will affect the Company.
PROPOSED LEGISLATION
Legislation pending before Congress proposes to alter the financing and
delivery of health care services provided by the Company (beyond the changes
made by the Budget Act). There are wide variations among the bills and their
ultimate effect on the Company cannot be determined. Certain proposals would
encourage the growth of managed care networks, extend temporary reductions in
Medicare reimbursement imposed under current law, impose additional costs in
Medicare reimbursement and substantially restructure Medicaid.
EXECUTIVE ACTION
In September 1997 President Clinton imposed, subject to certain narrow
exceptions, a six-month moratorium on the certification of new
Medicare-participating HHAs. As a result, it is unlikely that new HHAs will be
certified by the Health Care Financing Administration ("HCFA") in the Company's
markets during such moratorium period.
ADDITIONAL PAYOR CONSIDERATIONS
A limited number of the Company's management contracts require the
Company to refund a portion of its fee if either Medicare denies reimbursement
for an individual patient treatment or if the fee paid to the Company is
disallowed as a reimbursable cost. Also, Medicare retrospectively audits cost
reports of client hospitals, CMHCs, CORFs and HHAs upon which Medicare
reimbursement for services rendered in the programs managed by the Company is
based. Accordingly, at any time, the Company could be subject to refund
obligations to such clients for prior period cost reports that have not been
audited and settled as of the date hereof. Any significant decrease in Medicare
reimbursement levels or the imposition of significant restrictions on
participation in the Medicare program, or the disallowance by Medicare of any
significant portion of costs of the Company's client hospitals, CMHCs, CORFs and
HHAs, including the fees paid or payable to the Company, where the Company has a
reimbursement denial repayment obligation, could materially and adversely affect
the Company.
Certain private insurance companies contract with hospitals and other
providers on an "exclusive" or a "preferred provider" basis and some insurers
have introduced plans known as "preferred provider organizations" ("PPOs").
Under such plans, there may be financial incentives for subscribers to use only
those providers that contract with the plans. Under an exclusive provider plan,
which includes most "health maintenance organizations" ("HMOs"), private payors
limit coverage to those services provided by selected providers. With this
contracting authority, private payors may direct patients away from nonselected
providers by denying coverage for services provided by them.
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Most PPOs and HMOs currently pay providers on a discounted
fee-for-service basis or on a discounted fixed rate per day of care. Many health
care providers do not have accurate information about their actual costs of
providing specific types of care, particularly since each patient presents a
different mix of services and lengths of stay. Consequently, the discounts
offered to PPOs and HMOs may result in payments at less than actual costs.
Payors, including Medicare and Medicaid, are attempting to manage
costs, resulting in declining amounts paid or reimbursed to hospitals for the
services provided. As a result, the Company anticipates that the number of
patients served by hospitals on a per diem, episodic or capitated basis will
increase in the future. There can be no assurance that if amounts paid or
reimbursed to hospitals, CMHCs, CORFs and HHAs decline, it will not adversely
affect the Company.
The Company's clients are reimbursed by Medicare for a substantial
majority of the partial hospitalization services provided by such programs. HCFA
has recently advised fiscal intermediaries who process Medicare reimbursements
to review more closely partial hospitalization programs. As a result some fiscal
intermediaries have initiated focused medical reviews of partial hospitalization
programs. There can be no assurance as to the effects of any focused medical
review that hereafter may be conducted on programs managed or operated by the
Company.
INCREASED SCRUTINY OF HEALTHCARE INDUSTRY
The healthcare industry has in general been the subject of increased
government and public scrutiny in recent years, which has focused on the
appropriateness of the care provided, referral and marketing practices and other
matters. Increased media and public attention has recently been focused on the
outpatient services industry in particular as a result of allegations of
fraudulent practices related to the nature and duration of patient treatments,
illegal remuneration and certain marketing, admission and billing practices by
certain healthcare providers. The alleged practices have been the subject of
federal and state investigations, as well as other legal proceedings. Home
healthcare, an area into which the Company is expanding, is a target for
investigations because yearly Medicare payments to these types of services have
increased substantially during the past several years. The Company is unable to
predict the effect of a post-payment review on its home health agencies or
publicity in general about the healthcare services industry might have on the
Company. There can be no assurance that the Company or the acute care hospitals,
CMHCs, CORFs, and HHAs, which offer healthcare programs now or hereafter owned
or managed by the Company, will not be subject to federal and state review or
investigation from time to time.
Federal and state governments have recently focused significant
attention on healthcare reform intended to control healthcare costs and to
improve access to medical services for uninsured individuals. These proposals
include cutbacks to the Medicare and Medicaid programs and steps to permit
greater flexibility in the administration of Medicaid. See "--Reimbursement
Considerations." It is uncertain at this time what legislation regarding
healthcare reform may ultimately be enacted or whether other changes in the
administration or interpretation of governmental healthcare programs will occur.
There can be no assurance that future healthcare legislation or other changes in
the administration or interpretation of governmental healthcare programs will
not have a material adverse effect on the Company's business, prospects,
financial condition or results of operations.
CONTRACT TERMS AND RENEWALS
Commencing its current operations in February 1996, the Company has
derived substantially all of its revenues from contracts to provide management,
staffing and billing services for physical rehabilitation and behavioral health
programs in hospitals and freestanding rehabilitation centers. These contracts
have initial terms of 3 to 15 years and many have automatic renewal terms
subject to termination by either party. Substantially all of the Company's
management contracts may be terminated by either party without cause upon
advance notice of between 30 and 180 days depending on the particular contract.
In addition, such contracts generally provide for early termination either by
the client hospital, CMHC or CORF for "cause." The continued success of the
Company is subject to its ability to renew or extend existing management
contracts and obtain new management contracts. Contract renewals and extensions
are likely to be subject to competing proposals from other contract management
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<PAGE> 11
companies as well as consideration by certain hospitals to convert their
outpatient programs from independently managed programs to programs operated
internally or to terminate their outpatient programs in order to reassign
patient beds for other healthcare purposes. There can be no assurance that any
hospital, CMHC, CORF or HHA will continue to do business with the Company
following expiration of its management contract or earlier if the related
management contract is terminated either with or without cause. Any changes in
the Medicare program which have the effect of limiting or reducing reimbursement
levels for health services provided by programs managed by the Company could
result in the early termination of existing management contracts and would
adversely affect the ability of the Company to renew or extend existing
management contracts and to obtain new management contracts. The termination or
non-renewal of a material number of management contracts would result in a
significant decrease in the Company's revenues and would have a material adverse
effect on the Company's business, financial condition, results of operations and
cash flows. The Company has entered into a letter of intent to sell its Medicare
behavioral health management contracts with freestanding centers and hospitals
and is currently negotiating the purchase of the assets of a Florida based
company that provides behavioral health services to outpatient physician centers
and hospitals through managed care contracts at eight locations.
GOVERNMENT REGULATION
The federal government and all states in which the Company operates
regulate certain aspects of the healthcare services provided by programs managed
by the Company and other healthcare services provided by the Company. In
particular, the development and operation of healthcare facilities are subject
to federal, state and local licensure and certification laws. Healthcare
facilities are subject to periodic inspection by governmental and other
authorities to assure compliance with the standards established for continued
licensure under state law and certification under the Medicare and Medicaid
programs. A failure to obtain or renew any required regulatory approvals or
licenses could prevent such healthcare facility from offering outpatient
services or receiving Medicare, Medicaid or other third party payments.
The Company is also subject to federal and state laws which govern
financial and other arrangements between healthcare providers. These laws often
prohibit certain direct and indirect payments or fee-splitting arrangements
between healthcare providers that are designed to induce or encourage the
referral of patients to, or the recommendation of, a particular provider for
medical products and services.
Federal "Fraud and Abuse" Laws and Regulations. The Federal
Medicare/Medicaid Anti-Fraud and Abuse Amendments to the Social Security Act
(the "Anti-Kickback Law") make it a criminal felony offense to knowingly and
willfully offer, pay, solicit or receive remuneration in order to induce
business for which reimbursement is provided under the Medicare or Medicaid
programs. In addition to criminal penalties, including fines of up to $25,000
and five (5) years imprisonment, violations of the Anti-Kickback Law can lead to
civil monetary penalties (which, pursuant to the Budget Act, can amount to as
much as $50,000 for each violation, plus up to treble damages, based on the
remuneration illegally offered, paid, received or solicited) and exclusion from
Medicare, Medicaid and certain other state and federal health care programs. The
scope of prohibited payments in the Anti-Kickback Law is broad and includes
economic arrangements involving hospitals, physicians and other health care
providers, including joint ventures, space and equipment rentals, purchases of
physician practices and management and personal services contracts. HHS has
published regulations which describe certain "safe harbor" arrangements that
will not be deemed to constitute violations of the Anti-Kickback Law. HHS is
expected to promulgate additional safe harbor regulations in the future. The
safe harbors described in the regulations are narrow and do not cover a wide
range of economic relationships which many hospitals, physicians and other
health care providers consider to be legitimate business arrangements not
prohibited by the statute. Because the regulations describe safe harbors and do
not purport to describe comprehensively all lawful or unlawful economic
arrangements or other relationships between health care providers and referral
sources, health care providers having these arrangements or relationships may be
required to alter them in order to ensure compliance with the Anti-Kickback Law.
Management of the Company believes that its contracts with providers,
physicians and other referral sources are in material compliance with the
Anti-Kickback Law and will make every effort to comply with the Anti-Kickback
Law. However, in light of the narrowness of the safe harbor regulations and the
scarcity of case law
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<PAGE> 12
interpreting the Anti-Kickback Law, there can be no assurances that the Company
will not be alleged to have violated the Anti-Kickback Law, and if an adverse
determination is reached, whether any sanction imposed would have a material
adverse effect on the Company's financial condition, results of operations or
cash flows.
The Office of the Inspector General of the Department of HHS, the
Department of Justice and other federal agencies interpret these fraud and abuse
provisions liberally and enforce them aggressively. Members of Congress have
proposed legislation that would significantly expand the federal government's
involvement in curtailing fraud and abuse and increase the monetary penalties
for violation of these provisions. In addition, some states restrict certain
business relationships between physicians and other providers of health care
services.
Restrictions on Physician Referrals. The federal Anti-Self Referral Law
(the "Stark Law") prohibits certain patient referrals by interested physicians.
Specifically, the Stark Law prohibits a physician, or an immediate family
member, who has a financial relationship with an entity, from referring Medicare
or Medicaid patients with limited exceptions, to that entity for the following
"designated health services", clinical laboratory services, physical therapy
services, occupational therapy services, radiology or other diagnostic services,
durable medical equipment and supplies, radiation therapy services and supplies,
parenteral and enteral nutrients, equipment and supplies, prosthetics, orthotics
and prosthetic devices, home health services, outpatient prescription drugs, and
inpatient and outpatient hospital services. A financial relationship is defined
to include an ownership or investment in, or a compensation relationship with,
an entity. The Stark Law also prohibits an entity receiving a prohibited
referral from billing the Medicare or Medicaid programs for any services
rendered to a patient. The Stark Law contains certain exceptions that protect
parties from liability if the parties comply with all of the requirements of the
applicable exception. The sanctions under the Stark Law include denial and
refund of payments, civil monetary penalties and exclusions from the Medicare
and Medicaid programs.
Management of the Company believes that it is presently in material
compliance with the Stark Law and will make every effort to comply with the
Stark Law. However, in light of the lack of regulatory guidance and the scarcity
of case law interpreting the Stark Law, there can be no assurances that the
Company will not be alleged to have violated the Stark Law, and if an adverse
determination is reached, whether any sanction imposed would have a material
adverse effect on the Company's results of operations, financial condition or
cash flows.
Corporate Practice of Medicine Doctrine. Many states prohibit business
corporations from providing, or holding themselves out as a provider of, medical
care. Possible sanctions for violation of any of these restrictions or
prohibitions include loss of licensure or eligibility to participate in
reimbursement programs (including Medicare and Medicaid), asset forfeitures and
civil and criminal penalties. These laws vary from state to state, are often
vague and have seldom been interpreted by the courts or regulatory agencies. The
Company seeks to structure its business arrangements in compliance with these
laws and, from time to time, the Company has sought guidance as to the
interpretation of such laws; however, there can be no assurance that such laws
ultimately will be interpreted in a manner consistent with the practices of the
Company.
Certificates of Need and Certificates of Exemption. Many states,
including states in which the Company operates, have procedures for the orderly
and economical development of health care facilities, the avoidance of
unnecessary duplication of such facilities and the promotion of planning for
development of such facilities. Such states require health care facilities to
obtain Certificates of Need ("CONs") or Certificates of Exemption ("COEs")
before: initiating projects in excess of a certain threshold for the acquisition
of major medical equipment or other capital expenditures; changing the scope or
operation of a health care facility; establishing or discontinuing a health care
service or facility; increasing, decreasing or redistributing bed capacity;
and/or changing of ownership of a health care facility, among others. Possible
sanctions for violation of any of these statutes and regulations include loss of
licensure or eligibility to participate in reimbursement programs and other
penalties. These laws vary from state to state and are generally administered by
the respective state department of health. The Company seeks to structure its
business operations in compliance with these laws and has sought guidance as to
the interpretation of such laws and the procurement of required CONs and/or
COEs. There can be no assurance, however, that the Company or any of its clients
will be able to obtain required CONs and/or COEs in the future.
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The Company is unable to predict the future course of federal, state or
local legislation or regulation, including Medicare and Medicaid statutes and
regulations. Further changes in the regulatory framework could have a material
adverse effect on the Company's financial condition, results of operations or
cash flows.
DEPENDENCE ON KEY EMPLOYEES AND QUALIFIED MEDICAL PROFESSIONALS
The Company's ability to achieve its growth strategy is dependent in
large part upon the efforts of its senior management, particularly Charles M.
Fernandez, the Company's Chairman of the Board, Chief Executive Officer and
President. The loss of the services of Mr. Fernandez could have a material
adverse effect on the Company. The Company has secured a $2.0 million "key-man"
life insurance policy on Mr. Fernandez. As the Company continues to expand, its
business strategy becomes more dependent on its ability to recruit and retain
qualified medical professionals. The Company competes with general acute care
hospitals and other healthcare providers for the services of medical
professionals. Demand for such medical professionals is high and such
professionals often receive competing offers. No assurance can be given that the
Company will be able to continue to recruit and retain a sufficient number of
qualified medical professionals. The inability to successfully recruit and
retain medical professionals could adversely affect the Company's ability to
staff the Bally facilities and successfully implement its growth strategy.
RELIANCE ON KEY CUSTOMERS; RELATED PARTY ISSUES
For fiscal 1997, the Company generated approximately 23.1% of total
revenues from CMHCs owned by Behavioral Wellness, Inc. and certain related
entities, and approximately 44.9% from CMHCs owned by Community Mental Health
Center of Orlando, Inc. and certain related entities. Assuming consummation of
the DHG Acquisition, approximately 35.1% of the Company's revenues on a pro
forma basis for fiscal 1997 would have been derived from a capitated arrangement
with Foundation Health.
Medicare regulations limit reimbursement for healthcare charges paid to
related parties. A party is considered "related" to a provider if it is deemed
to be under common ownership and/or control with the provider. One test for
determining common control for this purpose is whether the percentage of the
total revenues of the party received from services rendered to the provider is
so high that it effectively constitutes control. Another test is whether the
scope of management services furnished under contract is so broad that it
constitutes control. It is possible that such regulations or the interpretation
thereof could limit the number of management contracts and/or the fees
attributable to such contracts if a particular client of the Company is deemed
"related."
LEVERAGE AND ABILITY TO SERVICE DEBT
The level of the Company's indebtedness could have important
consequences to purchasers of the Securities offered hereby, because: (i) a
portion of the Company's cash flow from operations must be dedicated to debt
service, including the Notes and the Company's debt obligations and will not be
available for other purposes; (ii) the Company's ability to obtain additional
financing in the future for working capital, or to pursue possible expansion of
its business or acquisitions, may be limited; and (iii) the Company's level of
indebtedness could limit its flexibility in reacting to changes in the industry
and economic conditions generally making it more vulnerable to adverse economic
conditions and limiting its ability to withstand competitive pressures or take
advantage of business opportunities. Certain of the Company's competitors
currently operate on a less leveraged basis, and are likely to have
significantly greater operating and financing flexibility than the Company
following consummation of the Offering.
The Company believes that, based upon current levels of operations, it
should be able to meet its interest obligations on the Notes, and its interest
and principal obligations under its credit agreements when due. However, if the
Company cannot generate sufficient cash flow from operations to meet its debt
obligations when due, the Company might be required to restructure or refinance
its indebtedness. There is no assurance that any such restructuring or
refinancing could be effected on satisfactory terms or would be permitted by the
terms of the Company's then existing indebtedness. There can be no assurance
that the Company's operating cash flows will be
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sufficient to meet its debt service requirements or to repay the Notes at
maturity or that the Company will be able to refinance the Notes or other
indebtedness at maturity.
SUBORDINATION
The Notes will be unsecured obligations of the Company and will be
subordinated in right of payment to all present and future Senior Indebtedness
of the Company and will be effectively subordinated to all indebtedness of the
Company's subsidiaries. In the event of bankruptcy, liquidation or
reorganization of the Company, the assets of the Company will be available to
pay obligations on the Notes only after all Senior Indebtedness has been paid in
full, and there may not be sufficient assets remaining to pay amounts due on any
or all of the Notes then outstanding. At September 30, 1997, the Company had
approximately $5.3 million of outstanding Senior Indebtedness. In the event of a
payment default with respect to Senior Indebtedness, no payments may be made on
account of the Notes until such default no longer exists. In addition, in the
event of other defaults on Senior Indebtedness payments on the Notes may be
delayed or prohibited. See "Description of Notes."
RISKS RELATED TO A REPURCHASE EVENT
Upon the occurrence of a Repurchase Event, each Holder of the Notes may
require the Company to repurchase all or a portion of such Holder's Notes. If a
Repurchase Event were to occur, there can be no assurance that the Company would
have sufficient financial resources, or would be able to arrange financing, to
pay the repurchase price for all the Notes tendered by Holders thereof. In
addition, the occurrence of certain Repurchase Events would constitute an event
of default under certain of the Company's current debt agreements, including the
Company's current credit facility, and the Company's repurchase of the Notes as
a result of the occurrence of a Repurchase Event may be prohibited or limited
by, or create an event of default under, the terms of future agreements relating
to borrowings of the Company, including agreements relating to Senior
Indebtedness. In the event a Repurchase Event occurs at a time when the Company
is prohibited from purchasing the Notes, the Company could seek the consent of
its lenders to purchase the Notes or could attempt to refinance the borrowings
that contain such prohibition. If the Company does not obtain such a consent or
repay such borrowings, the Company would remain prohibited from purchasing the
Notes. In such case, the Company's failure to purchase tendered Notes would
constitute an Event of Default under the Indenture which would, in turn,
constitute a further default under the Company's existing debt agreements and
may constitute a default under the terms of other indebtedness that the Company
may incur from time to time. In such circumstances, the subordination provisions
in the Indenture would prohibit payments to the Holders of the Notes. See
"Description of Notes--Repurchase at Option of Holders Upon a Repurchase Event."
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of Common Stock in the public market could adversely
affect the market price of the Common Stock and the Notes. As of December 5,
1997, Continucare had 13,729,802 shares of Common Stock outstanding, assuming no
exercise of currently outstanding options. Although there is presently a public
market for the Common Stock, there can be no assurance (and it is not presently
likely) that such market will have sufficient trading activity to permit holders
of Notes converted into Common Stock to sell their shares in desired amounts, or
at desired prices, or that such market will be sustained, and the sale of
substantial amounts of shares is likely to have a material adverse effect on the
market price for the shares of Common Stock and the Notes. In addition to this
registration statement, the Company has (i) registered for resale an aggregate
of 8,500,000 shares of Common Stock previously issued upon formation of
Continucare and pursuant to a private placement, and 370,000 shares of Common
Stock held by certain option holders of the Company, which amounts included
approximately 3,927,000 shares held by current officers and directors of the
Company (ii) agreed to register, subject to certain agreements with the
Placement Agent (as defined herein), (A) 2,250,000 shares in connection with a
recent private placement, (B) 490,617 shares in connection with recent
acquisitions and (C) approximately 600,000 shares in connection with warrants.
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POTENTIAL VOLATILITY
There has been significant volatility in the market price of securities
of healthcare companies that often has been unrelated to the operating
performance of such companies. The Company believes that certain factors, such
as legislative and regulatory developments, quarterly fluctuations in the actual
or anticipated results of operations of the Company, lower revenues or earnings
in the financial results of the Company than those anticipated by securities
analysts, the overall economy and the financial markets, could cause the price
of the Common Stock and the Notes to fluctuate substantially.
COMPETITION
The healthcare industry is highly competitive. Continucare competes
with several national competitors and many regional and national healthcare
companies, some of which have greater resources than Continucare. In addition,
healthcare providers may elect to manage their own outpatient health programs.
Competition is generally based upon reputation, price, the ability to offer
financial and other benefits for the particular provider, and the management
expertise necessary to enable the provider to offer outpatient programs that
provide the full continuum of outpatient services in a quality and
cost-effective manner. The pressure to reduce healthcare expenditures has
emphasized the need to manage the appropriateness of health services provided to
patients. As a result, competitors without management experience covering the
various levels of the continuum of outpatient services may not be able to
compete successfully.
INSURANCE
Continucare carries general liability, comprehensive property damage,
malpractice, workers' compensation and other insurance coverages that management
considers adequate for the protection of Continucare's assets and operations.
There can be no assurance, however, that the coverage limits of such policies
will be adequate. A successful claim against Continucare in excess of its
insurance coverage could have a material adverse effect on Continucare.
ABSENCE OF PUBLIC MARKET
No public market exists for the Notes offered hereby. The Notes (and
the shares of Common Stock issuable upon conversion thereof) have not been
registered under the Securities Act and, while the Company has agreed to file a
registration statement with the Commission with respect to the Notes offered
hereby (and the Common Stock issuable upon conversion thereof), there can be no
assurance that such registration statement will become effective under the
Securities Act. In addition, there can be no assurance that a regular trading
market will be established for the Notes or that a trading market will be
sustained for the Common Stock into which the Notes are convertible. If a
trading market does not develop or is not maintained, holders of the Notes may
experience difficulty in reselling the Notes or may be unable to sell them at
all. If a market for the Notes develops, any such market may be discontinued at
any time. If a public trading market develops for the Notes, future trading
prices of the Notes will depend on many factors, including, among other things,
prevailing interest rates, the Company's results of operations and the market
for similar securities. Depending on prevailing interest rates, the market for
similar securities and other factors, including the financial condition of the
Company, the Notes may trade at a discount from their principal amount.
USE OF PROCEEDS
The shares of Common Stock offered by the Selling Stockholders are not
being sold by the Company, and the Company will not receive any proceeds from
the sale thereof.
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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
GENERAL
The following unaudited pro forma consolidated balance sheet as of September 30,
1997 and the unaudited pro forma consolidated statement of income for the year
ended June 30, 1997 and the three months ended September 30, 1997 include the
Company's historical financial position and results of operations, adjusted to
reflect (a) the acquisition of Doctors Health Group discussed below and (b) the
sale by the Company of $46,000,000 of 8% Convertible Subordinated Notes (the
"Notes") and the application of the net proceeds therefrom, as if all such
events and transactions had occurred as of September 30, 1997 in the case of the
consolidated balance sheet, and as of July 1, 1997 in the case of the
consolidated statements of income.
The unaudited pro forma consolidated financial information has been prepared by
the Company based, in part, on the audited financial statements of the
businesses acquired as required under the Securities Exchange Act of 1934,
adjusted where necessary, with respect to pre-acquisition periods, to conform
with the fiscal year of the Company and to the basis of accounting used in the
Company's consolidated financial statements. These unaudited financial
statements are not intended to be indicative of the results that would have
occurred if the transactions had occurred on the dates indicated or which may be
realized in the future. The accompanying unaudited pro forma consolidated
financial information should be read in connection with the historical financial
statements and the notes thereto, in each case incorporated by reference from
documents filed by the Company with the Commission, as described in "Documents
Incorporated by Reference."
ACQUISITIONS
On April 10, 1997, the Company consummated the acquisition of three Florida
based physician practices, including two arthritis rehabilitation centers for an
aggregate purchase price of approximately $3.3 million (the "Arthritis Rehab
Acquisition"). The aggregate purchase price was approximately $3.3 million of
which approximately $2.5 million was borrowed by the Company under the Company's
Revolving Note and Term Note. As a result of the acquisition, goodwill and other
intangible assets of approximately $2.1 million was recorded, which is being
amortized over a weighted average life of 20 years. This acquisition is
reflected in Continucare Corporation's historical September 30, 1997 balance
sheet. The pro forma consolidated statement of income for the fiscal year ended
June 30, 1997 includes the nine months of operations of these entities prior to
their acquisition by Continucare.
On October 31, 1997, the Company acquired certain assets of Doctors Health
Group, Inc. ("DHG") for an aggregate purchase price of approximately $14.5
million of which $13.0 million was paid in cash. The remainder of the purchase
price was in Continucare common stock. The cash portion of the purchase price
was funded from a portion of the proceeds of the sale of the Notes. This
acquisition generated approximately $8.8 million of goodwill and $5.6 in
intangible assets all of which will be amortized over a range of 4 to 28 years,
with an estimated weighted average of 25 years.
ISSUANCE OF NOTES
On October 30, 1997, the Company consummated the private placement of
the Notes.
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CONTINUCARE CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
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<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------------ FOR THE
ACQUISITION ISSUANCE OF ACQUISITION
CONTINUCARE ----------------- ACQUISITION NOTES AND THE
CORPORATION DHG(1) ADJUSTMENTS ADJUSTMENTS NOTES
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,507,552 $ - $(13,342,880)(2) $ 38,000,000 (5) $ 29,164,672
Accountants receivable, net 3,534,682 - - - 3,534,682
Prepaid expenses and other assets 525,522 - - - 525,522
----------- ----------------- ------------ ------------ ------------
Total current assets 8,567,756 - (13,342,880) 38,000,000 33,224,876
Other receivables 5,600,000 - - - 5,600,000
Property and equipment, net 1,230,491 100,000 - - 1,330,491
Goodwill, net 3,249,523 - 9,106,517(3) - 12,356,040
Other intangible assets, net 2,568,314 - 5,636,363(3) 3,000,000 (5) 11,204,677
Other assets, net 574,300 - 574,300
Deferred tax asset, net 505,699 - - - 505,699
----------- ----------------- ------------ ------------ ------------
Total assets $22,296,083 $ 100,000 $ 1,400,000 $ 41,000,000 $ 64,796,083
=========== ================= ============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 929,817 $ - $ - $ - $ 929,817
Accrued expenses 1,113,848 - - - 1,113,848
Accrued medical plans - - - - -
Accrued interest payable 32,372 - - - 32,372
Current portion of capital lease obligation 45,126 - - - 45,126
Current portion of notes payable 5,042,500 - - (5,000,000) (5) 42,500
Income and other taxes payable 79,647 - - - 79,647
------------ ----------------- ------------ ----------- ------------
Total current liabilities 7,243,310 - - (5,000,000) 2,243,310
Convertible subordinated debentures - - 46,000,000 (5) 46,000,000
Long-term debt 209,546 209,546
Long-term accrued expenses 150,000 - - 150,000
------------ ----------------- ------------ ----------- ------------
Total liabilities 7,602,856 - - 41,000,000 48,602,856
------------ ----------------- ------------ ----------- ------------
Commitments and contingencies
Shareholders' equity
Common stock 1,089 - 24 (4) - 1,113
Additional paid-in capital 14,549,884 - 1,499,976 (4) - 16,049,860
Retained earnings 2,426,584 - - - 2,426,584
Treasury stock (2,284,330) - - - (2,284,330)
------------ ----------------- ------------ ----------- ------------
Total shareholders' equity 14,693,227 - 1,500,000 - 16,193,227
------------ ----------------- ------------ ----------- ------------
Total liabilities and shareholders' equity $ 22,296,083 $ - $ 1,500,000 $41,000,000 $ 64,796,083
============ ================= ============ =========== ============
</TABLE>
-16-
<PAGE> 18
CONTINUCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
The acquisition and Note adjustments reflected on the unaudited pro forma
consolidated balance sheet are as follows:
1) Represents the historical value of the assets acquired.
2) Represents the cash paid for the acquisition of DHG.
3) The aggregate purchase price has been allocated, on a preliminary basis,
to the net assets acquired based on their estimated fair market value. The
allocation of the purchase price is preliminary, while the Company
continues to obtain the information to determine the fair value of the
assets acquired and the liabilities assumed. Therefore, an uncertainty
exists with respect to the effects of the amortization periods assigned as
any adjustment could result in a change to estimated annual amortization
expense.
<TABLE>
<CAPTION>
DHG
<S> <C>
Total purchase price $ 14,842,880
Net tangible assets acquired (100,000)
Identifiable intangible assets acquired (5,636,363)
----------------
Goodwill $ 9,106,517
================
</TABLE>
Goodwill and intangible assets will be amortized over a range of 4 to 28
years, with an estimated weighted average of 25 years.
The preliminary allocation of the identifiable intangible assets acquired
is as follows:
<TABLE>
<CAPTION>
ALLOCATED VALUE
<S> <C>
Patient list $ 3,981,000
Assembled workforce 248,000
Non-compete agreement 23,363
Internally developed software 24,000
Trade name 1,360,000
---------------
Total identifiable intangible assets $ 5,636,363
===============
</TABLE>
-17-
<PAGE> 19
4) Represents the issuance of stock to effect the purchase of DHG as follows:
<TABLE>
<CAPTION>
<S> <C>
Common stock $ 24
Additional paid-in capital 1,499,976
------------
Goodwill $ 1,500,000
============
</TABLE>
5) Represents the proceeds of the issuance of the Notes in the amount of
$46,000,000 less related issuance costs of $3,000,000 and repayment of
$5,000,000 in notes payable. The $3,000,000 of debt issuance costs
capitalized will be amortized over the outstanding term of the Notes of
five years.
-18-
<PAGE> 20
CONTINUCARE CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HISTORICAL PRO
--------------------------------------- FORMA
ACQUISITIONS FOR THE
------------------------ ACQUISITION
CONTINUCARE ARTHRITIS ACQUISITION OFFERING AND THE
CORPORATION DHG REHAB ADJUSTMENTS ADJUSTMENTS NOTES
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Capitation revenues $ - $15,466,087 $ - $ - $ - $ 15,466,087
Net patient service revenues 1,041,793 - 2,951,521 - - 3,993,314
Management fees 12,874,592 - - - - 12,874,592
------------ ----------- ---------- ----------- ----------- ------------
Total revenues 13,916,385 15,466,087 2,951,521 - - 32,333,993
------------ ----------- ---------- ----------- ----------- ------------
Expenses:
Physician, hospital and other - 9,552,748 - - - 9,552,748
Payroll and employee benefits 6,348,195 2,104,895 1,560,734 (905,423)(1) - 9,108,401
Provision for bad debt 1,818,293 - 118,816 - - 1,937,109
Professional fees 1,450,790 - 40,658 - - 1,491,448
General and administrative 1,176,516 1,310,617 1,459,792 - - 3,946,925
Depreciation and amortization 208,936 134,456 70,001 1,564,478 (2) 600,000(3) 2,577,871
------------ ----------- ---------- ----------- ----------- ------------
Total expenses 11,002,730 13,102,716 3,250,001 659,055 600,000 28,614,502
------------ ----------- ---------- ----------- ----------- ------------
Income from operations 2,913,655 2,363,371 (298,480) (659,055) (600,000) 3,719,491
------------ ----------- ---------- ----------- ----------- ------------
Other income (expense):
Interest income (expense), net 165,253 16,564 - (189,187)(4) (3,461,250)(5) (3,468,620)
Minority interest (171,316) - - - - (171,316)
Other income - 22,738 61,755 - - 84,493
------------ ----------- ---------- ----------- ----------- ------------
Total other income (expense) (6,063) 39,302 61,755 (189,187) (3,461,250) (3,555,443)
------------ ----------- ---------- ----------- ------------ ------------
Income (loss) before income taxes 2,907,592 2,402,673 (236,725) (848,242) (4,061,250) 164,048
Provision for income taxes 1,200,917 - - 414,425 (6) (1,528,248)(7) 87,094
------------ ----------- ---------- ----------- ----------- ------------
Net income (loss) $ 1,706,675 $ 2,402,673 $ (236,725) $(1,262,667) $(2,533,002) $ 76,954
============ =========== ========== =========== =========== ============
Weighted average shares of common
stock outstanding 10,921,991 11,164,089
------------ ------------
Earnings (loss) per common share of
common stock outstanding $ 0.16 $ 0.01
============ ============
Weighted average shares of common
stock outstanding 10,875,785 17,462,711
------------ ------------
Earnings (loss) per common share and
common equivalent share assuming
full dilution $ 0.16 $ 0.01
============ ============
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
consolidated financial statements.
-19-
<PAGE> 21
CONTINUCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED JUNE 30, 1997
The acquisition and Note adjustments reflected on the unaudited pro forma
consolidated statement of income are as follows:
1) Represents the elimination of management fees paid to a DHG shareholder of
$1,055,000 which will no longer be incurred by the Company, offset by
annual consulting fees of $100,000 to be paid to the same shareholder
under a new consulting agreement. In addition, this adjustment includes an
approximate $50,000 increase in payroll and employee benefits for the
Arthritis Rehab Acquisition.
2) Represents the amortization of goodwill and other intangible assets
related to the acquisitions as follows:
<TABLE>
<S> <C>
Goodwill $ 461,898
Patient list 1,028,100
Assembled workforce 15,547
Non-compete agreement 6,933
Internally developed software 3,429
Trade name 48,571
------------
Total $ 1,564,478
============
</TABLE>
3) Represents the amortization of the capitalized debt issuance costs of
$3,000,000 over five years.
4) Represents an additional nine months of interest expense on the $2,500,000
note payable drawn by the Company for the Arthritis Rehab Acquisition.
5) Represents the net effect on interest income (expense) of the issuance of
the Notes (assuming for purposes of these pro forma financial statements
an 8.0% interest rate of the Notes) and the repayment of the $2,500,000
note payable as follows:
<TABLE>
<CAPTION>
PRINCIPAL INTEREST RATE INTEREST
<S> <C> <C> <C>
Notes $ 46,000,000 8.00% $ (3,680,000)
Notes payable (2,500,000) 8.75% 218,750
------------ ------------
Net change $ 43,500,000 $ (3,461,250)
============ ============
</TABLE>
6) Represents the income tax effect of certain acquisition adjustments, of
DHG's historical income before taxes (as DHG is a subchapter S
corporation) and of Arthritis Rehab Acquisition's historical loss before
taxes at an assumed tax rate of 37.63%.
7) Represents the income tax effect of the Offering adjustments at an assumed
tax rate of 37.63%.
-20-
<PAGE> 22
CONTINUCARE CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRO
HISTORICAL FORMA
-------------------------- ISSUANCE OF FOR THE
CONTINUCARE ACQUISITION ACQUISITION
CORPORATION ----------- ACQUISITION NOTES AND THE
DHG ADJUSTMENTS ADJUSTMENTS NOTES
<S> <C> <C> <C> <C> <C>
Revenues:
Capitation revenues $ -- $ 3,906,942 $ -- $ -- $ 3,906,942
Net patient service revenues 2,205,165 -- -- -- 2,205,165
Management fees 1,458,619 -- -- -- 1,458,619
----------- ----------- ----------- ------------ ------------
Total revenues 3,663,784 3,906,942 -- -- 7,570,726
----------- ----------- ----------- ------------ ------------
Expenses:
Physician, hospital and other -- 2,488,612 -- -- 2,488,612
Payroll and employee benefits 2,309,207 396,851 (187,500)(1) -- 2,518,558
Provision for bad debt 89,083 -- -- -- 89,083
Professional fees 115,954 -- -- -- 115,954
General and administrative 949,575 339,447 -- -- 1,289,022
Depreciation and amortization 103,563 12,550 346,169 (2) 150,000 (4) 612,282
----------- ----------- ----------- ------------ -----------
Total expenses 3,567,382 3,237,460 158,669 150,000 7,113,511
----------- ----------- ----------- ------------ -----------
Income from operations 96,402 669,482 (158,669) (150,000) 457,215
----------- ----------- ----------- ------------ -----------
Other income (expense):
Interest income (expense), net 28,575 -- -- (810,625)(5) (782,050)
Other income -- 11,476 -- -- 11,476
----------- ---------- ----------- ------------ -----------
Total other income (expense) 28,575 11,476 -- (810,625) (770,574)
----------- ---------- ----------- ------------ -----------
Income (loss) before income taxes 124,977 680,958 (158,669) (960,625) (313,359)
Provision for income taxes 49,677 -- 196,537 (3) (361,483)(6) (115,269)
----------- ---------- ----------- ------------ -----------
Net income (loss) $ 75,300 $ 680,958 $ (355,206) $ (599,142) $ (198,090)
=========== ========== =========== ============ ===========
Weighted average shares of common
stock outstanding 10,888,993 11,131,091
=========== ===========
Earnings (loss) per common share of common
stock outstanding $ 0.01 $ (0.02)
=========== ===========
Weighted average shares of common
stock outstanding 10,906,956 17,493,882
=========== ===========
Earnings (loss) per common share and common
equivalent share assuming full dilution $ 0.01 $ (0.02)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
consolidated financial statements.
-21-
<PAGE> 23
CONTINUCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
The acquisition adjustments reflected on the unaudited pro forma consolidated
statement of income are as follows:
1) Represents the elimination of management fees paid to a DHG shareholder of
$287,500 offset by consulting fees of $100,000 to be paid to the same
shareholder under a new consulting agreement.
2) Represents the amortization of goodwill and other intangible assets
related to the acquisitions as follows:
<TABLE>
<S> <C>
Goodwill $ 81,308
Patient list 248,813
Assembled workforce 2,214
Non-compete agreement 834
Internally developed software 857
Trade name 12,143
----------
Total $ 346,169
==========
</TABLE>
3) Represents the income tax effect of certain acquisition adjustments and of
DHG's historical income before taxes (as DHG is a subchapter S
corporation) at an assumed tax rate of 37.63%.
4) Represents the amortization of the capitalized debt issuance costs of
$3,000,000 over five years.
5) Represents the net effect on interest income (expense) of the issuance of
the Notes and the repayment of $5,000,000 of notes payable as follows:
<TABLE>
<CAPTION>
PRINCIPAL INTEREST RATE INTEREST
-------------- --------------- ------------
<S> <C> <C> <C>
Convertible Notes $ 46,000,000 8.00% $ (920,000)
Notes payable (5,000,000) 8.75% 109,375
-------------- ------------
Net change $ 41,000,000 $ (810,625)
-------------- ------------
</TABLE>
6) Represents the income tax effect of the issuance of the Notes at an
assumed tax rate of 37.63%.
-22-
<PAGE> 24
RATIO OF EARNINGS TO FIXED CHARGES
The Company's ratio of earnings to fixed charges for each of the periods
indicated is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, PRO FORMA THREE MONTHS ENDED SEPTEMBER 30, PRO FORMA
1996 1997 1997 1996 1997 1997
----------------------- ------------ ---------- ---------------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
43.1x 20.9x 1.04x 70.2x 4.5x 0.67x
</TABLE>
The ratio of earnings to fixed charges is computed by dividing fixed
charges into income before income taxes plus fixed charges. Fixed charges
include interest expense and amortization of debt issuance costs. The pro forma
information for the year ended June 30, 1997 gives effect to the (i) DHG
Acquisition, (ii) Arthritis Rehab Acquisition and (iii) the sale by the Company
of the Notes and the use of the net proceeds therefrom as if the transactions
had occurred on July 1, 1996. The pro forma information for the three months
ended September 30, 1997 gives effect to the (i) DHG Acquisition and (ii) the
sale by the Company of the Notes and the use of net proceeds therefrom as if
these transactions had occurred on July 1, 1997.
DESCRIPTION OF NOTES
The Notes were issued under an Indenture, between the Company and
American Stock Transfer & Trust Company, as Trustee (the "Trustee"). The
following summary of certain provisions of the Indenture does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
all of the provisions of the Indenture, including the definitions of certain
terms therein. Wherever a particular defined term is referred to, such defined
term refers to the Indenture and is incorporated herein by reference. As used in
this Description of Notes, the term "Company" means Continucare Corporation and
does not include its subsidiaries.
GENERAL
The Notes are unsecured subordinated obligations of the Company with an
aggregate principal amount of $46,000,000 and will mature on October 31, 2002.
The Notes bear interest at the rate of 8% per annum from the date of initial
issuance, or from the most recent Interest Payment Date to which interest has
been paid or provided for, payable semi-annually on April 30 and October 31 of
each year, commencing April 30, 1998, to the Person in whose name the Notes (or
any predecessor Notes) are registered at the close of business on the Regular
Record Date for such interest, which shall be the April 15 or October 15
(whether or not a Business Day), as the case may be, next preceding such
Interest Payment Date. Interest on the Notes will be paid on the basis of a
360-day year of twelve 30-day months, based on actual days elapsed.
Principal of, and premium, if any, and interest on the Notes will be
payable, and the transfer of Notes will be registrable, at the office or agency
of the Company maintained for such purposes in New York, New York. In addition,
payment of interest may, at the option of the Company, be made by check mailed
to the address of the Person entitled thereto as it appears in the Note
Register.
The Notes were issued only in fully registered form, without coupons,
in denominations of $1,000 and any integral multiples thereof. No service charge
will be made for any registration of transfer or exchange of the Notes, but the
Company may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith. The Company is not required
(i) to issue, register the transfer of or exchange any Note during a period
beginning at the opening of business 15 days before the mailing of notice fixed
for any redemption and ending at the close of business on such Redemption Date
or (ii) to register the transfer of or exchange any Notes for redemption in
whole or in part, except the unredeemed portion of the Notes being redeemed in
part.
-23-
<PAGE> 25
All monies paid by the Company to the Trustee or any Paying Agent for
the payment of principal of and premium, if any, and interest on any Note which
remains unclaimed for two years after such principal, premium or interest
becomes due and payable may be repaid to the Company. Thereafter, the Holder of
such Note may, as an unsecured general creditor, look only to the Company for
payment thereof.
The Indenture does not contain any provisions that would provide
protection to Holders of the Notes against a sudden and dramatic decline in the
credit quality of the Company resulting from any takeover, recapitalization or
similar restructuring, except as described below under "Repurchase at Option of
Holders Upon a Repurchase Event" and "Consolidation, Merger and Sale of Assets."
CONVERSION RIGHTS
The Notes are convertible into the Common Stock of the Company at any
time after 60 days following the date of initial issuance thereof and up to and
including the maturity date (subject to prior redemption by the Company on not
less than 20 nor more than 65 days' notice to the Trustee) initially at the
conversion price of $7.25 per share (subject to adjustment as described below).
The right to convert the Notes called for redemption or delivered for repurchase
will terminate at the close of business on the last Trading Day prior to the
Redemption Date or the Repurchase Date, unless the Company defaults in making
the payment due upon redemption or repurchase. For information as to notices of
redemption, see "Optional Redemption."
The Conversion Price will be subject to adjustment in certain events,
including (i) dividends (and other distributions) payable in Common Stock or any
class of capital stock of the Company, (ii) the issuance to all holders of
Common Stock of rights, warrants or options entitling them to subscribe for or
purchase Common Stock at less than the current market price, (iii) subdivisions
or combinations of Common Stock, (iv) distributions to all holders of Common
Stock of evidences of indebtedness of the Company, cash or other assets
(including securities, but excluding those dividends, rights, warrants, options
and distributions referred to above and excluding dividends and distributions
paid exclusively in cash), (v) distributions consisting exclusively of cash
(excluding any cash portion of distributions referred to in (iv) above or cash
distribution upon a merger or consolidation to which the second succeeding
paragraph applies) to all holders of Common Stock in an aggregate amount that,
combined together with (a) all other such all-cash distributions made within the
preceding 12 months in respect to which no adjustment has been made and (b) any
cash and the fair market value of other consideration paid or payable in respect
of any tender offers by the Company for Common Stock concluding within the
preceding 12 months in respect of which no adjustment has been made, exceeds
12.5% of the Company's market capitalization (defined as being the product of
the current market price of the Common Stock times the number of shares of
Common Stock then outstanding) on the record date for such distribution, and
(vi) the purchase of Common Stock pursuant to a tender offer made by the Company
or any of its subsidiaries which involves an aggregate consideration that
together with (a) any cash and the fair market value of any other consideration
paid or payable in any other tender offer by the Company or any of its
subsidiaries of Common Stock expiring within the 12 months preceding the
expiration of such tender offer in respect of which no adjustment has been made
and (b) the aggregate amount of any such all-cash distributions referred to in
(v) above to all holders of Common Stock within the 12 months preceding the
expiration of such tender offer in respect of which no adjustments have been
made, exceeds 12.5% of the Company's market capitalization on the expiration of
such tender offer. No adjustment in the Conversion Price shall be required
unless such adjustment (plus any adjustments not previously made) would require
an increase or decrease of at least 1% in such price; provided, however, that
any adjustments which by reason of this sentence are not required to be made
shall be carried forward and then taken into account in any subsequent
adjustment.
In addition to the foregoing adjustments, the Company will be permitted
to make such reduction in the Conversion Price as it considers to be advisable
in order that any event treated for Federal income tax purposes as a dividend or
distribution of stock or stock rights will not be taxable to the holders of the
Common Stock.
Subject to the rights of Holders of the Notes described below under
"Repurchase at Option of Holders Upon a Repurchase Event," in case of certain
consolidations or mergers to which the Company is a party or the transfer of
substantially all of the assets of the Company, each Note then outstanding
would, without the consent of any Holders of the Notes, become convertible only
into the kind and amount of securities, cash and other property
-24-
<PAGE> 26
receivable upon the consolidation, merger or transfer by a holder of the number
of shares of Common Stock into which such Note might have been converted
immediately prior to such consolidation, merger or transfer (assuming such
holder of Common Stock failed to exercise any rights of election and received
per share the kind and amount received per share by a plurality of non-electing
shares).
Fractional shares of Common Stock will not be issued upon conversion,
but, in lieu thereof, the Company will pay a cash adjustment based upon market
price. Upon conversion, Holders will be entitled to receive interest accrued
through the date of such conversion, payable (without additional interest) on
the next succeeding Interest Payment Date.
If at any time the Company makes a distribution of property to its
stockholders that would be taxable to such stockholders as a dividend for
Federal income tax purposes (e.g., distributions of evidence of indebtedness or
assets of the Company, but generally not stock dividends or rights to subscribe
for Common Stock) and, pursuant to the antidilution provisions of the Indenture,
the Conversion Price of the Notes is reduced, such reduction may be deemed to be
the payment of a taxable dividend to Holders of the Notes. Holders of the Notes
could, therefore. have taxable income as a result of an event pursuant to which
they receive no cash or property that could be used to pay the related income
tax.
RESTRICTED PAYMENTS
The Indenture provides that the Company shall not make any Restricted
Payment to any Person and the Company shall not permit any Subsidiary of the
Company to make any Restricted Payment other than to the Company. "Restricted
Payment" means, with respect to any Person, (i) the declaration or payment of
any dividend or the incurrence of any liability to make any other payment or
distribution of cash or other property or assets (other than a payment or
distribution consisting solely of Capital Stock of the Company, other than
Disqualified Capital Stock (as defined below)) by such Person in respect of such
Person's Capital Stock, excluding dividends from one Subsidiary of the Company
to another Subsidiary of the Company or to the Company and excluding cash
dividends by the Company which do not exceed $2.0 million in the aggregate in
any fiscal year, (ii) except for the purchase of shares of Common Stock of the
Company in the aggregate amount of up to $2.0 million in any fiscal year, any
payment on account of the purchase, redemption, defeasance or other retirement
of such Person's Capital Stock (other than a payment or distribution consisting
solely of Capital Stock of the Company, other than Disqualified Capital Stock)
or any other payment or distribution made in respect thereof, either directly or
indirectly or by merger, consolidation or otherwise, or (iii) any payment, loan,
contribution, or other transfer of funds or other property (other than payments
or distributions consisting solely of Capital Stock of the Company, other than
Disqualified Capital Stock) to any stockholder of such Person in their capacity
as stockholders as opposed to employees, directors or consultants.
RANKING
The payment of the principal of and premium, if any, and interest on
the Notes will, to the extent set forth in the Indenture, be subordinated in
right of payment to the prior payment in full of all Senior Indebtedness. Upon
any payment or distribution of assets to creditors upon any liquidation,
dissolution, winding-up, reorganization, assignment for the benefit of
creditors, marshaling of assets or any bankruptcy, insolvency or similar
proceedings of the Company, the holders of all Senior Indebtedness will be first
entitled to receive payment in full of all amounts due or to become due thereon
before the Holders of the Notes will be entitled to receive any payment in
respect of the principal of or premium, if any, or interest on the Notes. No
payment or distribution of any assets of the Company shall be made on account of
principal of and premium, if any, or interest on the Notes, in the event and
during the continuation of (i) any default in the payment of principal of or
premium, if any, or interest on any Senior Indebtedness beyond any applicable
grace period with respect thereto or (ii) any other event of default with
respect to any Senior Indebtedness permitting the holders of such Senior
Indebtedness (or a trustee or other representative on behalf of the holders
thereof) to declare such Senior Indebtedness due and payable prior to the date
on which it would otherwise have become due and payable, upon written notice
thereof to the Company and the Trustee by any holders of Senior Indebtedness (or
a trustee or other representative on behalf of the holders thereof) (the
"Default Notice"), unless and until such event of default shall have been cured
or waived or ceased to
-25-
<PAGE> 27
exist and such acceleration shall have been rescinded or annulled; provided such
payments may not be prevented under clause (ii) above for more than 179 days
after an applicable Default Notice has been received by the Trustee unless the
Senior Indebtedness in respect of which such event of default exists has been
declared due and payable in its entirety, in which case no such payment may be
made until such acceleration has been rescinded or annulled or such Senior
Indebtedness has been paid in full. No event of default which existed or was
continuing on the date of any Default Notice may be made the basis for the
giving of a second Default Notice and only one such Default Notice may be given
in any 365-day period unless the default which was the basis for the Default
Notice shall have been cured or waived for a period of not less than 180 days.
By reason of such subordination, in the event of insolvency, creditors
of the Company who are not holders of Senior Indebtedness or of the Notes may
recover less, ratably, than holders of Senior Indebtedness and may recover more,
ratably, than the Holders of the Notes.
The Notes are effectively subordinated to all indebtedness and other
liabilities and commitments (including trade payables and lease obligations) of
the Company's subsidiaries. Any right of the Company to receive assets of any
such subsidiary upon the liquidation or reorganization of any such subsidiary
(and the consequent right of the Holders of the Notes to participate in those
assets) is effectively subordinated to the claims of that subsidiary's
creditors, except to the extent that the Company is itself recognized as a
creditor of such subsidiary, in which case the claims of the Company would still
be subject to any security interest in the assets of such subsidiary and any
indebtedness of such subsidiary senior to that held by the Company.
The Indenture does not prohibit the incurrence of additional
indebtedness, including Senior Indebtedness. At September 30, 1997, the Company
had approximately $7.6 million of aggregate liabilities, including $5.3 million
of Senior Indebtedness. The Company expects from time to time to incur
additional Indebtedness, including Senior Indebtedness.
CERTAIN DEFINITIONS
"Capital Lease Obligation" means, with respect to any person, at the
time any determination thereof is to be made, any obligation of such person for
the payment of rent or other amounts under a lease of property or assets which
obligation is required to be accounted for as a capitalized lease on the balance
sheet of such person under GAAP.
"Disqualified Capital Stock" means, with respect to any person, any
Capital Stock of such Person that, by its terms (or by the terms of any security
into which it is convertible or for which it is exercisable, redeemable or
exchangeable), matures, or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the option of the holder thereof,
in whole or in part, on or prior to the maturity of the Notes.
"Senior Indebtedness" means, with respect to the Company, any of the
following (without duplication): (i) (a) any liability or obligation of the
Company for borrowed money (including, without limitation, principal of and
premium, if any, interest, fees, penalties, expenses, collection expenses, and
other obligations in respect thereof, and, to the extent permitted by applicable
law, interest accruing after the filing of a petition initiating any proceeding
under the Bankruptcy Law whether or not allowed as a claim in such proceeding),
whether or not evidenced by bonds, debentures, notes or other written
instruments, and any other liability or obligation evidenced by notes, bonds,
debentures or similar instruments whether or not contingent, (b) any deferred
payment obligation of the Company for the payment of the purchase price of
property or assets evidenced by a note or similar instrument (excluding any
obligation for trade payables or constituting the deferred purchase price of
property or assets which is not evidenced by a note or similar instrument and
which is unsecured), (c) any Capital Lease Obligations of the Company, (d) all
obligations of the Company under interest rate and currency swaps, floors, caps,
or similar arrangements intended to fix interest rate obligations or currency
fluctuation risks, (e) all obligations of the Company evidenced by a letter of
credit or any reimbursement obligation of the Company in respect of a letter of
credit, (f) all obligations of others secured by a lien to which any of the
properties or assets of the Company are subject (including, without limitation,
leasehold interests and any intangible property rights), whether or not the
obligations secured thereby have been assumed by the Company or shall otherwise
be the
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Company's legal obligation and, with respect to any of the foregoing items
described in clauses (a) through (f) above, whether outstanding on the date of
execution of the Indenture or thereafter created, incurred or assumed and (g)
all obligations of others of the kinds described in the preceding clauses (a),
(b), (c), (d) or (e) assumed by or guaranteed by the Company and the obligations
of the Company under guarantees of any such obligations; and (ii) any
amendments, renewals, extensions, deferrals, modifications, refinancing and
refunding of any of the foregoing. "Senior Indebtedness" shall not include: (i)
indebtedness that by the terms of the instrument or instruments by which such
indebtedness was created or incurred expressly provides that it (a) is junior in
right of payment to the Notes or (b) ranks pari passu in right of payment with
the Notes, (ii) any repurchase, redemption or other obligation in respect of
Disqualified Capital Stock, (iii) any indebtedness of the Company to any
Subsidiary of the Company or to any Affiliate of the Company, (iv) any
indebtedness incurred in connection with the purchase of goods, assets,
materials or services in the ordinary course of business or representing amounts
recorded as accounts payable, trade payables (which are unsecured) or other
current liabilities (other than for borrowed money) or deferred revenue and
deposits of the Company on the books of the Company (other than the current
portion of any long-term indebtedness of the Company that but for this clause
(iv) would constitute Senior Indebtedness), (v) any indebtedness of or amount
owed by the Company to employees for services rendered to the Company or in
connection with the severance of employment, (vi) any liability for Federal,
state, local or other taxes owing or owed by the Company or (vii) obligations in
respect of the Notes.
OPTIONAL REDEMPTION
The Notes are redeemable at the Company's option in whole or from time
to time in part, upon not less than 20 nor more than 65 days' notice mailed to
each Holder of the Notes to be redeemed at such Holder's address appearing in
the Note Register, on any date on or after October 31, 2000 and prior to
maturity.
The Redemption Prices (expressed as a percentage of the principal
amount) are as follows for the 12-month period beginning October 31 of the years
indicated:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2000 104.00%
2001 102.00%
</TABLE>
and thereafter at 100% of principal amount, together with accrued
interest to the Redemption Date (subject to the right of Holders of record on
the relevant Regular Record Date to receive interest due on an Interest Payment
Date that is on or prior to the Redemption Date).
No sinking fund is provided for the Notes.
EVENTS OF DEFAULT
The following will be Events of Default under the Indenture: (i)
failure to pay principal of or premium, if any, on any Note when due, whether or
not such payment is prohibited by the subordination provisions of the Indenture;
(ii) failure to pay any interest on any Note when due, continued for 30 days,
whether or not such payment is prohibited by the subordination provisions of the
Indenture; (iii) default in the payment of the Repurchase Price in respect of
any Note on the Repurchase Date therefor, whether or not such payment is
prohibited by the subordination provisions of the Indenture; (iv) failure to
perform or breach of any other covenant of the Company in the Indenture, which
continues for 60 days after written notice as provided in the Indenture; and (v)
certain events of bankruptcy, insolvency or reorganization of the Company or any
Significant Subsidiary.
Subject to the provisions of the Indenture relating to the duties of
the Trustee, in case an Event of Default shall occur and be continuing, the
Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request or direction of any of the Holders, unless
such Holders shall have offered to the Trustee reasonable indemnity. Subject to
the Trustee being offered reasonable security or indemnity against the costs,
expenses and liabilities which might be incurred by the Trustee, the Holders of
a majority in aggregate principal
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amount of the Outstanding Notes will have the right by written instruction to
the Trustee, to direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee or exercising any trust or power
conferred on the Trustee.
If an Event of Default (other than an Event of Default specified in
clause (v) above) shall occur and be continuing, either the Trustee or the
Holders of not less than 25% in aggregate principal amount of the Outstanding
Notes may accelerate the maturity of all Notes. If an Event of Default specified
in clause (v) shall occur, all unpaid principal and accrued interest on the
Notes then outstanding shall ipso facto become and be immediately due and
payable without any declaration or other act on the part of the Trustee or any
Holder.
No Holder of any Note will have any right to institute any proceeding
with respect to the Indenture or for any remedy thereunder, unless (i) such
Holder shall have previously given to the Trustee written notice of a continuing
Event of Default and unless also the Holders of at least 25% in aggregate
principal amount of the Outstanding Notes shall have made written request to the
Trustee to institute proceedings, (ii) such Holder has offered to the Trustee
reasonable indemnity, (iii) the Trustee for 60 days after receipt of such notice
has failed to institute any such proceeding and (iv) no direction inconsistent
with such request shall have been given to the Trustee during such 60-day period
by the Holders of a majority in principal amount of the Outstanding Notes.
However, such limitations do not apply to a suit instituted by a Holder of a
Note for enforcement of (a) payment of the principal of and premium, if any, or
interest on such Note on or after the respective due dates expressed in such
Note, (b) the right to require repurchase of such Note or (c) the right to
convert such Note in accordance with the Indenture.
The Indenture provides that the Company will deliver to the Trustee,
within 90 days after the end of each fiscal year and within 90 days after the
end of each six-month period after the end of each fiscal year, an officers'
certificate, stating as to each signer thereof that he or she is familiar with
the affairs of the Company and whether or not to his or her knowledge the
Company is in default in the performance and observance of any of the Company's
obligations under the Indenture and if the Company shall be in default,
specifying all such defaults of which he or she has knowledge and the nature and
status thereof.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company, without the consent of the Holders of any of the Notes
under the Indenture, may consolidate with or merge into any other Person or
convey, transfer or lease its assets substantially as an entirety to any Person,
provided that (i) the successor is a Person organized under the laws of any
domestic jurisdiction; (ii) the successor Person, if other than the Company,
assumes the Company's obligations on the Notes and under the Indenture; (iii)
after giving effect to the transaction no Event of Default, and no event after
notice or lapse of time, would become an Event of Default, shall have occurred
and be continuing; (iv) the Company or the surviving person (if other than the
Company) will have Consolidated Net Worth (immediately after the transaction but
prior to any purchase accounting adjustments resulting from the transaction)
greater than or equal to the Consolidated Net Worth of the Company immediately
preceding the transaction and (v) the Company has delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that such
consolidation, merger, conveyance, transfer or lease and, if a supplemental
indenture is required in connection with such transaction, such supplemental
indenture, complies with this covenant and that all conditions precedent herein
provided for relating to such transaction have been complied with.
"Consolidated Net Worth" means, with respect to any Person as of any
date, the sum of (i) the consolidated equity of the common stockholders of such
Person and its consolidated Subsidiaries as of such date plus (ii) the
respective amounts reported on such Person's balance sheet as of such date with
respect to any series of preferred stock (other than Disqualified Capital
Stock).
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the
Company and the Trustee with the consent of the Holders of 66 2/3% in aggregate
principal amount of the Outstanding Notes; provided, however, that
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no such modification or amendment may, without consent of the Holder of each
Outstanding Note affected thereby, (i) change the stated maturity of the
principal of, or any installment of interest on any Note or, once a Company
Notice has been sent following a Repurchase Event, the Repurchase Date; (ii)
reduce the principal amount of, or the premium or interest on any Note or the
price payable upon the repurchase of any Note in connection with a Repurchase
Event; (iii) change the place of payment where, or currency in which, any Note
or any premium or interest thereof is payable; (iv) impair the right to
institute suit for the enforcement of any payment on or with respect to any
Note; (v) adversely affect the right to convert the Notes; (vi) adversely affect
the right to cause the Company to repurchase the Notes; (vii) modify the
subordination provisions in a manner adverse to the Holders of the Notes; (viii)
reduce the above-stated percentage of Outstanding Notes necessary to modify or
amend the Indenture; or (ix) modify any of the provisions of the Indenture
governing the waiver of Defaults and Events of Default, except to increase the
percentage of aggregate principal amount of Outstanding Notes referred to in
such provisions.
The Holders of a majority in aggregate principal amount of Outstanding
Notes may waive compliance by the Company with certain restrictive provisions of
the Indenture. The Holders of a majority in aggregate principal amount of the
Outstanding Notes may waive any past default or right under the Indenture,
except (i) a default in payment of principal, premium or interest, (ii) the
right of a Holder to have a Note repurchased or to convert the Note or (iii)
with respect to any covenant or provision of the Indenture that requires the
consent of the Holder of each Outstanding Note affected.
REPURCHASE AT OPTION OF HOLDERS UPON A REPURCHASE EVENT
The Indenture provides that if a Repurchase Event occurs after initial
issuance of the Notes, each Holder of the Notes shall have the right (which
right may not be waived by the Board of Directors or the Trustee) at the
Holder's option, to require the Company to repurchase all of such Holder's
Notes, or any portion thereof that is an integral multiple of $1,000, on the
date (the "Repurchase Date") that is 45 calendar days after the date of the
Company Notice (as defined below), for cash at a price equal to 101% of the
principal amount of such Notes to be repurchased (the "Repurchase Price"),
together with accrued interest to the Repurchase Date.
Within 15 calendar days after the occurrence of a Repurchase Event, the
Company is obligated to mail all Holders of record of the Notes a notice (the
"Company Notice") of the occurrence of such Repurchase Event and of the
repurchase right arising therefrom. The Company must deliver a copy of the
Company Notice to the Trustee. To exercise the repurchase right, the Holder of
such Note must deliver on or before the fifth day preceding the Repurchase Date
irrevocable written notice to the Trustee of the Holder's exercise of such right
(except that the right of the Holders to convert such Notes shall continue until
the close of business on the last Trading Day preceding the Repurchase Date),
together with the Notes with respect to which the right is being exercised, duly
endorsed for transfer to the Company.
A Repurchase Event will be deemed to have occurred at such time after
initial issuance of the Notes if:
(i) any Person (including any syndicate or group deemed to be a
"Person" under Section 13(d)(3)of the Exchange Act), other than the
Company, any subsidiary of the Company or any current or future employee or
director benefit plan of the Company or any subsidiary of the Company or
any entity holding capital stock of the Company for or pursuant to the
terms of such plan, or an underwriter engaged in a firm commitment
underwriting in connection with a public offering of capital stock of the
Company, is or becomes the beneficial owner, directly or indirectly,
through a purchase, merger or other acquisition transaction or series of
transactions of shares of capital stock of the Company entitling such
Person to exercise 50% or more of the total voting power of all shares of
capital stock of the Company entitled to vote generally in the election of
directors;
(ii) the Company sells or transfers all or substantially all of the
assets of the Company to another Person;
(iii) there occurs any consolidation of the Company with, or merger of
the Company into, any other Person, or any merger of another Person into
the Company (other than a merger (a) which does not result in
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any reclassification, conversion, exchange or cancellation of outstanding
shares of Common Stock, (b) which is effected solely to change the
jurisdiction of incorporation of the Company and results in a
reclassification, conversion or exchange of outstanding shares of Common
Stock solely into shares of Common Stock, or (c) a transaction in which the
stockholders of the Company immediately prior to such transaction owned,
directly or indirectly, immediately following such transaction, at least a
majority of the combined voting power of the outstanding voting stock of
the Company resulting from the transaction, such stock to be owned by such
stockholders in substantially the same proportion as their ownership of the
voting stock of the Company immediately prior to such transaction);
(iv) a change in the Board of Directors of the Company in which the
individuals who constituted the Board of Directors of the Company at the
beginning of the 24-month period immediately preceding such change
(together with any other director whose election by the Board of Directors
of the Company or whose nomination for election by the stockholders of the
Company was approved by a vote of at least a majority of the directors then
in office either who were directors at the beginning of such period or
whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of the directors then in office; or
(v) the Common Stock of the Company is the subject of a "Rule 13e-3
transaction" as defined under the Exchange Act.
provided, however, that a Repurchase Event shall not be deemed to have
occurred if the Daily Market Price per share of the Common Stock for any ten
Trading Days within the period of twenty consecutive Trading Days ending
immediately before a Repurchase Event shall equal or exceed 120% of the
Conversion Price of such Notes in effect on each such Trading Day. A "beneficial
owner" shall be determined in accordance with Rule 13d-3 promulgated by the
Commission under the Exchange Act, as in effect on the date of execution of the
Indenture.
The right to require the Company to repurchase the Notes as a result of
the occurrence of a Repurchase Event could create an event of default under
Senior Indebtedness as a result of which any repurchase could, absent a waiver,
be blocked by the subordination provisions of the Notes. The occurrence of a
Repurchase Event would most likely constitute an event of default under the
Company's credit facility with First Union. See "Subordination" above. Failure
of the Company to repurchase the Notes when required would result in an Event of
Default with respect to the Notes whether or not such repurchase is permitted by
the subordination provisions. The Company's ability to pay cash to the Holders
of Notes upon a Repurchase Event may be limited by certain financial covenants
contained in the Company's then existing debt obligations.
Rule 13e-4 under the Exchange Act requires, among other things, the
dissemination of certain information to security holders in the event of any
issuer tender offer and may apply in the event that the repurchase option
becomes available to the Holders of the Notes. The Company will comply with this
rule to the extent applicable at that time.
The repurchase feature of the Notes may in certain circumstances make
more difficult or discourage a takeover of the Company and the removal of
incumbent management. The foregoing provisions would not necessarily afford
Holders of the Notes protection in the event of highly leveraged or other
transactions involving the Company that may adversely affect Holders.
Except as described above with respect to a Repurchase Event, the
Indenture does not contain provisions permitting the Holders of the Notes to
require the Company to repurchase or redeem the Notes in the event of a
takeover, recapitalization or similar transaction. Subject to the limitation on
mergers and consolidations described above, the Company, its management or its
subsidiaries could, in the future, enter into certain transactions, including
refinancings, certain recapitalizations, acquisitions, the sale of all or
substantially all of its assets, the liquidation of the Company or similar
transactions, that would not constitute a Repurchase Event under the Indenture,
but that would increase the amount of Senior Indebtedness (or any other
Indebtedness) outstanding at such time or substantially reduce or eliminate the
Company's assets. Under certain circumstances, the incurrence
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<PAGE> 32
of significant amounts of additional indebtedness could have an adverse effect
on the Company's ability to service its indebtedness, including the Notes.
If a Repurchase Event were to occur, there is no assurance that the
Company would have sufficient funds to repurchase all Notes tendered by the
Holders thereof or to make any principal, premium, if any, or interest payments
otherwise required by the Notes.
As noted above, one of the events that constitutes a Repurchase Event
under the Indenture is a sale or other transfer of all or substantially all of
the assets of the Company. The Indenture will be governed by New York law, and
the definition under New York law of "substantially all" of the assets of a
corporation varies according to the facts and circumstances of the transaction.
Accordingly, if the Company were to engage in a transaction in which it disposed
of less than all of its assets, a question of interpretation could arise as to
whether such disposition was of "substantially all" of its assets and whether
the transaction constituted a Repurchase Event.
SATISFACTION AND DISCHARGE
The Company may, subject to certain conditions, discharge its
obligations under the Indenture while the Notes remain outstanding if all
outstanding Notes have become due and payable and the Company has deposited with
the Trustee an amount sufficient to pay and discharge all outstanding Notes on
the date of their scheduled maturity or the scheduled date of redemption.
REPORTS
In addition to complying with any applicable legal requirements, the
Company will deliver to the Holders of record, and to any beneficial owners so
requesting, annual reports containing audited consolidated financial statements
with a report thereon by the Company's independent auditors.
GOVERNING LAW
The Indenture and the Notes will be governed by and construed in
accordance with the laws of the State of New York.
A successor Trustee may be appointed in accordance with the terms of
the Indenture.
MISCELLANEOUS
Holders of Notes will not have preemptive rights. The Company has
agreed to at all times reserve and keep available out of its authorized and
unissued Common Stock and/or issued shares of Common Stock held in its treasury,
solely for issuance upon the conversion of the Notes, such number of shares of
Common Stock as will from time to time be deliverable upon the conversion of the
Notes then outstanding.
FORM, DENOMINATION, BOOK-ENTRY PROCEDURES AND TRANSFER
Notes initially sold to qualified institutional buyers ("Rule 144A
Notes") were represented by one or more Notes in registered, global form
(collectively, the "Global Notes"). The Global Notes were deposited on October
30, 1997, the date of the Closing of the Sale of the Notes (the "Closing Date")
with or on behalf of The Depository Trust Company ("DTC"), in New York, New
York, and registered in the name of DTC or its nominee, in each case for credit
to an account of a direct or indirect participant in DTC as described below.
Except as set forth below, the Global Notes may be transferred, in
whole and not in part, only to another nominee of DTC or to a successor of DTC
or its nominee. Beneficial interests in the Global Notes may not be exchanged
for Notes in certificated form except in the limited circumstances described
below. See "--Exchange of Book-Entry Notes for Certificated Notes."
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<PAGE> 33
Notes sold to institutional accredited investors ("Other Notes") were
issued in registered, certificated (i.e., non-global) form. Other Notes may not
be exchanged for beneficial interests in any Global Notes except in the limited
circumstances described below. See "--Exchange of Certificated Notes for
Book-Entry Notes."
Rule 144A Notes (including beneficial interests in the Global Notes)
and Other Notes are subject to certain restrictions on transfer and will bear a
restrictive legend as described under "Notice to Investors." In addition,
transfer of beneficial interests in the Global Notes are subject to the
applicable rules and procedures of DTC and its direct or indirect participants,
which may change from time to time.
DEPOSITARY PROCEDURES
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic
book-entry changes in accounts of its Participants. The Participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. Access to DTC's system is also available to
other entities such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a Participant, either directly
or indirectly (collectively, the "Indirect Participants"). Persons who are not
Participants may beneficially own securities held by or on behalf of DTC only
through the Participants or the Indirect Participants. The ownership interest
and transfer of ownership interest of each actual purchaser of each security
held by or on behalf of DTC are recorded on the records of the Participants and
Indirect Participants.
DTC has also advised the Company that, pursuant to procedures
established by it, (i) upon deposit of the Global Notes, DTC will credit the
accounts of Participants designated by Loewenbaum & Co. Incorporated (the
"Placement Agent") with portions of the principal amount of the Global Notes and
(ii) ownership of such interests in the Global Notes will be shown on, and the
transfer of ownership thereof will be effected only through, records maintained
by DTC (with respect to the Participants) or by the Participants and the
Indirect Participants (with respect to other owners of beneficial interests in
the Global Notes).
Investors in the Global Notes may hold their interests therein directly
through DTC if they are participants in such system, or indirectly through
organizations which are participants in such system. All interests in a Global
Note may be subject to the procedures and requirements of DTC. The laws of some
states require that certain persons take physical delivery in certificated form
of securities that they own. Consequently, the ability to transfer beneficial
interests in a Global Note to such persons will be limited to that extent.
Because DTC can act only on behalf of Participants, which in turn act on behalf
of Indirect Participants and certain banks, the ability of a person having
beneficial interests in a Global Note to pledge such interests to persons or
entities that do not participate in the DTC system, or otherwise take actions in
respect of such interests, may be affected by the lack of a physical certificate
evidencing such interests. For certain other restrictions on the transferability
of the Notes, see "--Exchange of Book-Entry Notes for Certificated Notes" and
"--Exchange of Certificated Notes for Book-Entry Notes."
Except as described below, owners of interests in the Global Notes will
not have Notes registered in their name, will not receive physical delivery of
Notes in certificated form and will not be considered the registered owners or
holders thereof under the Indenture for any purpose.
Payments in respect of the Global Note registered in the name of DTC or
its nominee will be payable to DTC in its capacity as the registered holder
under the Indenture. Under the terms of the Indenture, the Company and Trustee
will treat the persons in whose names the Notes, including the Global Notes, are
registered as the owners thereof for the purpose of receiving such payments and
for any and all other purposes whatsoever. Consequently, neither the Trustee nor
any agent thereof has or will have any responsibility or liability for (i) any
aspect of DTC's records or any Participant's or Indirect Participant's records
relating to or payments made on account of beneficial ownership interests in the
Global Notes, or for maintaining, supervising or reviewing any of DTC's records
or any Participant's or Indirect Participant's records relating to the
beneficial ownership interests in the Global Notes or (ii) any other matter
relating to the actions and practices of DTC or any of its Participants or
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<PAGE> 34
Indirect Participants. DTC has advised the Company that its current practice,
upon receipt of any payment in respect of securities such as the Notes, is to
credit the accounts of the relevant Participants with the payment on the payment
date, in amounts proportionate to their respective holdings in principal amount
of beneficial interests in the relevant security as shown on the records of DTC
unless DTC has reason to believe it will not receive payment on such payment
date. Payments by the Participants and the Indirect Participants to the
beneficial owners of Notes will be governed by standing instructions and
customary practices and will be the responsibility of the Participants or the
Indirect Participants and will not be the responsibility of DTC, the Trustee or
the Company. Neither the Company nor the Trustee will be liable for any delay by
DTC or any of its Participants in identifying the beneficial owners of the
Notes, and the Company and the Trustee may conclusively rely on and will be
protected in relying on instructions from DTC or its nominee for all purposes.
Interests in the Global Notes will trade in DTC's Same-Day Funds
Settlement System and secondary market trading activity in such interests will
therefore settle in immediately available funds, subject in all cases to the
rules and procedures of DTC and its participants.
Transfers between Participants in DTC will be effected in accordance
with DTC's procedures, and will be settled in same-day funds.
DTC has advised the Company that it will take any action permitted to
be taken by a holder of Notes only at the direction of one or more Participants
to whose account with DTC interests in the Global Notes are credited and only in
respect of such portion of the principal amount of the Notes as to which such
Participant or Participants has or have given such direction. However, if there
is an Event of Default under the Indenture, DTC reserves the right to exchange
the Global Notes for legended Notes in certificated form and to distribute such
Notes to its Participants.
The information in this section concerning DTC and its book-entry
systems has been obtained from sources that the Company believe to be reliable,
but neither the Company nor the Placement Agent takes responsibility for the
accuracy thereof.
Although DTC has agreed to the foregoing procedures to facilitate
transfers of interest in the Global Notes among participants in DTC, it is under
no obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. Neither the Company nor the Trustee
will have any responsibility for the performance by DTC or its respective
participants or indirect participants of their respective obligations under the
rules and procedures governing their operations.
EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES
A Global Note is exchangeable for Notes in registered certificated form
if (i) DTC (x) notifies the Company that it is unwilling or unable to continue
as Depositary for the Global Note and the Company thereupon fails to appoint a
successor Depositary within 90 days or (y) has ceased to be a clearing agency
registered under the Exchange Act, (ii) the Company in its sole discretion
elects to cause the issuance of the Notes in certificated form or (iii) there
shall have occurred and be continuing an Event of Default or any event which
after notice or lapse of time or both would be an Event of Default under the
Indenture. In addition, beneficial interests in a Global Note may be exchanged
for certificated Notes upon request but only upon at least 20 days prior written
notice given to by or on behalf of DTC in accordance with customary procedures.
In all cases, certificated Notes delivered in exchange for any Global Note or
beneficial interests therein will be registered in the names, and issued in any
approved denominations, requested by or on behalf of the Depositary (in
accordance with its customary procedures) and will bear the legend referred to
in "Notice to Investors", unless the Trustee determines otherwise in compliance
with applicable law.
EXCHANGE OF CERTIFICATED NOTES FOR BOOK-ENTRY NOTES
Other Notes, which will be issued in certificated form, may not be
exchanged for beneficial interests in any Global Note unless such exchange
occurs in connection with a transfer of such Other Notes and the transferor
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<PAGE> 35
first delivers to the Trustee a written certificate (in the form provided in the
Indenture) to the effect that such transfer will comply with the appropriate
transfer restrictions applicable to such Notes.
PAYMENT AND PAYING AGENCY
Payments in respect of the Notes held in global form shall be made to
the Depositary, which shall credit the relevant accounts at the Depositary on
the applicable Interest Payment Dates or in respect of the Notes that are not
held by the Depositary, such payments shall be made by check mailed to the
address of the holder entitled thereto as such address shall appear on the
register. The paying agent (the "Paying Agent") shall initially be the Trustee
and any co-paying agent chosen by the Trustee and acceptable to the Company. The
Paying Agent shall be permitted to resign as Paying Agent upon 30 days' written
notice to the Trustee and the Company. In the event that the Trustee shall no
longer be the Paying Agent, the Company shall appoint a successor (which shall
be a bank or trust company acceptable to the Company) to act as Paying Agent.
REGISTRAR AND TRANSFER AGENT
The Trustee will act as registrar and transfer agent for the Notes.
Registration of transfers of the Notes will be effected without charge
by or on behalf of the Company, upon payment of any tax or other governmental
charges that may be imposed in connection with any transfer or exchange. The
Company will not be required to register or cause to be registered the transfer
of the Notes after they have been called for redemption.
REGISTRATION RIGHTS
Pursuant to the Registration Rights Agreement between the Company and
the Placement Agent, the Company has filed with the Commission a registration
statement (the "Shelf Registration Statement") on Form S-3, of which this
Prospectus forms a part, to cover resales of Transfer Restricted Securities (as
defined below) by the holders thereof who satisfied certain conditions relating
to the provision of information in connection with the Shelf Registration
Statement. Additionally, the Company will use its best efforts to keep effective
the Shelf Registration Statement until the earlier of two years after the Issue
Date or such time as all of the Notes or Common Stock issuable upon conversion
thereof have been sold thereunder or otherwise cease to be registrable
securities within the meaning of the Registration Rights Agreement.
Notwithstanding the foregoing, the Company will be permitted to prohibit offers
and sales of Transfer Restricted Securities pursuant to the Shelf Registration
Statement under certain circumstances and subject to certain conditions (any
period during which offers and sales are prohibited being referred to as a
"Suspension Period"). "Transfer Restricted Securities" means each Note and any
underlying share of Common Stock until the date on which such Note or underlying
share of Common Stock has been effectively registered under the Securities Act
and disposed of in accordance with the Shelf Registration Statement, the date on
which such Note or underlying shares of Common Stock is distributed to the
public pursuant to Rule 144 under the Securities Act or the date on which such
Note or share of Common Stock may be sold or transferred pursuant to Rule 144(k)
(or any similar provisions then in force).
The Company will provide to each holder copies of the prospectus that
is a part of this Shelf Registration Statement, notify each such holder when the
Shelf Registration Statement is effective and take certain other actions as are
required to permit unrestricted resales of the Securities. A holder that sells
Securities pursuant to the Shelf Registration Statement is required to be named
as a selling security holder in the related prospectus and to deliver a
prospectus to purchasers, is subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and is bound
by the provisions of the Registration Rights Agreement that are applicable to
such a holder (including certain indemnification rights and obligations).
The Company is permitted to suspend use of the prospectus that is part
of the Shelf Registration Statement during certain periods of time and in
certain circumstances. Each holder of the Securities will be deemed to have
agreed that, upon receipt of notice from the Company of the occurrence of any
event which makes any statement in
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<PAGE> 36
the prospectus which is part of the Shelf Registration Statement untrue in any
material respect or which requires the making of any changes in this prospectus
in order to make the statements therein not misleading or of certain other
events specified in the Registration Rights Agreement, such holder will suspend
the sale of the Securities pursuant to such prospectus until the Company has
amended or supplemented this prospectus to correct such misstatement or omission
and has furnished copies of the amended or supplemented prospectus to such
holder or the Company has given notice that the sale of the Securities may be
resumed, as the case may be. If the Company shall give such notice to suspend
the sale of the Securities, it shall extend the relevant period referred to
above during which the Company is required to keep effective the Shelf
Registration Statement by the number of days during the period from and
including the date of the giving of such notice to and including the date when
holders shall have received copies of the supplemented or amended prospectus
necessary to permit resales of the the Securities or to and including the date
on which the Company has given notice that the sale of the Securities may be
resumed, as the case may be.
If the Company fails to comply with the Registration Rights Agreement
or the Shelf Registration Statement fails to become effective, then the Company
will pay liquidated damages (the "Liquidated Damages") to each holder of the
Securities which are "restricted" securities under the Securities Act as
follows:
(i) if the Shelf Registration Statement is not filed with the
Commission on or prior to the 60th day after the Issue Date, then
commencing on the day after such required filing date, Liquidated
Damages shall be payable in an amount equal to $.05 per week per $1,000
principal amount of Notes and $1,000 principal amount of Notes and $.01
per week per share (subject to adjustment in the event of stock splits
or consolidations, stock dividends and the like) of Common Stock
issuable upon the conversion of the Notes; or
(ii) if a Shelf Registration Statement is not declared effective
by the Commission on or prior to the 120th day after the Issue Date,
then, commencing on the 121st day after the Issue Date, additional
Liquidated Damages shall be payable in an amount equal to $.05 per week
per $1,000 principal amount of Notes and $.01 per week per share
(subject to adjustment as set forth above) of Common Stock issuable
upon the conversion of the Notes; or
(iii) if the Shelf Registration Statement has been declared
effective and such Shelf Registration Statement ceases to be effective
at any time prior to the second anniversary of the Issue Date (other
than after such time as all Notes or Common Stock issuable pursuant to
the conversion thereof have been disposed of thereunder or otherwise
cease to be registrable securities within the meaning of the
Registration Rights Agreement), then additional Liquidated Damages
shall be payable in an amount equal to $.05 per week per $1,000
principal amount of Notes and $.01 per week per share (subject to
adjustment as set forth above) of Common Stock issuable upon the
conversion of the Notes, commencing on the date such Shelf Registration
Statement ceases to be effective;
provided however, that the Liquidated Damages rate on the Notes or
Common Stock issuable pursuant to the conversion thereof may not exceed in the
aggregate $.10 per week per $1,000 principal amount of Notes and $.02 per week
per share (subject to adjustment as set forth above) of Common Stock issuable
upon the conversion of the Notes; provided, further, however, that (1) upon the
filing of a Shelf Registration Statement (in the case of clause (i) above), (2)
upon the effectiveness of a Shelf Registration Statement (in the case of clause
(ii) above), or (3) upon the effectiveness of the Shelf Registration which had
ceased to remain effective (in the case of clause (iii) above), the obligation
to pay Liquidated Damages as a result of such clause, as the case may be, shall
cease to accrue.
Any amounts of Liquidated Damages due pursuant to clause (i), (ii) or
(iii) above will be payable in cash on April 30 or October 31 of each year to
the Holders of record on the fifteenth day of the month in which the relevant
payment date falls.
The Registration Rights Agreement shall be governed by, and construed
in accordance with, the laws of the State of New York. The summary herein of
certain provisions of the Registration Rights Agreement does not
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<PAGE> 37
purport to be complete and is subject to, and is qualified in its entirety by
reference to, all the provisions of the Registration Rights Agreement, a form of
which is available upon request to the Company.
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Company is authorized to issue 100,000,000 shares of Common Stock,
par value $.0001 per share. As of December 5, 1997, 13,729,802 shares of Common
Stock are issued and outstanding. Holders of Common Stock are entitled to share
ratably in such dividends and distributions as may from time to time be declared
by the Board of Directors of the Company from funds legally available therefor
and upon liquidation will be entitled to share ratably in any assets of the
Company legally available for distribution to holders of the Common Stock. The
Company's Restated Articles of Incorporation and Restated Bylaws do not confer
any preemptive, subscription, redemption or conversion rights on the holders of
Common Stock. Holders of Common Stock are entitled to cast one vote for each
share held of record on each matter submitted to a vote of shareholders. There
is no cumulative voting, which means that holders of a majority of the voting
power may elect all of the directors.
For additional information with respect to the Common Stock, see the
Company's registration statement on Form 8-A filed with the Commission on
September 4, 1996 and incorporated by reference herein.
PREFERRED STOCK
The Company is authorized to issue 1,000,000 shares of Preferred Stock,
par value $.0001 per share (the "Preferred Stock"). As of the date hereof, there
were no shares of Preferred Stock issued and outstanding. Although the Company
has no present plans to issue shares of Preferred Stock, Preferred Stock may be
issued from time to time in one or more classes or series with such
designations, powers, preferences, rights, qualifications, limitations and
restrictions as may be fixed by the Company's Board of Directors. The Board of
Directors, without obtaining shareholder approval, could issue the Preferred
Stock with voting and/or conversion rights and thereby dilute the voting power
and equity of the holders of Common Stock and adversely affect the market price
of such stock. The issuance of Preferred Stock could also be used as an
antitakeover measure by the Company without any further action by the
shareholders.
DIVIDEND POLICY
Holders of Common Stock are entitled to receive such dividends as may
be declared and paid from time to time by the Board of Directors out of funds
legally available therefor. The Company intends to retain any earnings for the
operation and expansion of its business and does not anticipate paying cash
dividends in the foreseeable future. Any future determination as to the payment
of cash dividends will depend upon future earnings, results of operations,
capital requirements, the Company's financial condition and such other factors
as the Board of Directors may consider.
SELLING SHAREHOLDERS
The Notes were originally issued by the Company through the Placement
Agent to the Selling Shareholders in a transaction exempt from the registration
requirements of the Securities Act to persons reasonably believed by such
Placement Agent to be "qualified institutional buyers" (as defined in Rule 144A
of the Securities Act) and to a limited number of institutional accredited
investors (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under
the Securities Act). The Selling Shareholders (which term includes their
transferees, pledgees, donees or successors) may from time to time offer and
sell pursuant to this Prospectus any or all of the Notes and Shares.
Set forth below are the names of each Selling Shareholder, the
principal amount of Notes that may be offered and sold by such Selling
Shareholder pursuant to this Prospectus and (if one percent or more) the
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<PAGE> 38
percentage of such Notes owned as of December 5, 1997, the number of Shares that
may be offered and sold by such Selling Shareholder pursuant to this Prospectus
and (if one percent or more) the percentage of Common Stock represented by the
Shares owned by each Selling Shareholder after conversion of the Notes.
Any or all of the Notes or Shares of Common Stock listed below may be
offered for sale pursuant to this Prospectus by the Selling Shareholders from
time to time. Accordingly, no estimate can be given as to the amount of the
Notes or Shares that will be held by the Selling Shareholders upon consummation
of any such sales. In addition, the Selling Shareholders identified below may
have sold, transferred or otherwise disposed of all or a portion of their Notes
since the date on which the information regarding their Notes was provided, in
transactions exempt from the registration requirements of the Securities Act.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE
INTO WHICH THE OF COMMON STOCK
PRINCIPAL AMOUNT PERCENTAGE OF NOTES NOTES ARE AFTER CONVERSION OF
NAME OF NOTES OUTSTANDING CONVERTIBLE(1) THE NOTES(2)
- -------------------------------- --------------------- ------------------- ------------------- --------------------
<S> <C> <C> <C> <C>
Franklin Templeton Group............ $ 19,000,000 41.30 2,620,690 16.03%
Pecks Management Partners.......... 13,500,000 29.34 1,862,069 11.94
IDS American Express................ 4,000,000 8.70 551,724 3.86
Dean Witter Intercapital............ 4,000,000 8.70 551,724 3.86
Putnam Investments.................. 4,000,000 8.70 551,724 3.86
Carret and Company, Inc............. 1,500,000 3.26 206,897 1.48
</TABLE>
--------------------
* Less than one percent.
(1) Assumes conversion of the full amount of Notes held by such Selling
Shareholder at the initial conversion price of $7.25 per share; such
conversion price is subject to adjustment as described under "Description
of Notes-- Conversion Rights." Accordingly, the number of Shares issuable
upon conversion of the Notes may increase or decrease from time to time.
Fractional shares will not be issued upon conversion of the Notes; cash
will be paid in lieu of fractional shares, if any.
(2) The percentage of Common Stock after conversion of the Notes represents the
percentage of the Common Stock each Selling Shareholder will have after
treating as outstanding the number of Shares of Common Stock shown as being
issuable upon the assumed conversion by the named Selling Shareholder of
the full amount of such holder's Notes but not assuming the conversion of
the Notes of any other Selling Shareholder. These percentages are based on
13,729,802 shares of Common Stock that were issued and outstanding as of
December 5, 1997 before taking into account any of the assumed conversions.
-37-
<PAGE> 39
PLAN OF DISTRIBUTION
The Notes and the Shares are being registered to permit public
secondary trading of such securities by the holders thereof from time to time
after the date of this Prospectus. The Company has agreed, among other things,
to bear all expenses (other than underwriting discounts and selling commissions)
in connection with the registration and sale of the Notes and the Shares covered
by this Prospectus.
The Company will not receive any of the proceeds from the offering of
the Notes and the Shares by the Selling Shareholders. The Company has been
advised by the Selling Shareholders that the Selling Shareholders may sell all
or a portion of the Notes and Shares beneficially owned by them and offered
hereby from time to time on any exchange on which the securities are listed on
terms to be determined at the times of such sales. The Selling Shareholders may
also make private sales directly or through a broker or brokers. Alternatively,
any of the Selling Shareholders may from time to time offer the Notes or Shares
beneficially owned by them through underwriters, dealers or agents, who may
receive compensation in the form of underwriting discounts, commissions or
concessions from the Selling Shareholders and the purchasers of the Notes or
Shares for whom they may act as agent. The aggregate proceeds to the Selling
Shareholders from the sale of the Notes or Shares offered by them hereby will be
the purchase price of such Notes or Shares less discounts and commissions, if
any.
The Notes and Shares may be sold from time to time in one or more
transactions at fixed offering prices, which may be changed, or at varying
prices determined at the time of sale or at negotiated prices. Such prices will
be determined by the holders of such securities or by agreement between such
holders and underwriters or dealers who may receive fees or commissions in
connection therewith.
The outstanding Common Stock is listed for trading on the AMEX and the
Shares have been approved for listing on the AMEX upon notice of issuance. The
Selling Shareholders have advised the Company that they are making and currently
intend to continue making a market in the Notes; however, they are not obligated
to do so and any such market-making may be discontinued at any time without
notice, in the sole discretion of the Selling Shareholders. The Company does not
intend to apply for listing of the Notes on any securities exchange.
Accordingly, no assurance can be given that any market for the Notes will be
developed or maintained. See "Risk Factors -- Absence of Public Market."
In order to comply with the securities laws of certain states, if
applicable, the Notes and Shares will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Notes and Shares may not be sold unless they have been registered or qualified
for sale in the applicable state or they comply with an available exemption from
the applicable registration or qualification requirement.
The Selling Shareholders and any broker and any broker-dealers, agents
or underwriters that participate with the Selling Shareholders in the
distribution of the Notes or Shares may be deemed to be "underwriters" within
the meaning of the Securities Act, in which event any commissions received by
such broker-dealers, agents or underwriters and any profit on the resale of the
Notes or the Shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
In addition, any securities covered by this Prospectus that qualify for
sale pursuant to Rule 144 or Rule 144A of the Securities Act may be sold under
Rule 144 or Rule 144A rather than pursuant to this Prospectus. There is no
assurance that any Selling Shareholder will sell any or all of the Notes or
Shares described herein, and any Selling Shareholder may transfer, devise or
gift such securities by other means not described herein.
The Notes were originally sold to the Selling Shareholders on October
30, 1997 in a private placement. The Company agreed to indemnify and hold the
Selling Shareholders harmless against certain liabilities under the Securities
Act that could arise in connection with the sale of the Notes by the Initial
Purchasers. The Company and the Selling Shareholders are obligated to indemnify
each other against certain liabilities arising under the Securities Act related
to the offer and sale of the Notes and Shares under this Prospectus.
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<PAGE> 40
The Company will use its best efforts to cause the Registration
Statement to which this Prospectus relates to remain effective for a period of
two years from the effective date thereof, or until it is no longer required for
transfer of the Notes or the underlying Shares. The Company is permitted to
suspend the use of this Prospectus in connection with the sales of Notes and
Shares by holders upon the happening of an event or if there exists any fact
that makes any statement of material fact made in this Prospectus untrue or that
requires the making of additions to or changes in the Prospectus in order to
make the statements herein not misleading until such time as the Company advises
the Selling Shareholders that use of the Prospectus may be resumed, in which
case the period of time during which the Company is required to maintain the
effectiveness of this Registration Statement shall be extended. Expenses of
preparing and filing the Registration Statement and all post-effective
amendments will be borne by the Company.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain U.S. federal income tax
considerations relating to the purchase, ownership and disposition of a Note and
of Common Stock into which the Note may be converted. This summary is based on
the Internal Revenue Code of 1986, as amended (the "Code"), existing, temporary
and proposed Treasury Regulations, administrative pronouncements and judicial
decisions now in effect, all of which are subject to change, possibly
retroactively. This summary deals only with a holder that will hold the Note and
the Common Stock into which the Note may be converted as a "capital asset"
(within the meaning of section 1221 of the Code) and that is (i) a citizen or
resident of the United States, (ii) a domestic corporation or (iii) otherwise
subject to U.S. federal income taxation on a net income basis in respect of the
Note or Common Stock.. This summary does not purport to be a complete analysis
of all the potential tax considerations relevant to a particular investor and
does not address tax considerations applicable to an investor that may be
subject to special tax rules, like a bank, tax-exempt organization, insurance
company, dealer in securities or currencies, or a person that will hold a Note
or Common Stock as a position in a hedging transaction, "straddle" or
"conversion transaction" for tax purposes. The Company has not sought any ruling
from the Internal Revenue Service (the "IRS") with respect to the statements
made in this summary, and there can be no assurance that the IRS will agree with
these statements.
A PROSPECTIVE INVESTOR CONSIDERING THE PURCHASE OF A NOTE SHOULD
CONSULT HIS OWN TAX ADVISER WITH RESPECT TO THE APPLICATION OF THE U.S. FEDERAL
TAX LAWS TO HIS PARTICULAR SITUATION AS WELL AS ANY TAX CONSEQUENCES ARISING
UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION OR UNDER ANY
APPLICABLE TAX TREATY.
PAYMENT OF INTEREST
Interest on a Note generally will be includable in the income of a
Holder as ordinary income at the time the interest is received or accrued in
accordance with the Holder's method of accounting for U.S. federal income tax
purposes. The Notes were not issued with original issue discount ("OID") within
the meaning of the Code.
SALE, EXCHANGE OR REDEMPTION OF A NOTE
Upon a sale, exchange or redemption of a Note, a Holder generally will
recognize gain or loss equal to the difference between (i) the amount of cash
and the fair market value of any property received (except to the extent
attributable to accrued interest income not previously included in income, which
will be taxable as ordinary income) and (ii) the Holder's adjusted tax basis in
the Note. A Holder's adjusted tax basis in a Note generally will equal the
Holder's cost for the Note, increased by any market discount taken into income
by the Holder or decreased by the amount of any bond premium amortized by the
Holder. Subject to the market discount rules discussed below, gain or loss
recognized by a Holder will be capital gain or loss. Capital gain recognized by
certain noncorporate Holders is taxed at preferential rates that will vary
depending on whether the Note has been held for more than one year or 18 months
on the date of disposition.
CONSTRUCTIVE DIVIDEND
If at any time (i) the Company distributes cash or property to its
shareholders or purchases Common Stock, and the distribution or purchase is
taxable as a dividend to those shareholders for U.S. federal income tax purposes
(e.g., a distribution of cash, evidences of indebtedness or other assets of the
Company, but generally not a distribution of stock or rights to subscribe for
stock paid on Common Stock) and (ii) pursuant to the anti-dilution provision of
the Indenture or at the discretion of the Company the conversion rate of the
Notes is increased, the increase in conversion rate may be treated as a
constructive distribution to Holders of Notes (pursuant to section 305 of the
Code). A constructive distribution will be
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<PAGE> 41
taxable as a dividend, return of capital or capital gain in accordance with the
earnings and profits rules discussed under "--Dividends." A Holder of a Note
therefore could have taxable income as a result of an event pursuant to which he
receives no cash or property.
CONVERSION OF A NOTE
A Holder of a Note generally will not recognize any income, gain or
loss upon conversion of a Note into shares of Common Stock except with respect
to the receipt of either cash in lieu of a fractional share of Common Stock or
cash or Common Stock attributable to accrued interest on the converted Note. A
Holder's tax basis in the Common Stock received on conversion of a Note will be
the same as the Holder's adjusted tax basis in the Note at the time of
conversion (reduced by any basis allocable to a fractional share interest). The
holding period for the shares of Common Stock received on conversion generally
will include the holding period of the Note converted. Cash received in lieu of
a fractional share of Common Stock upon conversion of a Note will be treated as
a payment in exchange for the fractional share and generally will result in
capital gain or loss (measured by the difference between the cash received for
the fractional share and the Holder's adjusted tax basis in the fractional
share).
MARKET DISCOUNT
If a Note is acquired at a "market discount," some or all of the gain
realized upon a disposition or payment upon the Note's maturity may be treated
as ordinary income. Subject to a DE MINIMIS exception, "market discount" with
respect to a Note will be equal to the excess of (i) the stated redemption price
at maturity of the Note over (ii) the holder's tax basis in the Note immediately
after acquisition. The amount of market discount treated as having accrued will
be determined either on a ratable basis, or, if the holder so elects, on a
constant interest method. Upon any subsequent disposition of the Note (other
than in connection with certain nonrecognition transactions, e.g., the
conversion to Common Stock), the lesser of (i) gain realized on the disposition
and (ii) the market discount that accrued while the Holder held the Note will be
treated as ordinary income at the time of the disposition. A Holder may elect to
include market discount in income currently in lieu of including accrued market
discount in income at the time of disposition. A Holder of a Note acquired at a
market discount may be required to defer the deduction of a portion of the
interest expense on any indebtedness incurred or maintained to purchase or carry
the Note until the Note is disposed of in a taxable transaction, unless the
Holder elects to include accrued market discount in income currently. If a
Holder acquires a Note at a market discount and receives Common Stock upon
conversion of the Note, the amount of accrued market discount with respect to
the converted Note through the date of conversion will be treated as ordinary
income upon the disposition of the Common Stock.
AMORTIZABLE BOND PREMIUM
If a Holder of a Note purchases it at a cost that is in excess of the
amount payable on maturity of the Note, that excess may be treated as
"amortizable bond premium" that is allocated among the interest payments on the
Note using a constant interest rate method over the remaining term of the Note.
The amount allocated to each interest payment would be applied against and
offset a portion of the income from that interest payment, with a corresponding
reduction in the Holder's basis in the Note. The interest offset would be
available only if an election under section 171 of the Code is made or is in
effect. The election would apply to all debt instruments held or subsequently
acquired by the electing Holder on or after the first day of the first taxable
year to which the election applies and may not be revoked without the consent of
the IRS. The amount of the premium attributable to the conversion feature of the
Note must be eliminated in determining the amount of any amortizable bond
premium.
DIVIDENDS
A cash distribution paid on Common Stock will be treated as a dividend,
taxable as ordinary income to the Holders, to the extent of the Company's
current and accumulated earnings and profits. To the
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<PAGE> 42
extent a distribution on Common Stock exceeds the Company's current and
accumulated earnings and profits, a Holder will treat the distribution on each
share of Common Stock as a nontaxable reduction in the Holder's basis in that
share to the extent thereof and thereafter as capital gain. A dividend paid to a
Holder that is a U.S. corporation may qualify for a dividends received
deduction.
SALE OF COMMON STOCK
Upon a sale or exchange of Common Stock, a Holder generally will
recognize capital gain or loss equal to the difference between (i) the amount of
cash and the fair market value of any property received and (ii) the Holder's
adjusted tax basis in the Common Stock. Capital gain recognized by certain
noncorporate Holders is taxed at preferential rates that will vary depending on
whether the Common Stock has been held for more than one year or 18 months on
the date of disposition. A Holder's basis and holding period in Common Stock
received upon conversion of a Note are determined as discussed above under
"Conversion of the Notes."
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to payments
to certain noncorporate Holders of principal of, premium, if any, and interest
on a Note, payments of dividends on Common Stock and payments of the proceeds of
a sale of a Note or Common Stock. A 31% backup withholding tax may apply to any
of those payments if the Holder (i) fails to furnish or certify his correct
taxpayer identification number to the payor in the manner required, (ii) is
notified by the IRS that he has failed to report payments of interest or
dividends properly or (iii) under certain circumstances fails to certify that he
has not been notified by the IRS that he is subject to backup withholding for
failure to report interest or dividend payments. Any amounts withheld under the
backup withholding rules from a payment to a Holder will be allowed as a credit
against the Holder's U.S. federal income tax and may entitle the Holder to a
refund provided the required information is furnished to the IRS.
LEGAL MATTERS
Certain legal matters in connection with the Common Stock of Common
Stock being offered hereby will be passed upon by Greenberg Traurig Hoffman
Lipoff Rosen & Quentel, P.A., Miami, Florida.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
The accounting firm of Arthur Andersen LLP ("Arthur Andersen")
represented pre-Merger Zanart as its independent accountants during fiscal years
1996 and 1995 and was dismissed by the Board of Directors on November 15, 1996
in connection with the Merger. During the fiscal years ended 1996 and 1995 and
subsequent interim period, there were no disagreements between pre-Merger Zanart
and Arthur Andersen on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Arthur Andersen, would
have caused it to make reference to the subject matter of the disagreement in
connection with its reports. Arthur Andersen's reports on the financial
statements of pre-Merger Zanart for the fiscal years ended 1996 and 1995 did not
contain an adverse opinion or a disclaimer of opinion, and were not qualified or
modified as to uncertainty, audit scope, or accounting principles.
The accounting firm of Deloitte & Touche LLP ("Deloitte & Touche")
represented pre-Merger Continucare as its independent accountants during the
period from February 12, 1996 (inception) to June 30, 1996 and was appointed as
the Company's independent accountants by the Board of Directors for fiscal year
1997. There have been no reported disagreements on any matter of accounting
principles or practice or financial statement disclosure at any time during the
period that operations have been audited by Deloitte & Touche.
EXPERTS
The financial statements incorporated in this prospectus by reference
from the Company's Annual Report on Form 10-KSB for the year ended June 30,
1997, have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report, which is incorporated herein by reference, and have been
so incorporated in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
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<PAGE> 43
INDEX TO FINANCIAL STATEMENTS
DOCTORS HEALTH GROUP
Combined Balance Sheet as of
September 30, 1997 (Unaudited)...............................................F-2
Combined Statement of Income for
the Nine-Month Period Ended
September 30, 1997 (Unaudited)...............................................F-3
Combined Statement of Stockholders' Equity
as of September 30, 1997
(Unaudited)..................................................................F-4
Combined Statement of Cash
Flows for the Nine-Month
Period Ended September 30, 1997
(Unaudited)..................................................................F-5
Notes to Unaudited Combined
Financial Statements ........................................................F-6
F-1
<PAGE> 44
DHG ENTERPRISES, INC. D/B/A DOCTOR'S HEALTH GROUP
AND DOCTOR'S HEALTH PARTNERSHIP, INC.
COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1997 (UNAUDITED)
- ------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 750,937
Foundation IBNR receivable 845,634
Accounts receivable - Foundation 571,547
Accounts receivable 54,908
Prepaid expenses and other 59,435
-------------
Total current assets 2,282,461
Medical Reserve Fund --
Property and equipment, net 285,737
Security deposits 24,477
-------------
Total assets $ 2,592,675
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and other accrued expenses $ 118,371
Accrued medical claims, including amounts incurred
but not reported 961,258
Current installments of long-term debt 12,046
-------------
Total current liabilities 1,091,675
DEFERRED INCOME TAXES 41,809
-------------
Total liabilities 1,133,484
-------------
STOCKHOLDERS' EQUITY:
Capital stock 400
Retained earnings 6,777,254
Advances to stockholders (5,318,463)
-------------
Total stockholders' equity 1,459,191
COMMITMENTS AND CONTINGENCIES (Notes 4,7) --
-------------
Total liabilities and stockholders' equity $ 2,592,675
=============
</TABLE>
See accompanying notes to unaudited combined financial statements.
F-2
<PAGE> 45
DHG ENTERPRISES, INC. D/B/A DOCTOR'S HEALTH GROUP
AND DOCTOR'S HEALTH PARTNERSHIP, INC.
COMBINED STATEMENT OF INCOME
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1997 (UNAUDITED)
- ------------------------------------------------------------------------------
<TABLE>
<S> <C>
CAPITATION REVENUES $ 11,952,627
--------------
MEDICAL EXPENSES:
Physician services 512,314
Hospital and other medical services 7,067,112
Medical supplies 32,330
--------------
Total medical expenses 7,611,756
--------------
GROSS PROFIT 4,340,871
--------------
OPERATING EXPENSES:
Salaries and related benefits 1,486,090
Operating and administrative fees 894,205
Depreciation and amortization 72,050
--------------
Total operating expenses 2,452,345
--------------
OTHER INCOME 21,714
--------------
NET INCOME $ 1,910,240
==============
</TABLE>
See accompanying notes to unaudited combined financial statements.
F-3
<PAGE> 46
DHG ENTERPRISES, INC. D/B/A DOCTOR'S HEALTH GROUP
AND DOCTOR'S HEALTH PARTNERSHIP, INC.
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
AS OF SEPTEMBER 30, 1997 (UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL
RETAINED ADVANCES TO STOCKHOLDERS'
CAPITAL STOCK EARNINGS STOCKHOLDERS EQUITY
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ 400 $4,867,014 $ (3,275,362) $ 1,592,052
NET INCOME -- 1,910,240 -- 1,910,240
ADVANCES TO STOCKHOLDERS -- -- (2,043,101) (2,043,101)
---------- ---------- ------------- ------------
BALANCE, SEPTEMBER 30, 1997 $ 400 $6,777,254 $ (5,318,463) $ 1,459,191
========== ========== ============= ============
</TABLE>
See accompanying notes to unaudited combined financial statements.
F-4
<PAGE> 47
DHG ENTERPRISES, INC. D/B/A DOCTOR'S HEALTH GROUP
AND DOCTOR'S HEALTH PARTNERSHIP, INC.
COMBINED STATEMENT OF CASH FLOWS
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1997 (UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,910,240
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization expense 72,050
Gain on disposal of fixed assets (4,370)
(Increase) decrease in assets:
Foundation IBNR receivable 109,742
Accounts receivable - Foundation 517,157
Accounts receivable 21,235
Prepaid expenses and other assets (34,904)
Medical reserve fund 237,994
Increase (decrease) in liabilities:
Accounts payable and other accrued expenses (2,994)
Accrued medical claims, including amounts
incurred but not reported (109,742)
----------
Net cash flows provided by operating activities 2,716,408
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (35,884)
Proceeds from disposal of fixed assets 14,942
----------
Net cash used in investing activities (20,942)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances to stockholder (2,043,101)
Principal reduction of long-term debt (13,300)
----------
Net cash used in financing activities (2,056,401)
----------
INCREASE IN CASH AND CASH EQUIVALENTS 639,065
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 111,872
----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 750,937
==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 1,069
==========
</TABLE>
See accompanying notes to unaudited combined financial statements.
F-5
<PAGE> 48
DHG ENTERPRISES, INC. D/B/A DOCTOR'S HEALTH GROUP
AND DOCTOR'S HEALTH PARTNERSHIP, INC.
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1997
- ------------------------------------------------------------------------------
1. ORGANIZATION AND OPERATIONS
ORGANIZATION - The accompanying combined financial statements are
comprised of the following entities, affiliated through common ownership
and management: DHG Enterprises, Inc. d/b/a Doctor's Health Group ("DHG")
and Doctors' Health Partnership, Inc. ("DHP") (collectively, the
"Company").
DHG was incorporated under the laws of the state of Florida on November
30, 1987 and is headquartered in Miami, Florida. DHG changed its name to
DHG Enterprises, but is still d/b/a DHG. DHG owns and manages the DHG
Northwest center ("Northwest"), DHG Cutler Ridge center ("Cutler Ridge"),
DHG Hialeah center ("Hialeah"), DHG Douglas Center ("Douglas"), and the
Flagler/Northwest center ("Flagler"). (Note: these centers are d/b/a
Doctor's Medical Centers.)
DHP was incorporated under the laws of the state of Florida on December 3,
1987. This company is a subprovider for members assigned to DHG. DHP
contracts with seven physicians and a medical center managed by an
unaffiliated company for capitated services.
NATURE OF OPERATIONS - The Company operates in the state of Florida,
providing health care services subject to an affiliated provider agreement
entered into with Foundation Health Services, Inc., formerly known as Care
Florida, Inc. ("Foundation"), a health maintenance organization. For the
nine-month period ended September 30, 1997, substantially all of the
Company's revenue was derived from the provider agreement with Foundation.
DHG contracts with Dare to Care, Inc. ("DTC"), another entity affiliated
through common ownership and management, which owns and manages the DHG
Weschester Center. The DHG Weschester Center is d/b/a Primecare Medical
Center. Health services are provided to Foundation members through DHG,
DHP and DTC's primary care medical centers and its network of physicians
and health care specialists.
AFFILIATED PROVIDER AGREEMENTS - Effective July 1, 1995, DHG and DHP
entered into provider agreements with Foundation which will continue until
June 30, 2002 unless the Company fails to meet certain provisions of the
agreements. Should the Company or Foundation fail to meet the provisions,
either party gets 30-days' written notice to provide a program to correct
any deficiency. Failure to correct the deficiency within the allowed time
may result in termination of the agreement.
Services to be provided by the Company's centers include medical and minor
surgical services, including all procedures furnished in a physician's
office such as X rays, blood work, drugs, medical supplies and other
incidentals. The Company is responsible for providing all such services
and for directing and authorizing all other care, including emergency and
inpatient care for Foundation members. The Company is financially
responsible for all out-of-area care rendered to a member and to provide
direct care as soon as the member is able to return to the designated
medical center.
Foundation has agreed to pay the Company monthly for services provided to
members based upon a predetermined amount per member ("capitation") for
primary care and other services not provided in a Hospital facility as
defined by the contract. DHG shares equally in any profits or losses with
Foundation. Foundation has also agreed to share equally with the Company
in income or loss
F-6
<PAGE> 49
determined on a quarterly basis for services provided to members based
upon a capitation for hospital-based services and other services defined
by the contract.
Foundation IBNR Receivable and Claims Reserve Funds - Foundation withholds
certain amounts each month from the Company's Part A and Part B funds in
order to cover claims incurred but not reported or paid. The amount is
used by Foundation to pay the Company's Part A and Part B claims. The
amounts withheld by Foundation to cover incurred but not reported or paid
claims varies by center based on the history of the respective center and
is determined solely by Foundation.
ACCOUNTS RECEIVABLE FOUNDATION - This amount includes DHG's share of net
income for the quarters ended March 31, June 30 and September 30. In
addition, Foundation withholds certain amounts, referred to as the
"Medical Reserve Fund." The amount withheld is used to cover deficits for
final settlement with DHG upon termination of the Foundation agreement.
INDEPENDENT PHYSICIAN CONTRACTS - The Company has entered into contracts
with various independent physicians to provide primary care, specialty and
other referral services both on a prepaid and a negotiated fee-for-service
basis. Prepaid physicians-service costs are based upon a fixed fee per
member payable on a monthly basis. Such costs are presented in the
accompanying unaudited combined statements of income as hospital and other
medical services.
MALPRACTICE AND PROFESSIONAL LIABILITY INSURANCE - The Company is
uninsured with respect to medical malpractice risk. The Company has not
identified any unasserted claims under its incident-reporting system as of
September 30, 1997. No accrual for possible losses attributed to incidents
that may have accrued but that have not been identified under the
incident-reporting system have been made, because the amount, if any, is
not reasonably estimable.
REINSURANCE - The Company participates in Foundation's pooled reinsurance
program. Under the terms of the program, the Company is reinsured for 80
percent of eligible claims which exceed a $30,000 deductible per member
per calendar year. The per-member per month premium is $12.58 and $3.12
for each Medicare and commercial member, respectively. In the event that
the pooled catastrophic fund is in a deficit at December 31, the deficit
will be recovered through future premium adjustments.
MEMBERSHIP - Foundation members assigned to the Company's centers are
comprised of approximately 2,030 Medicare members and 592 commercial
members, respectively, at September 30, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION - The accompanying combined financial statements
include the accounts of all the companies listed in Note 1 which are
related through common ownership and management. All significant
intercompany balances and transactions have been eliminated in the
accompanying unaudited combined financial statements.
REVENUE AND MEDICAL COST RECOGNITION - Revenue from Foundation for primary
care (Primary-Care Capitation) is recognized monthly on the basis of the
number of members assigned to each center at the contractually agreed-upon
rates. Revenue, as per Part A and Part B funds, is recorded quarterly. The
Company receives quarterly payments from Foundation after all expenses are
paid by Foundation on behalf of the Company, including estimated claims
incurred but not reported, and claims-reserve-fund balances have been
determined. In addition to Foundation payments, the Company receives
copayments from commercial members for each office visit depending upon
the specific plan and options selected. Services provided to
non-Foundation members are on a fee-for-service basis as patients are
seen.
F-7
<PAGE> 50
Medical services are recorded as expenses in the period in which they are
incurred. Accrued medical claims are based on costs incurred for services
rendered prior to or on the balance sheet date. Included are services
incurred but not reported as of the balance sheet date based on a
reasonable estimate of such costs.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation on plant and equipment is calculated on the straight-line
basis over the estimated useful lives of the assets. Depreciation on
leasehold improvement is calculated on the straight-line basis over the
lease term.
INCOME TAXES - DHG has elected S corporation status, which passes the tax
effects of the corporations' operations directly to the stockholders.
Therefore, no provision for income taxes has been recorded for this
corporation.
DHP accounts for income taxes under the asset and liability method
according to the Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS
109"). Under the asset and liability method of SFAS 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
CHANGE IN ACCOUNTING STANDARDS - Statement of Financial Accounting
Standards ("SFAS") No. 130, Reporting Comprehensive Income will be
implemented for the Company's 1998 fiscal year. This Statement establishes
standards for the reporting and displaying of comprehensive income and its
components (revenue, expenses, gains and losses) in a full set of
financial statements.
In addition, the Company will implement SFAS 131, Disclosures About
Segments of an Enterprise and Related Information during the Company's
1998 fiscal year. This Statement establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also requires that public business enterprises
report certain information about their products and services, the
geographic areas in which they operate, and their major customers.
These statements are not expected to have a material impact on the
Company's financial position, operating results, or cash flows.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents consist of cash on
deposit and money market funds with an initial term of less than three
months.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amount of cash and cash
equivalents, Foundation IBNR, accounts receivable - Foundation, prepaid
assets, accounts payable and other accrued expenses, accrued medical
claims, and debt approximates fair value because of the short maturity of
these instruments.
USE OF ESTIMATES - Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to
F-8
<PAGE> 51
prepare the accompanying combined financial statements in conformity with
generally accepted accounting principles. Actual results could differ from
those estimates.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at September 30, 1997:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
<S> <C> <C>
Medical and office equipment $ 462,305 5-7 years
Leasehold improvements 302,667 5 years
Automobiles 292,332 5 years
----------
1,057,304
Less accumulated depreciation (771,567)
----------
Property and equipment, net $ 285,737
==========
</TABLE>
4. LEASES
Future minimum lease payments required under noncancelable operating
leases at September 30, 1997 for each of the five succeeding years and
thereafter are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30,
<S> <C>
1998 $254,523
1999 188,103
2000 94,931
--------
Total $537,557
========
</TABLE>
Rental expense incurred under operating leases for the nine-month period
ended September 30, 1997 amounted to approximately $219,000. Included in
rent expense for the nine-month period ended September 30, 1997 is
approximately $114,000 of payments made to an affiliated company for rent
of the Company's corporate headquarter and certain centers.
5. CAPITAL STOCK
The shares' authorized, issued, stock par value, and additional paid-in
capital for each of the combined companies as of September 30, 1997 is as
follows:
<TABLE>
<CAPTION>
STOCK PAR VALUE STOCK TOTAL
AUTHORIZED ISSUED PER STOCK PAR VALUE
<S> <C> <C> <C> <C>
DHG 50,000 20,000 .01 $ 200
DHP 50,000 20,000 .01 200
------
$ 400
======
</TABLE>
F-9
<PAGE> 52
6. RELATED PARTY TRANSACTIONS
The Company paid management fees of $862,500 during the nine-month period
ended September 30, 1997 to a stockholder. Such fees are included in the
unaudited combined statement of income as salaries expense.
Advances to stockholders at September 30, 1997 amounted to $5,318,463.
Such advances are a component of stockholders' equity and bear no
interest. The Company paid rent to an affiliated company (see Note 4).
7. COMMITMENTS AND CONTINGENCIES
GOVERNMENTAL REGULATION - The Company's operations have been and may
continue to be affected by various forms of governmental regulation and
other actions. It is presently not possible to predict the likelihood of
any such actions, the form which such actions may take, or the effect such
actions may have on the Company.
DISTRIBUTIONS - Florida statutes permit a corporation to make
distributions to its stockholders, provided that after giving effect to
the distribution, the value of the corporation's assets equals or exceeds
the value of its liabilities and the corporation is able to pay its debts
as they become due in the usual course of business. If any portion of the
distributions were determined to have been not in accordance with the
statutes, the directors of the corporation would be liable to pay the
corporation the amount of such portion, and the directors in turn would be
entitled to contributions from any stockholder who accepted the
distribution knowing that it was not made in accordance with the statutes.
* * * * * *
F-10
<PAGE> 53
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses in connection with the offering to which this Registration
Statement relates, other than commissions, are to be borne by the Company. All
amounts shown are estimated except the Securities and Exchange Commission
registration fee.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............................ $ 13,570
Trustees and Transfer Agent Fees............................................... 75,000
Accounting Fees................................................................ 225,000
Legal Fees..................................................................... 325,000
Printing Expenses.............................................................. 100,000
Miscellaneous Expense.......................................................... 191,430
--------
Total.......................................................................... $930,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant has authority under Section 607.0850 of the Florida
Business Corporation Act to indemnify its directors and officers to the extent
provided in such statute. The Registrant's Articles of Incorporation provide
that the Registrant may indemnify its executive officers and directors to the
fullest extent permitted by law either now or hereafter.
The provisions of the Florida Business Corporation Act that authorize
indemnification do not eliminate the duty of care of a director, and in
appropriate circumstances equitable remedies such as injunctive or other forms
of nonmonetary relief will remain available under Florida law. In addition, each
director will continue to be subject to liability for (a) violations of criminal
laws, unless the director had reasonable cause to believe his conduct was lawful
or had no reasonable cause to believe his conduct was unlawful; (b) deriving an
improper personal benefit from a transaction; (c) voting for or assenting to an
unlawful distribution; and (d) willful misconduct or a conscious disregard for
the best interests of the Registrant in a proceeding by or in the right of the
Registrant to procure a judgment in its favor or in a proceeding by or in the
right of a shareholder. The statute does not affect a director's
responsibilities under any other law, such as the federal securities laws.
At present, there is no pending litigation or proceeding involving a
director or officer of the Registrant as to which indemnification is being
sought, nor is the Registrant aware of any threatened litigation that may result
in claims for indemnification by any officer or director.
ITEM 16. LIST OF EXHIBITS.
<TABLE>
<S> <C>
4.1 Form of certificate evidencing shares of Common Stock,(1)
(Exhibit 4.1)
</TABLE>
II-1
<PAGE> 54
4.2 Indenture, dated as of October 30, 1997, between the Company and
American Stock Transfer & Trust Company, as Trustee, relating to
8% Convertible Subordinated Notes Due 2002. (2) (Exhibit 4.1)
4.3 Registration Rights Agreement, dated as of October 30, 1997, by
and between the Company and Loewenbaum & Company Incorporated (2)
(Exhibit 4.2)
5.1 Opinion of Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A.
(3)
12.1 Computation Regarding Ratios of Earnings to Fixed Charges (3)
23.1 Consent of Deloitte & Touche LLP (3)
23.2 Consent of Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A.
(included in Exhibit 5.1)
24.1 Power of attorney (included in signature page to the Registration
Statement).
25.1 Form T-1 Statement of Eligibility and Qualification of American
Stock Transfer & Trust under the Trust Indenture Act of 1939. (3)
Documents incorporated by reference to the indicated exhibit to the following
filings by the Company under the Securities Act of 1933 or the Securities
Exchange Act of 1934
(1) Post Effective Amendment No. 1 to the Registration Statement on
SB-2 on Form S-3 Registration Statement filed on October 29, 1996.
(2) Current Report on Form 8-K dated October 30, 1997.
(3) Filed herewith.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities
Act, 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 Commission such indemnification is
against public policy as expressed in the 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 against such director, officer or
controlling person in connection with the 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:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act.
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
II-2
<PAGE> 55
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment 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;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering; and
(4) That, for purposes of determining any liability under the
Securities Act, each filing of the registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Exchange Act (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to Section 15(d) of
the Exchange Act) that is incorporated by reference in the registration
statement 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-3
<PAGE> 56
SIGNATURES
Pursuant to the requirements of the Act, the Registrant certifies that
it has reasonable grounds to believe that it meets all of the requirements for
filing on Form S-3 and has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Miami, State of Florida, on December 23, 1997.
CONTINUCARE CORPORATION
By:/s/ Charles M. Fernandez
-------------------------------------------------
Charles M. Fernandez, Chairman of the Board,
Chief Executive Officer and President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Charles M. Fernandez his true and
lawful attorney-in-fact, acting alone, with full powers of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments, including any post-effective
amendments, to this Registration Statement, and to file the same, with exhibits
thereto, and other documents to be filed in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact or his substitute, acting alone, may lawfully do or cause
to be done by virtue hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Charles M. Fernandez Chairman of the Board, Chief Executive December 23, 1997
- -------------------------------------------- Officer and President (principal
Charles M. Fernandez executive officer)
/s/ Phillip Frost, M.D. Vice Chairman of the Board December 23, 1997
- --------------------------------------------
Phillip Frost, M.D.
/s/ Maria T. Sosa Principal Accounting Officer (principal December 23, 1997
- -------------------------------------------- financial officer and principal
Maria T. Sosa accounting officer)
/s/ Arthur M. Goldberg Director December 23, 1997
- --------------------------------------------
Arthur M. Goldberg
/s/ Richard B. Frost Director December 23, 1997
- --------------------------------------------
Richard B. Frost
/s/ Mark J. Hanna Director December 23, 1997
- --------------------------------------------
Mark J. Hanna
/s/ Elias F. Ghanem, M.D. Director December 23, 1997
- --------------------------------------------
Elias F. Ghanem, M.D.
/s/ Robert Soros Director December 23, 1997
- --------------------------------------------
Robert Soros
</TABLE>
<PAGE> 57
EXHIBIT INDEX
NUMBER DESCRIPTION
------ -----------
5.1 Opinion of Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A.
12.1 Computation Regarding Ratios of Earnings to Fixed Charges
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A.
(included in Exhibit 5.1)
24.1 Power of attorney (included in signature page to the Registration
Statement).
25.1 Form T-1 Statement of Eligibility and Qualification of American
Stock Transfer & Trust under the Trust Indenture Act of 1939.
<PAGE> 1
Exhibit 5.1
December 23, 1997
Continucare Corporation
100 S.E. Second Street
36th Floor
Miami, Florida 33131
Re: Registration Statement on Form S-3
Ladies and Gentlemen:
On the date hereof, Continucare Corporation a Florida corporation (the
"Company"), filed with the Securities and Exchange Commission a Registration
Statement on Form S-3 (the "Registration Statement"), under the Securities Act
of 1933, as amended (the "Act"). The Registration Statement relates to the
resale registration by the Company of up to $46,000,000 8% Convertible
Subordinated Notes due 2002 (the "Notes") and 6,344,828 shares of the Company's
Common Stock, par value $.0001 per share (the "Common Stock") issuable upon
conversion of the Notes. We have acted as special counsel to the Company in
connection with the preparation and filing of the Registration Statement.
In connection therewith, we have examined and relied upon the original
or a copy, certified to our satisfaction, of (i) the Amended and Restated
Articles of Incorporation and Amended and Restated Bylaws of the Company; (ii)
resolutions of the Company's Board of Directors authorizing the issuance of the
Notes, and the preparation of the Registration Statement and related matters;
(iii) the Registration Statement and exhibits thereto; and (iv) such other
documents and instruments as we have deemed necessary for the expression of the
opinions herein contained. In making the foregoing examinations, we have assumed
the genuineness of all signatures and the authenticity of all documents
submitted to us as originals, and the conformity to original documents of all
documents submitted to us as certified or photostatic copies. As to various
questions of fact material to this opinion, we have relied, to the extent we
deem reasonably appropriate, upon representations or certificates of officers or
directors of the Company and upon documents, records and instruments furnished
to us by the Company, without independently checking or verifying the accuracy
of such documents, records and instruments.
Based upon the foregoing examination, we are of the opinion that (i)
the Notes have been validly issued and constitute valid and binding obligations
of the Company, except as such obligations are subject to (i) any applicable
bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer,
moratorium or other laws relating to or affecting creditors' rights generally
and (ii) general principles of equity (regardless of whether such enforceability
is considered in a proceeding in equity or at law, (ii) the shares of Common
Stock have been duly authorized and reserved for issuance upon conversion of the
Notes and (iii) the shares of Common Stock, when delivered upon conversion of
the Notes, will be legally issued, fully paid and non-assessable.
We express no opinion as to the laws of any jurisdiction other than
the laws of the State of Florida and the federal laws of the United States of
America, in each case as in effect on the date hereof.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference of our name under the caption "Legal
Matters" in the prospectus comprising a part of the Registration Statement. In
giving such consent, we do not admit that we come within the category of persons
whose consent is required by Section 7 of the Act or the rules and regulations
of the Commission thereunder.
Sincerely,
GREENBERG TRAURIG HOFFMAN
LIPOFF ROSEN & QUENTEL, P.A.
<PAGE> 1
Exhibit 12.1
Continucare Corporation
Computation of Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
PRO FORMA
FYE 6/30/96 FYE 6/30/97 FYE 6/30/97
<S> <C> <C> <C>
Net Income 644,609 1,706,675 76,954
Plus:
Income Taxes 332,071 1,200,917 87,094
Interest Expense* 23,204 145,790 4,014,977
------- --------- ---------
"Earnings" 999,884 3,053,382 4,179,025
------- --------- ---------
Fixed Charges 23,204 145,790 4,014,977
------- --------- ---------
Ratio of Earnings to Fixed Charges 43.1 20.9 1.04
======= ========= =========
</TABLE>
* Includes amortization of debt expense.
<PAGE> 2
Continucare Corporation
Computation of Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Pro Forma
Q End 9/30/96 Q End 9/30/97 Q End 9/30/97
<S> <C> <C> <C>
Net Income 644,258 75,300 (198,090)
Plus:
Income Taxes 381,717 49,677 (115,269)
Interest Expense* 14,821 35,753 955,753
--------- ------- --------
"Earnings" 1,040,796 160,730 642,394
--------- ------- --------
Fixed Charges 14,821 35,753 955,753
--------- ------- --------
Ratio of Earnings to Fixed Charges 70.2 4.5 0.67
========= ======= ========
</TABLE>
* Includes amortization of debt expense.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration
Statement of Continucare Corporation on Form S-3 of our report dated September
23, 1997, appearing in the Annual Report on Form 10-K of Continucare Corporation
for the year ended June 30, 1997 and to the reference to us under the heading
"Experts" in the Prospectus, which is part of this Registration Statement.
DELOITTE & TOUCHE LLP
Miami, Florida
December 23, 1997
<PAGE> 1
EXHIBIT 25.1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------
FORM T-1
STATEMENT OF ELIGIBILITY AND QUALIFICATION
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
-------------------------------
AMERICAN STOCK TRANSFER & TRUST COMPANY
(Exact name of trustee as specified in its charter)
New York 13-3439945
(State of incorporation (I.R.S. employer
if not a national bank) identification No.)
40 Wall Street 10005
New York, New York (Zip Code)
(Address of trustee's
principal executive offices)
-------------------------------
CONTINUCARE CORPORATION
(Exact name of obligor as specified in its charter)
FLORIDA 59-2716023
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
100 Southeast 2nd Street
36th Floor
Miami, Florida 33131 33131
(Address of principal executive (Zip Code)
offices)
-------------------------------
8% CONVERTIBLE SUBORDINATED NOTES DUE 2002
(Title of the Indenture Securities)
<PAGE> 2
-2-
GENERAL
GENERAL INFORMATION.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to which it
is subject.
New York State Banking Department, Albany, New York
(b) Whether it is authorized to exercise corporate trust powers.
The Trustee is authorized to exercise corporate trust powers.
AFFILIATIONS WITH OBLIGOR AND UNDERWRITERS.
If the obligor or any underwriter for the obligor is an affiliate of the
trustee, describe each such affiliation.
None.
VOTING SECURITIES OF THE TRUSTEE.
Furnish the following information as to each class of voting securities of the
trustee:
As of DECEMBER 15, 1997
- --------------------------------------------------------------------------------
COL. A COL. B
- --------------------------------------------------------------------------------
Title of Class Amount Outstanding
- --------------------------------------------------------------------------------
Common Shares - par value $600 per share. 1,000 shares
TRUSTEESHIPS UNDER OTHER INDENTURES.
None.
INTERLOCKING DIRECTORATES AND SIMILAR RELATIONSHIPS WITH THE OBLIGOR OR
UNDERWRITERS.
None.
<PAGE> 3
-3-
VOTING SECURITIES OF THE TRUSTEE OWNED BY THE OBLIGOR OR ITS OFFICIALS.
None.
VOTING SECURITIES OF THE TRUSTEE OWNED BY UNDERWRITERS OR THEIR OFFICIALS.
None.
SECURITIES OF THE OBLIGOR OWNED OR HELD BY THE TRUSTEE.
None.
SECURITIES OF UNDERWRITERS OWNED OR HELD BY THE TRUSTEE.
None.
OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF VOTING SECURITIES OF CERTAIN AFFILIATES
OR SECURITY HOLDERS OF THE OBLIGOR.
None.
OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF ANY SECURITIES OF A PERSON OWNING 50
PERCENT OR MORE OF THE VOTING SECURITIES OF THE OBLIGOR.
None.
INDEBTEDNESS OF THE OBLIGOR TO THE TRUSTEE.
None.
DEFAULTS BY THE OBLIGOR.
None.
AFFILIATIONS WITH THE UNDERWRITERS.
None.
FOREIGN TRUSTEE.
Not applicable.
<PAGE> 4
-4-
LIST OF EXHIBITS.
T-1.1 - A copy of the Organization Certificate of American Stock Transfer &
Trust Company, as amended to date including authority to commence
business and exercise trust powers was filed in connection with the
Registration Statement of Live Entertainment, Inc., File No. 33-54654,
and is incorporated herein by reference.
T-1.4 - A copy of the By-Laws of American Stock Transfer & Trust Company, as
amended to date was filed in connection with the Registration Statement
of Live Entertainment, Inc., File No. 33-54654, and is incorporated
herein by reference.
T-1.6 - The consent of the Trustee required by Section 312(b) of the Trust
Indenture Act of 1939. Exhibit A.
T-1.7 - A copy of the latest report of condition of the Trustee published
pursuant to law or the requirements of its supervising or examining
authority. - Exhibit B.
-------------------------------
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939 the Trustee,
American Stock Transfer & Trust Company, a corporation organized and existing
under the laws of the State of New York, has duly caused this statement of
eligibility and qualification to be signed on its behalf by the undersigned,
thereunto duly authorized, all in the City of New York, and State of New York,
on the 23rd day of December 1997.
AMERICAN STOCK TRANSFER
& TRUST COMPANY
Trustee
By: /s/ Herbert J. Lemmer
-------------------------
Herbert J. Lemmer
Vice President
<PAGE> 5
EXHIBIT A
Securities and Exchange Commission
Washington, DC 20549
Gentlemen:
Pursuant to the provisions of Section 321 (b) of the Trust Indenture Act of
1939, and subject to the limitations therein contained, American Stock Transfer
& Trust Company hereby consents that reports of examinations of said corporation
by Federal, State, Territorial or District authorities may be furnished by such
authorities to you upon request therefor.
AMERICAN STOCK TRANSFER
& TRUST COMPANY
By: /s/ Herbert J. Lemmer
-------------------------
Herbert J. Lemmer
Vice President
<PAGE> 6
AMERICAN STOCK TRANSFER & TRUST COMPANY
40 WALL ST.
NEW YORK, NY 10005
EXHIBIT B
CONSOLIDATED REPORT OF CONDITION AND INCOME FOR A BANK WITH DOMESTIC OFFICES
ONLY AND TOTAL ASSETS OF LESS THAN $100 MILLION REPORT AT CLOSE OF BUSINESS ON
JUNE 30, 1997
All schedules are to be reported in thousands of dollars. Unless otherwise
indicated, report the amount outstanding as of the last business day of the
quarter.
SCHEDULE RC - BALANCE SHEET
<TABLE>
<CAPTION>
DOLLAR AMOUTS IN THOUSANDS
- -----------------------------------------------------------------------------------------------------------
ASSETS
<S> <C>
Cash and balances due from depository institutions:
a. Noninterest-bearing balances and currency and coin
b. Interest-bearing balances 433
Securities:
a. Held-to-maturity securities (from Schedule RC-B, column A)
b. Available-for-sale securities (from Schedule RC-B, column D) 3,537
Federal funds sold and securities purchased under agreements to resell
Loans and lease financing receivables:
a. Loans and leases, net of unearned income (from Schedule RC-C)
b. LESS: Allowance for loan and lease losses
c. LESS: Allocated transfer risk reserve
d. Loans and leases, net of unearned income, allowance, and reserve (item 4.a
minus 4.b and 4.c
Trading assets
Premises and fixed assets (including capitalized leases) 3,641
Other real estate owned (from Schedule RC-M)
Investments in unconsolidated subsidiaries and associated companies
(from Schedule RC-M)
Customers' liability to this bank on acceptances outstanding
Intangible assets (from Schedule RC-M)
Other assets (from Schedule RC-F) 6,678
a. Total assets (sum of items 1 through 11) 14,289
b. Losses deferred pursuant to 12 U.S.C. 1823 (j)
c. Total assets and losses deferred pursuant to 12 U.S.C. 1823 (j) (sum of
items 12.a and 12.b) 14,289
</TABLE>
<PAGE> 7
SCHEDULE RC - CONTINUED
<TABLE>
<CAPTION>
DOLLAR AMOUTS IN THOUSANDS
- -----------------------------------------------------------------------------------------------------------
LIABILITIES
<S> <C>
Deposits:
a. In domestic offices (sum of totals of columns A and C from Schedule RC-E)
(1) Noninterest-bearing
(2) Interest-bearing
b. In foreign offices, Edge and Agreement subsidiaries, and IBFs
(1) Noninterest-bearing
(2) Interest-bearing
Federal funds purchased and securities sold under agreements to repurchase
a. Demand notes issued to the U.S. Treasury
b. Trading liabilities
Other borrowed money (includes mortgage indebtedness and obligations under
capitalized leases):
a. With a remaining maturity of one year or less
b. With a remaining maturity of more than one year through three years
c. With a remaining maturity of more than three years
Not applicable
Bank's liability on acceptances executed and outstanding
Subordinated notes and debentures
Other liabilities (from Schedule RC-G) 1,851
Total liabilities (sum of items 13 through 20) 1,851
Not applicable
EQUITY CAPITAL
Perpetual preferred stock and related surplus
Common stock 600
Surplus (exclude all surplus related to preferred stock) 9,289
a. Undivided profits and capital reserves 2,523
b. Net unrealized holding gains (losses) on available-for-sale securities
Cumulative foreign currency translation adjustments
a. Total equity capital (sum of items 23 through 27) 12,438
b. Losses deferred pursuant to 12 U.S.C. 1823(j)
c. Total equity capital and losses deferred pursuant to 12 U.S.C. 1823(j) (sum
of items 28.a and 28.b) 12,438
Total liabilities, equity capital, and losses deferred pursuant to 12 U.S.C..
1823 (j) (sum of items 21 and 28.c) 14,289
</TABLE>
